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ECONOMY | 25-04-2020 11:27

Warning signs: four indicators that scare Argentine banks during the pandemic

Has Latin America escaped the worst of the pandemic? Or is the region just grossly untested and underreported?

The warning signs for Argentina’s banks are piling up as the economy collapses around them and the government struggles to avoid yet another messy default.

Profits in the financial system tumbled 20 percent in February from the month earlier, even as inflation reached 48 percent, according to data published by Central Bank. Things could be about to get much worse.

“We expect the already challenging operating conditions for Argentine banks, coupled with the ongoing sovereign debt crisis and the economic impact of the coronavirus, to drive further deterioration in banks’ fundamentals,” Marcelo De Gruttola, an analyst at Moody’s, said in an interview.

There are at least four indicators that concern the sector.

1. Non-performing loans

As the economy shrinks and the coronavirus lockdown goes on, companies and households are finding it harder to keep up with their debt payments.

“The growth of non-performing loans is what worries us the most,” said Mariela Díaz Romero, senior economist at consulting firm Econviews in Buenos Aires. “Payment arrears are at very high levels and will continue to rise because the economy will contract 6.5 percent this year.”

2. Stifling regulation

The Central Bank has ordered lenders to pay a minimum 26.6 percent on savings accounts known as retail time deposits, while also placing a ceiling of 24 percent for the yield on loans to small and medium-sized companies. Spot the problem?

“If maximum rates are set for credit, while deposits are forced to pay out a higher yield, results will deteriorate,” says Juan José Ciro, CFO of Banco CMF.

3. Deposits fall

The collapse of the peso has encouraged savers to close time deposits in pesos and buy dollars -- if they can.

As a result, “banks do not have long-term funding in Argentina,” De Gruttola said.

4. Peso collapse

Argentina’s unofficial exchange rate hit a record low last week after President Alberto Fernández indicated the nation may be preparing to turn on the printing presses to revive the economy.

The blue-chip swap rate, as it is known, traded as weak as 110 pesos per dollar Monday, after having finished March in 81.5. It strengthened to 104 pesos on Tuesday.

The collapse in the peso will further cut bank profits in dollar terms.

by Ignacio Olivera Doll, Bloomberg

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