Banks poised to play greater role in new economic era

For Argentina’s bankers, the last two decades have been a wild ride indeed. A 2001 run on all banks in the system, a freeze in deposits, and a currency devaluation devastated local players and drove some foreign institutions from the country. Later, under the Kirchner presidencies, the Central Bank endured frequent executive interventions. “The Central Bank’s independence has been eroded over the last decade. Upon taking office we started working on making it independent and stronger again,” remarks Demian Reidel, the Central Bank’s current vice president.

The financial sector has a long way to go when compared to the region. Argentina’s banking penetration accounts for just 15 percent of GDP compared to 68 percent and 63 percent in Brazil and Chile respectively. Private sector lending represents just 12 percent of GDP, versus an average of 52 percent in the rest of Latin America and 89.6 percent in other emerging markets. Savings have been negligible due to capital flight, and mortgages are extremely hard to come by, with most Argentines obliged to pay for their homes upfront, often in dollars because of the historic instability of the peso. Giving autonomy to the Central Bank, Argentina’s return to the international capital markets and a tax amnesty law which will allow Argentines to bring back money stashed overseas is slowly bringing back confidence in the banking system.

“Argentina is a great place to invest in because it has what an investor is looking for. The only exception is confidence, which has been lost due to economic mismanagement over time. As William Pitt puts it, ‘Confidence is a plant of slow growth’,” says Eduardo Escasany, President of Grupo Financiero Galicia, the country’s largest private sector commercial bank ranked by deposits, assets or loans.

“We used to have an illogical economic policy, with no reference prices which made it very difficult to valuate salaries, or companies, or anything. We now have prices and economic stability, thanks to the reforms made during 2016. There are still many issues that need to be solved, though this is a marathon, not a sprint,” says Gabriel Martino, President of HSBC Argentina.

Trust here is the key word. In order to build up its banking sector, Argentina must convince its customers that keeping their money in banks is safe – no small feat given the ‘corralito’ of 2001 is still fresh in the minds of many. Its large informal sector is also an issue, and initiatives need to be put in place to bank the unbanked. “The informal economy is quite large in Argentina, and small shops avoid paying taxes because they would be forced to shut down if they did not do so,” says Mr. Escasany.

Patricio Supervielle, President of Grupo Supervielle, adds that “Argentina has such a low credit penetration and such a modest financial system because savings were penalized. Under the new government, and an autonomous Central Bank, they have put forth the policy that savings must be rewarded in real terms.  As long as the government continues to deepen this policy, savings will stay in Argentina.”

As Delfín Jorge Ezequiel Carballo, Vice President of Banco Macro, points out, Argentine entrepreneurs have shown themselves to be able to adapt to changing circumstances in a way that is not seen elsewhere around the world. “This new government has to convince them that this time, the model will not go under, and that it is a good idea to invest. The private sector is naturally skeptical. The government has to play a strong role in communicating the direction it is taking and its reasons.”

Banco Macro is putting in place an aggressive expansion plan to take advantage of the new economic reality. “Banco Macro is a large bank, but we understand that we clearly have to grow geographically. Argentine banks are mainly focused on the consumer side, but we know that the big opportunities are in corporate banking, which will see enormous growth,” says Mr. Carballo.

Foreign players are also increasingly eyeing the potential of Argentina’s domestic market for financial services, as demonstrated by the recent entry into American online payments giant Paypal, whose link-up with local bank Banco Comafi will allow Argentine SME exporters to receive and withdraw foreign payments in pesos or dollars.    

Recovery of the home mortgage market
One of the goals of Macri is to reduce the housing deficit. For that reason, the Central Bank has launched an index-linked loan to transform the mortgage market. “Our mortgage market is almost inexisten, which is why we have created an inflation index currency called UVA (unidad de valor adquisitivo, a coefficient which adjusts both the quotas and the capital to inflation), so that people can obtain real loans and hopefully incentivize the growth of the mortgage market here,” says Mr. Reidel.   The newly-announced continuation of the Plan PROCREAR by President Macri, a social housing program enacted by the previous government and expanded last year, means a further $3 billion will be earmarked to help Argentines buy their own homes. Banco Nación, the largest state-owned bank, is playing a central role in the roll-out of this initiative, having already put in 30 billion pesos ($2 billion) to the plan, and with a further 30 billion pesos set aside for various real estate investment plans set out by the government.

Javier González Fraga, the bank’s president, points out that this is just the beginning. “The bank holds 28 percent of all deposits and 11 percent of loans, but despite its financial solidity, it’s still far from reaching its objective. It is my mission to put Banco Nación at the service of productive activity and real estate sector growth.”

“The bank holds 28 percent of all deposits and 11 percent of loans, but despite its financial solidity, it’s still far from reaching its objective. It is my mission to put Banco Nación at the service of productive activity and real estate sector growth”
Javier González Fraga, President, Banco Nación

He adds that the bank aims to double or even triple its loan book, putting its balance sheet to work on closing the housing gap in the country. This is something of a step change for the state-owned bank; in the past, its lending profile has been more oriented toward the public sector rather than SME or mortgage lending. And where Banco Nación goes, the rest of Argentina’s banks swiftly follow.

“We will deliberately direct an increasing percentage of our loans to mortgages,” says Juan Curutchet, President of Banco Provincia - the second largest bank in the nation by value and deposits which is publicly owned by the province of Buenos Aires government. “Only 3 percent of our total loans are in mortgages. We are planning to actively address the people who want to buy a house.” In 2015, Banco Provincia had only approved a total of 300 mortgages, but it expects to triple this figure this year. “This is not much, but it is still a big change. People will start asking about mortgages and comparing prices between banks. I expect Banco Provincia to play an increasing role in the market.”

For Banco Hipotecario, the country’s foremost mortgage lender, new opportunities are opening up in property lending. “The banking sector is very dynamic at the moment. We have a low credit to GDP ratio when compared to our neighbors, but it will go up as inflation continues decelerating and confidence makes Argentines bring their savings back to the country,” says Eduardo Elsztain, the bank’s president, who is also president of IRSA Group.

“Argentina is a great place to invest in because it has what an investor is looking for. The only exception is confidence, which has been lost due to economic mismanagement over time”
Eduardo J. Escasany, President, Grupo Financiero Galicia

Banco Hipotecario’s project to buy up unused land and obtain finance to develop properties upon it became the motor of the PROCREAR program. “The delivery of the solution of housing has been very positive. Argentines bestow great value on owning their homes, and the demand is still very large; many people want to have access to their first home. The access to financing will come when Argentines start trusting our own currency.”

Renewed interest in capital markets
The new climate is gradually bringing confidence back. “Under the previous administration, there weren’t as many incentives. The current government has put more focus on investment, and entrepreneurship is less stigmatized today. There is more appetite for generating investment, and it shows,” says Carlos Giovanelli, President of Havanna SA, which recently raised 158 million pesos ($11 million) in the country’s first local IPO since 2013.

Another IPO, this time for Grupo Supervielle, brought in both local and foreign investors, showing that for many, Argentina’s banking sector is a safe bet once again. “This is very good news for the country and means a complete change of plans and corporate governance. Our leadership has become multifaceted as we bring in investors and give them a voice,” says Mr. Supervielle.

The next step for Argentina is to expand its local capital markets offering, which is part of the plan already underway by BYMA, the newly-consolidated stock exchange. “We hope to integrate all of Argentina’s markets in order to be able to compete with the North American exchanges,” says Ernesto Allaria, President of BYMA. The bourse, which is basing its business model around that of Brazil’s Bovespa, wants the nation’s strongest companies to list on the market and attract top-quality foreign capital.

“The Argentine capital market could be 20 times bigger than what it is. Brazil’s GDP is three times that of Argentina, but Brazil trades $2 billion on its market, while Argentina trades around $20 million,” adds Mr. Allaria. One recurrent theme unites every area of the financial sector in Argentina: there is a lot of room for growth. And thus far, all indications are that the financial sector in the country has an unprecedented opportunity to reach its full potential.