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Moody's: Argentina's capital markets law to boost banks' mortgage securitization

Argentina's recently passed capital markets reform law will improve local banks' capacity to securitize mortgages, which is a credit positive, Moody's said May 10.

In a sector report, the rating agency said the new law that was passed May 9 is the country's latest effort in a series of pro-business policies that is focused on boosting economic growth, which is a positive for banks, companies and investors.

The law will allow banks to offer more mortgages "by making it easier to securitize their inflation-adjusted loan portfolios, which are comprised mostly of mortgages denominated in inflation-adjusted units," Moody's said. Banks will also be able to address maturity and currency mismatches that they face due to the use of short-term, noninflation-adjusted debts in backing up long-term, inflation-linked loans with maturities of up to 30 years.

Along with improving macroeconomic conditions, new mortgage securitization measures will gradually strengthen local capital markets and will bring Argentina's financial system more in line with those in other countries, where banks and capital markets complement each other, the rating agency said.

The law will address funding limits that had suppressed lending and will introduce rapid mortgage loan growth among banks this year. Moody's sees plenty of room to grow for both banks and capital markets due to a very low private-sector base. Argentina's credit-to-GDP ratio is at 16%, the lowest in the region, the rating agency said.

Argentina also has one of the most underdeveloped mortgage markets in the world, representing just over 1% of GDP at end-2017.

As for insurance companies, the new law will allow them to provide credit default insurance for mortgages, which was prohibited before. This will let banks transfer credit risk to the insurer and arrive at the proper risk appetite for their portfolios, therefore enabling lenders to disburse more mortgage loans. Moody's also expects investor interest for mortgage securitization vehicles to increase due to the new measure, but noted that this coverage type will not be widely available in the short term due to some constraints for insurers.

Moody's also expects the law to invigorate Argentina's managed assets industry given the reforms promoting investment in mutual funds and allowing for creation of exchange-traded funds and index funds. "Asset managers will gain broad leeway to create and oversee new funds while investors will no longer be double-taxed on income from closed-end funds," the rating agency said.

Furthermore, the provision revoking Argentina's securities regulator power to take over publicly traded companies will improve the predictability of the investment climate. "These and other reforms, including new tax breaks, will drive investment and create a larger, more diversified pool of securities that companies can use to optimize their capital structures," Moody's noted.

"These reforms will not change the economy overnight, but by increasing investment they will help fuel long-term growth," Moody's said.