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Uncertainty in Argentina drives bank rating downgrades in Q3

Rating downgrades among Latin American banks outflanked upgrades in the quarter through Oct. 1, with all negative rating actions coming from Argentine lenders.

Of the 22 corporate long-term rating revisions carried out by the three major agencies — S&P Global Ratings, Moody's and Fitch Ratings — in the period, 20 were downgrades of Argentine banks. Meanwhile, only two banks in the list saw upgrades to one notch higher each: HSBC México SA Institución de Banca Múltiple Grupo Financiero HSBC and Brazil's Banco do Estado do Rio Grande do Sul SA.

The barrage of adverse rating moves on Argentine banks reflect heightened risks in the country, following a currency crisis and the rise of Peronist opposition candidate Alberto Fernández in the presidential polls. Several rating agencies hit Argentina with sovereign downgrades in August amid fears at the time that the country might default on its sovereign obligations.

Moreover, Argentine banks are facing a volatile operating environment amid sluggish economic growth and fiscal pressures in the country, Fitch Ratings said in its batch downgrade of the country's financial institutions in September. These factors have weighed materially on financing conditions in the country, which could lead to a deterioration in the banks' loan books and a ballooning of nonperforming loans, the rating agency said.

Banco de la Ciudad de Buenos Aires, Banco Hipotecario SA and Banco de Galicia y Buenos Aires SAU, all of which received downgrades in the period, are the banks having the most public sector exposure and also among those with the least cash and cash equivalent holdings, Fitch noted.

But unlike previous crises, Moody's expects Argentina's banking sector to remain resilient as high liquidity levels and export loans have anchored banks' funding needs despite constrained financing conditions. Still, Moody's revised its outlook on Argentina's banking system to negative from stable, as the country's conditions continue to dampen banks' asset risk profiles, capital and inflation-adjusted earnings.

Elsewhere, a new rule in Brazil allowing foreign investment in banks, progress in the country's pension reform process and the privatization of state-owned lenders are deemed as positive developments for the sector. On the other hand, withdrawals from the FGTS workers' severance fund and the central bank's record-low interest rates are considered negative developments for banks.

In Mexico, measures that aim to reduce high credit costs are seen as credit positive, while an increase in the economic role of development banks is believed to be credit negative.

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This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.