While Argentine banks are unlikely to face catastrophe as a result of the country's latest crisis, analysts say broader existential problems remain a concern amid a collapse in traditional lending, vast macroeconomic imbalances and a strong decline in economic activity.
Credit growth has evaporated and delinquency is on the rise after around 18 months of recession, a period in which inflation and interest rates have surged. The latest problems facing Argentina, including a string of ratings downgrades, political uncertainty and the fate of an IMF program hanging in the balance, have further restrained banks as worsening operating conditions take a toll on their books.
With some forecasters predicting economic contraction of 3.8% this year and 2.5% in 2020, loan demand and supply have diminished in equal measure.
"Banks have less and less business to do," Valeria Azconegui, a senior analyst at Moody's, said in an interview with S&P Global Market Intelligence. The current operating environment, where lenders have limited loan generation almost solely to refinancing, paints a dark picture for the sector's future, which could see a number of market players shrinking.
"Balance sheets are getting smaller, and the system is getting smaller. Everyone is protecting themselves to minimize risks," Azconegui said, estimating that the sector's loan book will contract around 25% this year after adjusting for inflation and currency depreciation.


Primary elections in August saw opposition candidate Alberto Fernández take a much wider-than-expected lead against incumbent President Mauricio Macri. Although high levels of liquidity enabled Argentine banks to withstand the withdrawal of around 30% of their U.S. dollar deposits after the primary vote, economic pressures have mounted since.
The primaries roiled local markets and saw the Argentine peso fall dramatically, forcing President Macri to announce a re-profiling of sovereign debt and subsequently introduce capital controls. Nonperforming loans in Argentina's financial system shot to 4.5% at the close of the second quarter from 3.1% at the end of 2018, according to central bank figures.
"We see delinquency increasing even more," Fitch Ratings analyst Santiago Gallo told Market Intelligence. "Banks are hugely affected by inflation ... so their profitability is obviously pressured."
Despite the pressure, however, banks' high liquidity, strong solvency and leveraged loan portfolios indicate that the sector has not been caught off guard by the latest economic shock, said Javier Bolzico, the president of Argentina's ADEBA banking association. "These three things are a good starting point for the sector to face the current adverse situation," he said.
Leliqs to the rescue, for now
As part of its efforts to combat high annual inflation, which currently stands at around 55%, Banco Central de la República Argentina decided to peg its benchmark interest rate to the seven-day Leliq notes it offers to banks. The elevated rates on those notes, currently at about 77%, make them a profitable and relatively risk-free way for banks to compensate for the collapse in lending.
Although nominal profits for banks have increased significantly in recent quarters, the inflation-adjusted results of Argentine banks listed in the U.S. tell another story. "You can see that their earnings are much lower," Fitch's Gallo said, adding that some banks even saw losses in 2018.
Many banks remain heavily invested in Leliq notes, which should prop up nominal profits in the third and fourth quarters. However, with the country's political future still uncertain ahead of general elections on Oct. 27, some banks have started reducing their exposure to the central bank paper and instead turned to other short-term instruments such as repos, Azconegui from Moody's said.
Fernández, the presidential frontrunner, has not yet announced any concrete economic plans, but some observers believe Argentina's monetary policy will change if he is elected, with rates potentially falling from their current record-high levels. Such a move would alter the transactional strategy employed by banks, which so far has cushioned the system.
"There is no doubt this profitability will be difficult to sustain going forward," Azconegui said.
Much still depends on the result of the upcoming election and the policies favored by the country's next government. Joydeep Mukherji, managing director for Latin American sovereigns at S&P Global Ratings, highlighted the uncertainty at a recent webinar when he asked: "How does Argentina manage the situation between now and the advent of a stable government with a new plan and potentially a new agreement with the IMF?"
