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Moody's: Market turmoil after Argentine primaries is credit negative for banks

The market reaction to the wider-than-expected margin of victory by Peronist opposition candidate Alberto Fernández over incumbent President Mauricio Macri in the Aug. 11 primary elections in Argentina is credit negative for the country's banks, Moody's said in an Aug. 13 statement.

However, the country's financial system is also well prepared to face a potential run on deposits, Moody's said.

According to the rating agency, Argentine banks will be pressured by the "adverse market developments" in the wake of the elections, which has seen bank stocks, bonds, the benchmark MERVAL stock index and the peso all take a nosedive, after Fernández held a 15.5-point advantage in the Aug. 11 primary vote, far stronger than what polling had suggested.

While the deposit-based funding profiles have been "relatively stable" since the first currency crisis in Argentina in May 2018, "current developments will initially add pressure to banks' funding profiles and are likely to generate deposit dollarization and deposit withdrawals," Moody's said.

Still, most Argentine banks are amply prepared to withstand a potential run on deposits, according to Moody's. The financial system's loan-to-deposit ratio fell to 50% in July 2019, and is the lowest in the region. Meanwhile, banks' loan books have declined amid spiraling inflation and interest rates.

"The subdued loan demand helps banks maintain high liquidity, which has increased steadily over the past four quarters," Moody's said.

Recent developments in Argentina's economic recession, such as increasing interest rates and spiraling inflation, were already hampering banks' business prospects before the latest market reaction, the rating agency explained.

This has left a mark on Argentine banks' asset quality and profitability when adjusted for inflation, while "subdued loan growth has prevented a larger drop on their capital metrics."

"The baseline scenario is for the economic slump to bottom out in the second half of 2019, but if sovereign pressure continues, banks would have an even more challenging operating environment and consequently, deteriorating credit profiles," Moody's noted.