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Fitch: Political and economic risks to weigh on Argentine banks

Fitch Ratings said loan quality and profitability of Argentine banks for 2019 will face pressure due to the persistent macroeconomic challenges created by the ongoing recession in the country, accompanied by the political confusion surrounding the upcoming elections in October and November.

The rating agency noted that real credit growth declined in 2018 due to a challenging operating environment. Credit demand also fell amid very high nominal interest rates, political uncertainties and weakening investor and business confidence. Fitch expects negative real credit growth for 2019, seeing little to no sign of gradual improvement in 2020.

As for asset quality, the rating agency believes the deterioration in 2018 will persist in 2019 and could increase in line with the length and severity of the current recession. Fitch expects net income to risk-weighted assets to fall, due to higher loan provisions and slower growth, as well as higher costs. Furthermore, the agency noted that banks will be required to report inflation-adjusted financial statements in 2020, which will eliminate nominal profits from the balance sheets.

"Capitalization levels at most banks are adequate under our base case assumption of continued moderate asset deterioration, with Tier 1 capital at around 14% of risk-weighted assets as of January 2019," Fitch added.

The rating agency points to the negative rating outlook of the six Fitch-rated banks, which mirrors the adverse operating environment and low sovereign rating.

"Key downside sensitivities to the sovereign include policy and political developments or economic weakness that would put debt sustainability or IMF funding in question, further macro instability, erosion of international reserves, or failure to recover access to external market funding," Fitch added.