Moody's changed its outlook on Argentina's banking system to negative from stable, as it warned that "worsening operating conditions ... will continue to affect banks' asset risk profiles, capital and inflation-adjusted earnings."
In a report, the rating agency noted that it now expects Argentina's GDP to contract sharply, by 3.8% in 2019 and 2.5% in 2020. "We also expect currency volatility to continue to undermine investor and consumer sentiment, limiting banks' business prospects," it added.
The country's high inflation and interest rates, it noted, will lead to higher delinquencies and limit debt refinancing, while lending will continue to contract significantly. The rising loan losses and risk weighted assets, in turn, will lower banks' capital ratios.
Moody's expects the weakening environment to hit banks' bottom lines. "Rising funding cost, limited loan income and fees, increasing credit costs and hiking personnel expenses will compress profitability," the rating agency wrote. "This will be offset only mildly by banks' investments in high-yielding government and central bank securities."
It also noted that weakening investor confidence will pressure bank funding, while current liquidity buffers are exposed to the Argentine sovereign, whose own rating Moody's is reviewing for downgrade.
"Liquidity is ample but the concentration either directly or indirectly to the sovereign risk heightens the vulnerability to measures that can disrupt access to liquidity," Moody's said.
