Heightened economic uncertainty and market volatility in Argentina have weighed significantly on financing conditions in the country, leading to increased downside risks for local banks, Fitch Ratings said.
The increased likelihood of a change in government following Argentina's October presidential elections, as well fears that the country will fall into default after it extended the maturities of its short-term debts, has prompted Fitch to downgrade its sovereign ratings to CCC junk territory.
Although the extension of Argentina's debt maturities has a minimal impact on the banks' financial profiles due to low government exposure, the conditions could possibly worsen the lenders' already impaired performance, Fitch said. Possible impacts include a deterioration in the banks' loan books, an increased number of nonperforming loans, higher funding costs and inflation-driven hikes in administrative expenses.
In a list showing Argentine banks' sovereign exposure, Fitch revealed Banco de la Ciudad de Buenos Aires as having the largest public sector exposure as a percentage of its assets, with 27.8%. Banco Hipotecario SA and Banco de Galicia y Buenos Aires SAU trailed behind with 22.7% and 21.8%, respectively. The three banks were also among those with the least cash and cash equivalents holdings, with Banco Hipotecario's only hitting 9.5% of liquid assets.
Of the eight banks in the list, seven showed no exposure to sovereign bonds while four revealed public sector loan exposure of 0.3% or less. Almost 100% of the banks' exposure came from central bank securities.
Short-term central bank notes, known as Leliqs, are currently the highest source of Argentine banks' profitability, but concerns have emerged as to the sustainability of this investing model given recent political and economic developments, according to a report by S&P Global Market Intelligence.
"While banks have sufficient liquidity, the risk they would not want to roll over the high-yielding Leliqs in the case of a deposit run could result in a surge in peso liquidity that could further pressure the exchange rate and inflation," Fitch said.
On the other hand, holding cash instead of Leliqs would present lower returns, hence tighter margins and profitability, for the banks, Fitch noted.
The rating agency expects future challenges in banks' growth and profitability, as a deepening recession and slower demand will likely result in greater credit losses. Several banks showed a net loss in 2018 when accounting for inflation, due to a combination of high tax burden, increased credit and administrative costs, and a drop in loan growth.
The rating agency now expects Argentina's economy to contract 2.5% this year, worse than a previous estimate of 1.7% contraction.
Furthermore, Fitch forecasts continued negative growth among bank loans this year, exacerbated by lower credit demand and business confidence as well as banks' conservative underwriting standards.
Under current conditions, pressured liquidity and dampened capital expenditures among corporates could lead to higher leverage, which poses indirect and contagion risks for banks, Fitch added.
The rating agency also warned that Argentine government's policy adjustments could jeopardize future disbursements from the International Monetary Fund, if they result in failure to meet the performance criteria outlined in the standby arrangement, which could further aggravate the negative impact on banks' financial profiles.
