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In Argentine market fallout, Banco Galicia points to liquidity, capital buffers

Grupo Financiero Galicia SA can easily adjust its exposure to government securities if needed given the market turmoil caused by the shock result of the country's primary elections, an executive of the bank said in a call discussing its second-quarter results.

Galicia is among several Argentine banks that have adopted a strategy of selling U.S. dollars in the spot market and investing the local currency proceeds in short-term Treasury notes called Leliq. The Leliq has been the basis of the central bank's benchmark rate since 2018 following changes in its monetary policy framework that aim to stem inflation.

The strategy has borne fruit for the company, as its second-quarter net income from financial instruments surged 924% yearly. The result was mainly driven by higher returns in Leliq notes, which carried interest rates in excess of 60% as of the end of the quarter.

The central bank notes have also been a major source of revenue for banks as soaring interest rates and sluggish economic growth take a toll on Argentines' credit appetite.

However, the surprise success of Peronist opposition candidate Alberto Fernández over incumbent President Mauricio Macri in the Aug. 11 primaries has spurred local assets sharply downward. This prompted the central bank to raise its benchmark rate above 74%, as auctions of Leliq notes left it at over 1,000 basis points more than at the end of the prior week.

"Political uncertainty for the next 75 days is bringing uncertainty and volatility to the [foreign exchange] market that will create some pressure on inflation," according to Pablo Eduardo Firvida, Galicia's institutional relations manager.

Still, Firvida assured that the financial group is "very liquid [and] very well capitalized" as it prepares to face the ongoing volatility in the markets. Galicia can quickly temper its holdings in Leliq notes, Firvida said, noting that the company's strategy on central bank instruments is "very short-term."

The executive also maintained that there have yet to be noticeable instances of increased dollar conversion in banks, although he noted that this will be a main factor to monitor as Argentines tend to "think in dollars." Growth in peso-denominated deposits had been "quite stable" prior to the primaries, the executive noted.

Given the developments, Galicia is targeting a reserve coverage ratio above 100% to cover any deterioration in its asset quality, Firvida said.