Argentina Commercial Banking Report Q3 2008

Key Issues Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit. In a number of emerging markets, macro-economic imbalances are evident.

The figures on the tables above provide a snapshot of the banking sector in Argentina and the changes that have taken place within it over the last year. To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets, and GDP mean little. However, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

From this quarter, we have included a section that examines the risks associated with each country's banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector be likely need to source funding from banks in the rest of the world over the course of 2008? Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets.

Over the last year, Latin America has been a major beneficiary of the pick up in investors' appetites for risk. Yields on bonds have been falling, and the compression of yield spreads has been larger than in other parts of the world. In every one of the Latin American countries monitored by BMI, the loan/deposit ratios have been rising. Current account and budgets are, for the most part, balanced. Collectively, the banks are sourcing funds from the rest of the world in order to lend to non-bank customers.

As in previous reports, we include a SWOT analysis for Argentina. There are points of strength - such as strong growth and, in very broad terms, a germane macro-economic environment. However, overall, Argentina is unusual in that the banking system does not really come between savers/depositors and borrowers in the way that it did prior to 2001 and in the way that banking systems do in almost all other countries. In financial terms, the banks have recovered from the crisis of six years ago. They have not, however, regained depositors' trust. Nor are they themselves confident to lend.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns. It does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns. This reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

Argentina's overall CBBER is 53.1. Within the limits to potential return, the banking elements and the country elements are fairly evenly weighted - with scores of 51.9 and 47.2, respectively. Within the risks to the realisation of potential returns, the banking elements and the country elements are also evenly weighted - with respective scores of 60.0 and 60.3.