Argentina Commercial Banking Report Q4 2008

This report is being written at a time when the global financial crisis which arose as a result of the evaporation of interbank liquidity appeared to be moving towards a resolution. The governments of the UK, the US and most of the larger countries in the eurozone have all announced plans to make funds available in one form or another to their respective commercial banking sectors. As yet, it is too early to identify the impact of the crisis on particular emerging markets. However, in the regular section which discusses the changes which we are making to the report, we include a lengthy analysis which attempts to identify the key issues. In essence, in the emerging markets (and, indeed, the developed countries) of Asia Pacific, commercial banks and insurers appear to be well placed to deal with the crisis. The same is broadly true of commercial banks and insurers in the various countries of the Middle East and North Africa. In Latin America, Chile, Brazil, Mexico and Colombia appear better placed than Argentina, Venezuela, Bolivia and Ecuador. South Africa's situation appears to have much in common with that of Brazil; by contrast, Nigeria faces some of the same challenges as those that confront Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.

It has not been practicable for us to collate the latest figures for assets and premium income this quarter.

The global financial situation has been changing so rapidly that most numbers would have become instantly out of date. Nevertheless, we expect that in the coming months it will become obvious that credit growth is slowing dramatically in most of the countries whose commercial banking sectors are profiled in BMI's reports. We will amend the figures and indeed our forecasts accordingly.

The tables above provide a snapshot of the changes in the banking sector in Argentina over the last year and 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 it be likely that the banking sector needs 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, macroeconomic 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 accounts 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 nonbank 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 macroeconomic 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 bank assurance 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 market 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 market elements and the country elements are also evenly weighted with respective scores of 60.0 and 60.3.