Javier Milei, Argentine President
Argentine banking stocks listed in New York are facing a significant downturn as the government implements a series of economic measures, including slashing interest rates and restricting new borrowing. This has impacted their profitability, which had previously benefited from favorable financial conditions. Notable banks such as Banco Macro, BBVA Argentina, Grupo Supervielle, and Grupo Financiero Galicia have seen their shares drop by at least 18% from their yearly highs. This marks a reversal for stocks that provided the best returns among the 30 Latin American banks with American Depository Receipts in the first five months of 2024.
Economic Recession and Its Impact on Banks
The primary challenge for these banks is the need to shift away from earnings derived from central bank debt and return to traditional lending practices. This shift comes at a time when Argentina’s economy is in a deep recession. The country’s gross domestic product contracted by 5.1% in the first quarter compared to the previous year and likely continued to decline in the subsequent months.
For lenders to see a resurgence, there needs to be an economic rebound that encourages banks to start lending to the private sector. According to Juan Jose Vazquez, head of research at Cohen SA in Buenos Aires, this will require substantial growth in lending activities, as traditional loans accounted for only a third of the assets of Argentina’s four largest private lenders in the fourth quarter of 2023, down from at least 55% a decade ago.
Impact of Falling Interest Rates
The earlier rally in bank shares was driven by the industry reporting roughly 2.42 trillion pesos ($2.65 billion) in net income in the best first quarter since 2010. Returns on public securities, including inflation-linked notes, constituted approximately 47% of Grupo Galicia’s banking division’s total net income for the quarter.
However, analysts and traders caution that the period of easy money driving these earnings has ended. The central bank has cut key interest rates by 93 percentage points to 40% since December. Additionally, consecutive budget surpluses have reduced supply. With inflation rates slowing, the upside for index-linked treasury notes is limited. Consumer prices rose by 4.2% in May, down from 8.8% in April and a significant drop from 25.5% in December. Moreover, Argentine authorities announced plans to phase out one-day repo notes, replacing them with treasury notes for monetary policy management.
Transition to Traditional Lending
The government now aims for banks to pivot towards consumer loans, such as mortgages, which have not been widely available in recent years. Economy Minister Luis Caputo emphasized that for the past two decades, banks have primarily taken deposits and lent them to the public sector, either to the central bank or the Treasury. The goal now is for banks to function traditionally, lending to the private sector to stimulate economic growth.
Wall Street strategists and banks are optimistic about this shift. Bank of America analysts predict significant loan growth for the sector by 2025. Grupo Galicia officials anticipate loans to grow by around 30% in real terms by the end of the year, while Supervielle expects lending to expand, maintaining a focus on corporate over retail loans.
Despite this optimism, analysts tie market confidence to the political landscape, particularly the rise of President Javier Milei. Since Milei's election victory, ADRs for BBVA, Galicia, Macro, and Supervielle have returned at least 120%. Milei's promises to stabilize the economy, reverse budget deficits, and attract back the billions of dollars held abroad have bolstered investor confidence. However, the transition to increased private sector lending is expected to be gradual.
"If banks manage to shift the share of assets exposed to the public sector and begin to lend to the private sector, that will be a very gradual process," said Vazquez. "I don't see it being immediate."
For more information on related topics, consider exploring:
Te puede interesar
Lo más visto
