At the annual Argentine Rural Society Fair in Buenos Aires, held in late July and better known as La Rural, the usual stars are the pedigree livestock. Bulls are shampooed and braided. Gaucho handlers induce their stallions to stretch out their backs and raise their tails while judges circle around taking note of every virtue and defect.
But this year, farmers themselves seem to be the main focus. Just ask Alberto Lasmartres, a fruit grower who exports canned peaches from the western province of Mendoza. He came to La Rural in hopes of winning a prize -- anything from grand champion to honorable mention -- for one or more of the dozen Aberdeen Angus bulls he has brought to the fair. From his wallet Lasmartres, 59, retrieves business cards handed to him by reps from the country’s biggest banks, both domestic and foreign, which are offering him money at rates barely above this year’s projected 10.5 percent inflation. “They never took much interest in agriculture before,” he says. “Now they’re asking people like me what they can do to build their market share of agribusiness loans.”
After several years of crisis brought on by Argentina’s world-record $110 billion debt default in 2001, banks are eager to lend money again and are chasing after safe clients like Lasmartres. It’s a strategy that makes sense: With food products accounting for two thirds of Argentina’s $34 billion export total in 2004, farmers can claim much of the credit for a GDP that expanded by 9 percent last year, on top of 2003’s 8.8 percent, to reach $483 billion. Until recently, banks were mere spectators in this robust recovery, struggling to cut down operating costs and reduce portfolios bloated by nonperforming loans, mainly to big corporations and middle-class consumers.
But after three years of heavy losses, a financial sector turnaround began in the last quarter of 2004. “Since then almost all major banks are showing positive earnings,” says Martín Redrado, governor of the Central Bank of Argentina. “Credit markets are growing by 30 percent this year.”
Much of that credit growth is taking place in Argentina’s provinces, among farmers and small and medium-size businesses tied to agriculture. In addition to expanding credit, there are other reasons for optimism. Nonperforming loans now account for less than 11 percent of total loans, down from more than 50 percent at the end of 2002. Deposits have also been flowing back: After plummeting from $80 billion in December 2000 to $25 billion in December 2002, they rose to $39 billion at the beginning of this year.
The picture for Argentina’s financial sector isn’t entirely rosy, however, as even the most-senior government officials concede. “Sustained high economic growth requires a significant level of investment, and that can happen only with a banking system with a strong capacity for intermediation,” says Economy Minister Roberto Lavagna in an interview with Institutional Investor.
At the beginning of this year, private sector credit totaled only $48 billion, equivalent to an anemic 10 percent of GDP. That compares with 23 percent in 2000, just before the crisis. “It will take three or four years before banking penetration reaches precrisis levels,” predicts Felisa Josefina Miceli, chairwoman of state-owned Banco de la Nación Argentina, the country’s largest financial institution.
In the meantime, banks have to compete with a huge accumulation of savings outside the financial system. According to central bank estimates, Argentineans have offshore holdings -- in the U.S., Europe, Uruguay and the Caribbean -- of at least $100 billion. “Just a moderate shift in portfolio decisions by those people holding money abroad means a significant increase in capital available in Argentina,” says Fernando Navajas, chief economist at Fundación de Investigacione Económicas, a leading economic research institute, funded by 150 businesses and based in Buenos Aires. The problem is that even the fraction of flight capital that is returning to Argentina largely bypasses the banking system and is going into family companies and real estate projects as cash.
Banks are also hostage to macroeconomic trends. The country is overly dependent on growth spurred by hungry new markets, like China and India, that are willing to pay top dollar for soybeans, corn and meat from the fertile Argentinean pampas. “If commodity prices fall and other trends change, banks will face a deteriorating environment without having fully recovered from the last crisis,” warns Carina López, a Buenos Airesbased banking analyst for Standard & Poor’s.
Argentineans have come to expect such abrupt reversals of fortune. Having suffered through booms and busts every seven or eight years, they tend to speak about their economic cycles with Old Testament fatalism. “In this country there are years of fat cows and lean cows,” says farmer Lasmartres.
The leanest years in Argentina’s history began in 2001, when the government’s inability to service its soaring debt led to the abrupt abandonment of the one-to-one exchange rate of the peso to the dollar. The following year the peso plummeted by 75 percent and GDP imploded by 10.9 percent. To prevent panicked depositors from emptying their accounts, the government placed strict limits on bank withdrawals. The measure was known infamously as the corralito, implying that deposits were being quarantined. (Even financial measures are described in farm slang in Argentina.)
In 2002 the government imposed two conversion rates, one affecting assets, the other liabilities. Bank assets were converted at one peso to the dollar, which allowed many corporate clients to pay back their bank loans -- most of them dollar-denominated -- at less than the market exchange rate. Under a second conversion rate, bank liabilities -- such as savings accounts and other interest-bearing deposits, which also were largely dollar-denominated -- had to be repaid at 1.4 pesos to the dollar. That saved many corporate clients from going bankrupt. But the government didn’t do the banks any favors. The move brought new banking activity to a standstill and saddled the financial system with staggering debt.
Additionally, the government forced the banks to exchange deposits for ten-year, dollar-denominated state bonds known as Bodens. This action infuriated ordinary depositors and left banks with portfolios bulging with government debt that the financial markets refused to accept at face value because of Argentina’s massive 2001 default on $88 billion in bonds and $22 billion in interest arrears on those bonds.
Bodens began to rise in value only after the center-left government of President Néstor Kirchner launched a sovereign debt restructuring plan in January of this year. Under the plan, Argentina swapped bonds with a face value of $82 billion for $42 billion in new bonds that begin amortizing in 2024. Because interest rates are so low -- some of the new bonds initially pay only 1.33 percent -- and the maturity of the bonds so lengthy, at 20 or more years, creditors will get as little as 25 cents on the dollar and even in the best cases no more than 30 cents. (The government is still locked in a struggle with the International Monetary Fund over repayment of more than $11 billion in remaining debt to the IMF.)
Despite its miserliness, the swap was approved by the vast majority of bondholders, leaving Argentinean officials crowing. “The markets spoke, with 76 percent of creditors agreeing to our terms,” says Economy Minister Lavagna. Meanwhile, the face value of Bodens held by Argentinean banks increased from 40 cents on the dollar in October 2002 to 90 cents in August 2005, raising hopes that banks may be able to sell the low-yield bonds without onerous losses to their asset portfolios.
The long road back for the banks began with their own debt restructuring. Banco de Galicia y Buenos Aires -- the largest Argentinean-owned private sector bank, with $7.49 billion in assets at the beginning of this year -- had a painful turnaround and continues to struggle with debt. Executives of the bank, which is owned by Grupo Financiero Galicia, declined to be interviewed, but officials from one of Galicia’s biggest creditors, the Washington-based International Finance Corp., the World Bank’s private sector financing arm, explained how the Argentinean bank went about restructuring $1.37 billion of debt with more than 240 banks and other creditors, in a deal completed in May 2004.
Negotiations began in July 2002, when Galicia informed its creditors, including the IFC, which had a total exposure of $310 million in the bank, that it was insolvent. “Obviously, it was a big disappointment when we got that first call saying they couldn’t pay interest or principal,” recalls James Scriven, the IFC’s head of new business for Latin American financial markets and a key participant in the debt negotiations. Creditors were intensely concerned when they saw that an ongoing run had depleted more than two thirds of Galicia’s deposits. There was alarm over how much debt would be written off and how many cents on the dollar would be recovered. Some creditors were so scared that they sold their exposure on the secondary market for as little as 20 cents on the dollar in 2002.
“But as we began the restructuring, we agreed with the bank that all creditors would be treated equally and that there would be fair burden-sharing among all participants, including the shareholders,” says Scriven. There were no write-offs, though Galicia did offer to convert debt into equity. The few creditors who accepted the offer made strong gains: Galicia’s share price rose from $2.22 in December 2002 to $7.29 in December 2004. But most creditors preferred to extend the maturity on their loans and reduce their interest rates.
For its part, Galicia slimmed down drastically, slashing its branches by 23 percent, to 227 today from 295 before the crisis, and cutting staff by 33 percent, from 5,859 to 3,952 employees. In the financial sector as a whole, there was a 7 percent reduction in branches and a 14 percent cutback in employees. Today, after three years of red ink, including a $36.9 million loss in 2004, Galicia has edged into the black, with net income of $48.3 million for the first half of 2005.
“One continuing source of concern is Galicia’s exposure to low-yielding government debt,” says Roberto Attuch, a São Paulobased banking analyst for Credit Suisse First Boston. Government paper accounts for 60 percent of Galicia’s assets, compared with an industry average of 50 percent. The central bank has given all banks until January 2006 to reduce their exposure to 40 percent. That means that Galicia must in short order sell a third of its Bodens and other government bond holdings at less than face value. To afford that, it will have to raise about $100 million in new capital, according to central bank officials. The problem is that Galicia’s shareholders don’t have that kind of money, and the bank probably can’t raise enough capital by issuing new shares on the Merval, the local stock market.
Like other Argentinean banks, Galicia is trying to grow out of its problems by finding new clients in the country’s fast-expanding economy. With big foreign corporate customers able to borrow from their parent companies, Galicia has shifted its focus to smaller enterprises, including farmers based in the provinces, where the bank has half of its branches. Galicia’s loans to big corporations declined from $654 million in December 2003 to $446 million a year later, while loans to middle-market companies rose from $365 million to $431 million. The abundance of Galicia advertisements and representatives at this year’s La Rural fair testifies to the bank’s revived interest in farm loans, which typically include money for new equipment, seed, fertilizer and pesticides at annual rates below 12 percent. Banks also provide export financing and handle the conversion of foreign currency revenues into pesos.
Banco Macro Bansud, based in Buenos Aires, pioneered this drive into the hinterlands. “Since we got into retail banking in 1996, we have always seen ourselves as a regional bank focused on small and medium businesses and lower-middle-class consumers,” says Macro chairman Jorge Horacio Brito. “We knew we couldn’t compete in Buenos Aires.”
Now Macro is the envy of its peers. Though only the ninth-biggest bank in Argentina, with $2.04 billion in assets at the beginning of this year, it is the country’s fastest-growing financial institution. Over the past decade Macro has bought nine regional banks and built a network of 256 branches -- 83 percent of them outside Buenos Aires -- with 4,650 employees. Last year its loan portfolio doubled, to $666 million. Even more impressive, Macro is the only bank that remained profitable throughout the crisis, with 12 consecutive quarters of earnings, including net income of $22 million in the first three months of this year. Among major banks it has one of the lowest exposures to government securities: 30 percent of assets.
In the midst of the crisis, Macro pulled off an especially daring -- and lucky -- financial coup by acquiring Bansud, a bank with a large presence in southern Argentina. In December 2001, Macro agreed to purchase Bansud from Grupo Financiero Banamex, a big Mexican bank, for $65 million. Banamex itself had been bought in August 2001 by Citigroup. And Citigroup was anxious to divest itself of Bansud, which was awash in red ink and saddled with problem loans.
But Macro threatened to back out unless Banamex and Citigroup could guarantee the survival of Bansud. In the end Macro paid nothing to acquire 59.6 percent of Bansud. In fact, thanks to a deal signed in January 2002, Macro ended up receiving $211 million in cash from Citigroup and Banamex: $51 million for selling part of Bansud’s assets back to Banamex, $60 million in cash to ensure Bansud’s liquidity and $100 million from the sale of corporate loans in Macro’s portfolio to Citibank. In 2004, Macro swapped its shares to acquire the remaining Bansud stock from Citigroup.
“The Bansud deal gave us great liquidity in the worst of the crisis,” says Macro chairman Brito. Most of the $211 million was deposited in the U.S., where the Argentinean government could not force their conversion into pesos at the artificially low exchange rate it had imposed on dollars held by banks in Argentina.
The windfall enabled Macro to maintain a small exposure to Argentinean government securities. Macro used its Bansud dollars for another major expansion. In September 2004 it acquired Nuevo Banco Suquía, a troubled bank with operations in central Argentina, for $100 million, or more than double the next highest bid. “We paid a premium because Suquía was the last strategic acquisition we needed to become a nationwide bank,” says Brito.
Among the foreign banks Banco Río de la Plata has been the most aggressive in following Macro’s provincial strategy. Fully owned by Spain’s Grupo Santander, it is the fifth-biggest Argentinean bank, with $5 billion in assets at the beginning of this year, though it recorded net income of only $12.8 million in 2004. During the 1990s, Río, like other foreign banks, concentrated on the most-profitable loan market segments: large corporations and affluent consumers in Buenos Aires. When the crisis struck, a number of foreign institutions -- among them, Canada’s Bank of Nova Scotia; France’s Crédit Agricole and Société Générale; two Italian banks, Banca Intesa and Banca Nazionale del Lavoro; and the U.K.'s Lloyds TSB Group -- decided to exit Argentina. Many of those that remained operated on tight managerial leashes from their headquarters, whose main concern was to stem the red ink.
Río was a notable exception. “Things happen so quickly in Argentina that we must have freedom to make decisions locally,” says chairman Enrique Cristofani. In the aftermath of the crisis, the home office in Madrid has injected $400 million in new capital and is planning a further $100 million before the end of this year. This recapitalization has helped rid the bank of substantial holdings in government bonds, which reached 60 percent of assets after the crisis and have since been reduced to a manageable 30 percent. The sale of government bonds below their face value was largely responsible for Río’s $193 million in net losses during the first half of 2005. That’s why bank executives prefer to draw attention to the $51.6 million in operating profits for the same period, up from $17.9 million in the first half of 2004.
Cristofani has cut costs drastically and reoriented the bank’s business. Río has reduced its branches by 25 percent, from 265 in 2002 to 200 today. Because interest rate margins and profits are so low on traditional lending, the bank has concentrated on fees and commissions, which now cover 89 percent of its operating expenses. Examples include fees for ATM use, safe-deposit boxes, receipt and transfer of funds, insurance, import-export transactions and foreign currency sales and purchases.
A growing source of new fee income is cross-promotional arrangements with retailers that give discounts to bank clients who use Río credit and debit cards for their purchases. In mid-2002 the bank signed an agreement with a major supermarket chain, Disco, that gives Río cardholders 15 percent discounts on Mondays and 5 percent the rest of the week. Disco and Río split the cost of the discounts. The bank profits by charging membership, interest and late fees to its cardholders. Río has reached similar discount agreements with a variety of retailers, including Exxon gasoline stations, McDonald’s restaurants and several cinema chains.
Meanwhile, corporate banking, which has long been Río’s strong suit, is in the doldrums. Large companies, especially foreign ones, are financing themselves internally or using local banks only for short-term loans. Competition for business clients is so fierce that interest rates run as low as 6 or 7 percent -- well below inflation. This has produced a dramatic shift in Río’s loan portfolio. Before the crisis corporate loans accounted for almost half of the loan total. For 2005 the bank is estimating a total loan portfolio of $2 billion, of which corporates will make up only $500 million, while loans to consumers and smaller enterprises account for $1.5 billion. “We are using our corporate contacts to reach small and medium business clients,” says Cristofani.
A case in point is Río’s evolving relationship with Grupo Arcor, a big confectionery company based in Córdoba province, with $950 million in sales and net income of $35 million last year. In July 2005, Arcor launched an ice cream business and turned to Río for help in financing a network of about 100 distributors, mainly in the provinces. The bank agreed but asked Arcor for detailed information on its distributors so they could be recruited as new Río business clients. “We didn’t have the resources to do all that work, so we had to depend on Arcor,” says Cristofani. “This is the sort of thing we have been doing in the business sector for the past two years.”
Whereas the crisis forced Río to rebalance its retail and wholesale banking, Banco Hipotecario, with $3 billion in assets and $28 million in net income in 2004, had a much worse problem: a portfolio built entirely on mortgage loans. Mortgages were dependent on a middle class that was in precipitous decline: The economic crisis led to 44.3 percent of Argentineans living below the poverty level in 2004, according to IMF estimates, compared with 29.7 percent in 2000. “Not only has the middle class shrunk, but high unemployment and job uncertainty have dampened demand for mortgages,” says Victoria Miles, a London-based analyst who covers Argentinean banking for J.P. Morgan Chase & Co.
Hipotecario’s immediate problems were coping with a nonperforming mortgage rate that reached 25 percent in 2002 and restructuring the bank’s $1.3 billion debt after a December 2002 default. In successful negotiations that ended in May 2004, the bank managed to get its creditors to extend maturities on their Hipotecario bonds by an average of five years and to lower interest rates from an average 10 percent to 5 percent. The bank has already bought back $260 million of its debt, reducing the total to a little more than $1 billion. “The restructuring has allowed us to start growing again,” says chairwoman Clarisa Lifsic.
Now Hipotecario is looking beyond the mortgage market for new growth. It managed to bring its NPL rate down to 10.2 percent by mid-2005, mainly because soaring real estate prices in Buenos Aires have convinced mortgage holders to hang on to their residences at all costs. But the bank hasn’t benefited much from the luxury real estate boom, which is largely being financed by cash brought back from abroad by Argentineans.
Faced with these constraints, Hipotecario decided to become a full-fledged commercial bank. In February 2005 it announced its intention to pay $207 million in cash and $25 million in stock for the Argentinean operations of Banca Nazionale del Lavoro. If the deal goes through, Hipotecario will get BNL’s 100 branches and $1.3 billion in assets, including corporate and consumer loan portfolios. But Hipotecario’s management resources will be severely tested. “All of our 118 years’ experience is in one product, mortgage loans,” says Lifsic. “We have to change the whole culture of the company.”
So does state-owned Banco de la Nación, according to chairwoman Miceli. Her task is a lot tougher than her counterparts’ at private sector banks because Nación’s mandate forces it to be concerned with both its bottom line and with social aims. “Our biggest mission is to cover the failures of the market and go into places where private sector banks don’t want to have branches,” says Miceli. Nación has 651 branches -- almost three times as many as second-place Galicia -- half of them in provincial towns where there is no other bank. And unlike private sector banks, Nación hasn’t closed down a single branch or fired any of its staff in the aftermath of the crisis. Its current roster of 15,568 employees is 400 less than in mid-2003 because of retirements.
Nación is by far Argentina’s biggest bank, with $14.5 billion in assets at the beginning of this year, almost twice Galicia’s total. Its sheer size and strong ties with the government helped Nación weather the crisis. Fearing that private sector banks wouldn’t survive, many Argentineans shifted their savings to the government’s Nación. “I think any market share for deposits that the foreign banks lost has been won by a public sector bank like ours,” says Miceli.
Nación also benefited from the government’s decision not to service its sovereign debt for three years before the restructuring accord reached in January 2005. The unpaid interest, as well as taxes on booming agrarian exports, created huge budget surpluses -- equivalent to about 4 percent of GDP, or $19.3 billion last year alone -- that by law must be deposited in Nación as the legal financial agent of the government. “It has been a boon for us,” acknowledges Miceli.
But in other ways, Nación has suffered the same problems as private sector banks and has handled them less successfully, concedes Miceli, whose career includes stints as a government economist and as a director at the other big state-owned bank, Banco de la Provincia de Buenos Aires. When Miceli took over as chairwoman in June 2003, the nonperforming loan rate was an astounding 64 percent. Two years later she has managed to bring that down to 28 percent -- still a figure that no private sector bank would tolerate. Like other Argentinean banks, Nación focused too heavily on large corporate loans, which accounted for half of its $1 billion total loan portfolio in June 2003, while small and medium-size enterprises received a mere 11 percent. “It was obvious that the bank’s very high NPL rate was concentrated in a relatively few very large companies in the Buenos Aires region,” says Miceli. Today large enterprises account for only 31 percent of a total loan portfolio that has grown to $2.36 billion, while the share for smaller businesses, most of them in the provinces, has vaulted to 42 percent.
Nación insists that it no longer offers loans at unprofitable interest rates and that it is more forceful with deadbeats. “We will no longer be the chump partner of our business clients,” says Miceli. The new policy is being felt, and resented, by farmers, who have traditionally been Nación customers. At La Rural in Buenos Aires, there was widespread grumbling about the 18.75 percent refinancing rate offered by Nación for nonperforming loans.
But Nación’s new toughness hasn’t convinced its critics, who strongly suspect that, in keeping with long-standing practice, many loans are still being handed out to political allies of the government. The IMF has tried unsuccessfully to get the government to appoint independent private auditors for Nación and Banco de la Provincia. (IMF officials declined requests for interviews by Institutional Investor.) “The government has resisted the IMF because it considers a public sector bank like Nación to be part of government economic policy and thus off-limits to international organizations or private auditors,” says Miguel Angel Broda, economist and principal at Estudio Broda, a leading Buenos Aires economic consulting firm. “But if you want long-term fiscal solvency, the public sector banks have to be brought under more control.”
According to Nación chairwoman Miceli, it’s the government that must bring itself under control. “Nación can best be strengthened if we are not forced to hand out loans for political reasons as in the past and if the government keeps up its budget surplus so that it doesn’t have to borrow from us,” she says.
That’s an opinion shared by her private sector colleagues. “Hopefully, the political class has learned something from the last crisis,” says Macro chairman Brito. “Then maybe the next crisis will be in 20 years instead of the usual seven.”
