In the last two years, bank credit for families and companies collapsed, at the cost of loans to the State

Banks have substantially reduced the portion of credit allocated to both individuals and companies in the last two years. This emerges from a report prepared by the FIX agency, which on the other hand highlighted the soundness of the system despite the effects of the pandemic. According to the rater’s work, exposure to the non-financial private sector fell from 40.4% in 2019 to 33.1% in 2020, falling an additional notch to 30.5% of assets in 2021.

Another noteworthy fact of the report is that the system reduced the concentration of credit in the main debtors, which is good news because “it reduces the risk of uncollectibility.” The rating agency highlighted that the financial system has “very good liquidity, adequate levels of capitalization and good quality of their credit portfolios”.

The sharp drop in loans to the private sector (measured in terms of bank assets) stems from the drop in demand for credit by the public and by companies. But it is striking that this reduction occurred not only in 2020 but also continued into 2021, despite the rebound in economic activity after the downturn caused by the pandemic. For this year they expect a “slow” credit recovery to take place.

The credit crunch caused year-on-year declines in banks’ interest income, which was offset by higher interest earned on investment in repos and Leliq

FIX considered that the system presents “enough resilience” to deal with adverse situations. Among the main aspects that could affect local banks, the following stand out:

– The government’s ability to reduce current levels of inflation.

– Volatility of the local financial markets, influenced by expectations regarding the negotiation of the agreement with the International Monetary Fund (IMF) in a scenario of meager levels of reserves and upcoming debt maturities.

– Slowing of the economic recovery, aggravated by adverse weather conditions that would affect the volume of agricultural production and the policies of developed countries that could affect prices.

– Uncertainties about the health situation, given the appearance of new strains of the virus.

At the same time, credit crunch caused year-over-year declines in interest income. It also affected the lower rate spread due to regulatory limits imposed by the Central Bank and the higher cost of funding, in a context of negative real rates. These lower incomes were compensated by higher interest obtained from the investment in passive repos and titles, particularly the Leliq, the Liquidity Letters issued by the Central.

The rating outlook for the financial sector went from “negative” to “stable” in September last year, given the solidity shown by the banking system to get through the crisis caused by the pandemic

In relation to fundraising, FIX explains that the entities “prioritized funding with deposits and especially in local currency, in a context of exchange restrictions and negative rates.” Of course Those resources were not to increase the credit offer, but to expand the placement in Leliq.

During the last two years, there has been a strong increase in the relative share of deposits from institutional investors that provide financial services, such as mutual funds (FCI) that as of September 2021 represent 18.8% of the deposits of the non-financial private sector in local currency, which has led to a greater concentration of funding and an increase in its volatility and cost.

The rating outlook for the financial sector went from “negative” to “stable” in September of last year, given the solidity shown by the banking system to get through the crisis caused by the pandemic. However, the report does not delve into the most worrying aspect related to banking and the management of its assets, which is the growing weight of public debt (both Leliq and Treasury bonds). This means that there is a displacement of the private sector at the expense of a greater participation of the public sector.

KEEP READING: