New York, January 05, 2005 -- In its annual report on Argentina's banking
industry, Moody's Investors Service says that its stable outlook for the
system's ratings is indicative of the continuing burden of the banks'
holdings of public sector debt and its structural mismatches, as well as
the negative effects that both financial and legal uncertainties have
had on Argentina's overall business climate.
"Despite recent performance improvements aided by a more benign inflation
and interest rate environment, the Argentine banks' core earnings
outlook, asset quality and funding access remain fundamentally weak," the
rating agency concludes.
The report also provides an update on Moody's new global local currency
deposit ratings and national scale ratings for the Argentine banks.
The summary opinion of Moody's report, "Banking System Outlook:
Argentina", follows:
"Our credit outlook for the Argentine banks continues to hinge largely on
the sovereign's slow progress in rescheduling its external debt. After
three years, this lack of resolution continues to burden the financial
system not only due to its holdings of public sector debt, but also
because of the effects that political, financial and legal ambiguities
have had on the overall business climate and asset values in Argentina.
This backdrop continues to weigh on the bank ratings because of the
considerable impact it has on bank fundamentals and franchise value. Our
global foreign currency deposit and bank financial strength ratings
remain at the same low levels of Caa2 and E, respectively.
Our "E" bank financial strength ratings, which are indicative of
intrinsic financial strength, reflect the banks' continued weak core
profitability and earnings quality, reflecting their uncertain recurring
earnings, pressured asset quality, and weak economic capitalization. In
addition, the banks face operational and transition risks as the system
undergoes a major reconstruction. Deposit levels, though apparently more
stable, remain lackluster.
The Argentine banks are also still challenged by an uncertain rule of
law, particularly as it concerns the right to foreclose on problem
debts, as well as the never-ending debate on the "amparos", lawsuits by
depositors claiming the original value of their dollar deposits.
Financial margins also remain relatively volatile, resulting in part from
the structural mismatch of assets and liabilities partly as a result of
the asymmetric pesification and indexation of the financial system in
2002. While moderate loan growth and provisioning have helped improve
asset quality, it remains fundamentally weak. This points to further
credit costs down the road, especially given present high unemployment
levels and still relatively weak corporate credit quality.
That said, the system's overall performance improved during the first
nine months of 2004, aided by more benign inflation and interest rates as
well as the banks' own efforts to adjust their operations to the more
difficult business climate. Loss levels declined as a result of higher
securities gains and as funding costs eased. The banks also continued to
tackle operating cost overages in the context of still weak revenue
growth. We expect the moderate upturn in lending to continue in the near
term in light of attractive rates and marketing campaigns, which should
provide better coverage of costs.
We remain cautiously optimistic as the banks begin to turn the corner,
while they cope with a pressured business environment and a
hard-to-plan-for sovereign debt problem. Mergers and consolidations,
which began to pick up pace in 2004, should help to further the
restructuring of the financial system."