In Argentina, the tables have literally turned since the 1990s, when the economic situation involved maintaining the peso at a convertible one-to-one rate with the American dollar. Foreign banks began to buy Argentine institutions and set up subsidiaries in Argentina. Locally financed Argentine banks saw this trend as a threat, and many decided to sell out to foreign institutions, mostly from Europe.
Near the end of 2001, however, Argentina’s economic crisis caused the collapse of the country’s financial system, and bank deposits were trapped in the so-called ‘corralito’ [‘little corral’] – the phrase used for the system that prevented Argentines from getting at their own assets during the crisis.
Soon, the U.S. dollar was set at three pesos to the dollar. As confidence in the financial system dried up, people began withdrawing their meager savings from Argentine banks. Faced with the decision of whether to leave Argentina or stay, four foreign banks have already abandoned Argentina since 2001. Now, however, a new trend has begun to move in the opposite direction: Local Argentine institutions are buying the foreign banks that are leaving the country. Little by little, Argentine banks are recovering the position they occupied in earlier times.
One of the first foreign banks to leave was France’s Credit Agricole. In Argentina, Credit Agricole controlled three banks — Bersa, Bisel and Suquia. El Banco Nación, an Argentine bank, has taken over those three institutions, although it has only been able to sell one of them, Suquia, to MacroBansud, an Argentine-owned bank. Meanwhile, MacroBansud has acquired part of ScotiaBank, a Canadian bank that was among the first foreign institutions to leave during the low point of the crisis. ScotiaBank sold 65% of its shares to Comafi, and MacroBansud acquired the rest.
Banco Patagonia is another Argentine institution that has begun to gain customers. In 2002, Patagonia acquired Sudameris from Italy’s Intesa BCI. Banco Patagonia-Sudameris recently made news by purchasing the locally owned shares of Lloyds. Lloyd had the longest history in Argentina of any foreign bank.
This latest transaction makes Patagonia-Sudameris the fourteenth-ranked bank in terms of deposits ($2.169 billion), up from seventeenth position. In terms of assets, Patagonia-Sudameris rises to the twelfth spot, with $4.145 billion; it had occupied the fifteenth spot. The bank’s network also increases from 32 branches in 2001 to 150 branches in 2004.
The next foreign bank to leave Argentina will be Italy’s Banca Nazionale del Lavoro (BNL). Some reports say Banco Hipotecario might be interested in acquiring BNL. In any case, the question remains: Will BNL be the last foreign bank to leave the Argentine market?
Analysts have differing opinions. “BNL is going to leave the country,” says Fernando Canzani, the Argentine representative of Standard Bank London, a South African bank that specializes in emerging markets. “Probably, other [foreign] banks will also leave because of the lack of structural reform; low profitability, and the low level of legal security” in Argentina.
However, Juan José Piano, of Argentine-owned Banco Piano, says, “Those foreign banks that decided to leave our country already left in the two or three years after the end of [dollar-peso] convertibility.”
The news about Lloyds has set off alarm bells in other emerging markets such as Brazil, Colombia and Costa Rica. Nevertheless, “People should realize that there is no flight by foreign banks from emerging markets,” says Gabriel Noussan, professor of financial management at IAE, the business school at Austral University. “Nor is there a flight from Latin America. In fact, the major institutions, as well as old ones like Citigroup and the leading Spanish banks (BBVA, Santander Central Hispano) not only are staying, but they are trying to expand their business.”
What the System will Look Like
Before December 2001, 52% of all bank deposits in Argentina were in foreign hands. That number has now dropped to 33.1%. Meanwhile, local banks have expanded their ownership from 12.7% up to 16.7% of total deposits. Moreover, Argentina’s publicly owned banks — the third group of players in the market – have expanded their share of ownership from 32.9% to 47.4% [of deposits]. These figures show that local banks have a greater presence in the market than foreign banks because of the recent trend.
“I’m inclined to believe there has to be a duality in Argentina’s banking sector,” says Piano. “The presence of foreign banking is important when it is time to design the institutions of a financial system that can connect with international markets. The public wins whenever the supply of credit and financial services is as broad as possible.”
Noussan believes that “the existence of a mix of banks is something very positive. Foreign banks bring lots of experience in new businesses, and new ways to structure financing. They bring dynamic management skills.”
“Some banks, such as ours, continue to place their bets on this country,” Canzani confirms. “In fact, we are increasing our presence in emerging markets such as Argentina. I don’t think that the origin of a bank’s capital is as important as having a solid and efficient financial system.”
Every bank in Argentina will have to confront a range of challenges in order to compete in the marketplace. Juan José Preciado, director of capital markets at the University of Salvador, says that the Argentine banking system “must make a strong commitment to rebuilding confidence. It must participate actively in providing financial assistance to the private sector. It must play a leading role in the development of capital markets, because banks have the infrastructure to become the link between investors and companies. Moreover, it must bring back the millions who remain outside the system. Some banks have already become aware of the business they can generate. They are participating in the development of a fiduciary structure and evaluating the agribusiness sector, as well as consumer companies that are looking for financing.”
Noussan says, “Banks face the challenge of increasing their role in the economy. They need to take advantage of mergers and partnerships, and normalize their ownership structure by increasing their solvency. They must repair the damage done by years of losses by achieving sustained growth in their profits.”
According to Noussan, neither foreign-owned nor locally owned banks should be withdrawing from business sectors in Argentina or elsewhere in South America. “There are lots of challenges, but the opportunities are also immense. You have to realize that in Latin America, institutions are well below international standards. There isn’t much sophistication about using financial services. Banking is only available for the middle and upper classes.”
As a result, says Canzani, “The greatest challenge is how to make moves in a volatile environment where demand for credit is low.”
The Future of Argentine Banking
The departure of such international banks as Lloyds and BNL reflects the special problems of Argentina, not the region as a whole. “You have to put this question in the context of a series of events in recent years,” says Canzani. These events include “the end of [dollar-peso] convertibility, the crisis of the financial system, the establishment of the ‘corralito’ [which paralyzed the banking system]; the loss of deposits in relation to the GDP; an economy that grows without financial assistance to the banking sector, and the slow recovery of deposits.”
Given this scenario, says Preciado, “Those banks that don’t adapt to the new rules will find it very hard to stay in the country. By this, I mean those banks that fail to make the transition from the main way banks generated revenues during the 1990s – through big spreads they obtained from the difference between the rates they paid to investors and the rates they received from companies. To survive now, banks will have to get involved in providing financial assistance to the real economy and in providing more financial benefits to companies.”
Piano agrees. “When they were investing a decade ago, some banks placed their bets on a different sort of Argentina. This country has changed a great deal from a social, economic and even a political point of view. The risks that banks face nowadays are very different from what they were ready to assume [in those days]. To bring back business on a large scale, we had to survive three very hard years. Working conditions today are not the same.”
Noussan adds that the events of the last few years have deeply wounded the confidence of consumers of financial services. Foreign banks have suffered from small networks, a low market share in payroll processing, and a small share in the credit card market. Given current conditions, they see very little opportunity to prosper in the medium term without making significant investments.” Noussan adds, “This sector faces a slow and painful recovery. It will involve the reconstruction of institutions, solvency and profitability. Perhaps the most important – and hardest – task will be to rebuild confidence among consumers of financial services.”