Buenos Aires — By Francisco Aldaya
It is said that the profitability of the banking activity is strongly linked to the performance of the economy. In the case of Argentina, the economy has been stagnant for a decade, afflicted by fiscal imbalances, inflation and peso depreciation.
Despite this unfavorable context, Grupo Financiero Galicia, the largest private financial institution in the country, managed to grow its total assets measured in dollars by approximately 50% in the last 10 years.
Fabián Kon, who has led the group since mid-2016, states that the key to this success is technological innovation and the extensive network of officers that Galicia has in order to be close to its customers’ needs.
In order for credit to the private sector to grow again in real terms, the country must bet on an economic plan that makes fiscal balance a top priority, says Kon, arguing that today in Argentina “since there is no currency, there is no savings in that currency”.
The following conversation was edited for the sake of length and clarity.
The credit to the private sector as a percentage of GDP is currently below 20% in Argentina, well below the regional average, which is approximately 45%. What needs to happen for credit to grow again in Argentina?
Argentina is a country with a rickety financial system, isn’t it? I think it is less than 15% [of GDP] today. There are many factors. When you have a problem of macroeconomic instability as Argentina has had in the last few years, that is an attempt against credit, because how do I adjust it? Do I take credit in pesos? Do I take credit in dollars? If I take credit in dollars, will I be able to repay it? Can a bank lend the dollars of its depositors or does it prefer to be more conservative and keep a very high liquidity to be able to return those deposits and not lend them? If it were a loan in pesos, well, it should be a variable rate because the fixed rate is very difficult to fix. Then the macroeconomic problem of instability in Argentina is the main reason for the financial system not to be able to have depth.
Argentina is a country with a rickety financial system.Fabián Kon, CEO of Grupo Financiero Galicia
And in this context, inflation would also be one of the variables that hinder, right?
Until Argentina does not solve the fiscal imbalance problem it has, both at national, provincial and municipal levels, you will continue to live with inflation. It is not something you can achieve with a presidential term, but Argentina has to make explicit and put in black and white what it needs to grow. Where you say, well, but if there is fiscal balance then I will make less social investment, and it is exactly the other way around, if there is fiscal balance there will be investments, the GDP will grow, employment will grow, you will collect more, and by collecting more you will be able to apply that higher collection to social growth, to social assistance plans, to educational plans.
How did Galicia handle the most complicated variables of the Argentine economy during the last decade? Is there anything that Galicia did differently from the others?
Every year is also a little different. Previous periods where there were rates of 70% are not the same as now. The rates [today] are not positive. The key to doing well is counseling. We have company officers all over the country. And here comes an interesting topic, which is this discussion of digital bank versus physical bank. We try to combine the two. Although we have all the digital tools, any company in Jujuy or La Pampa, or Tierra del Fuego, has a company officer sitting in their province who advises them. In Argentina, I would say that every one or two months the chances of you issuing a negotiable bond, issuing it in pesos, issuing it adjusted by CER, adjusted by the Central Bank’s pass-through rate, I would say that it is much more circumstantial.
In today’s context of regulated rates, where does the banking business go?
Today there is a context in which there are many regulated passive and active rates. This is somehow causing that when one looks at the balance sheets of the banks in the last quarters, the Return on Investment has been falling. So today, in a way, there is a certain concern to reduce these regulations to prevent the financial system from weakening. There is no high risk situation, but if you look at the information for the first quarter you will see that there are already some banks in the system with losses in the first quarter. When a bank loses, it is basically a loss of capital and capital is what supports the activity of a bank. So when you look at banks in general, regulators around the world are very prudent in terms of ensuring an adequate level of profitability to preserve that capital.
Do you have any annual projections for 2021 for net income, and how the delinquency rate is going to behave?
The first quarter was obviously much lower than 2020, the first quarter of 2021. We had positive inflation-adjusted returns, so we are generating capital, but much lower than we had been. The issue of rate regulations has a lot of influence on the return of banks. The reality is that non-performing loans increased in a recessionary, pandemic context, but did not reach very high levels. And here I have two explanations. The first is that the financial system is very small, so it also becomes very selective. Naturally, there is a selection process for the most profitable companies. So, in a way, this means that the default rate is not so low. If the financial system has more penetration and reaches more layers of society, it would also generate a social benefit for all sectors to have access to credit in Argentina. And the second is that the credit bureau systems in Argentina are well developed. I believe that Argentines are responsible in that sense and they really use the default when the situation becomes impossible to pay. And there we banks have refinanced a lot.
Since there is no currency there is no savings in that currency. We know there are savings in another currency. But there are no savings in pesos.Fabián Kon, CEO of Grupo Financiero Galicia
Are there risks in an increasing exposure to the public sector, for example, in Leliqs?
Leliqs or Pass-Throughs are something normal, they occur in all the financial systems of the world. We do not see a risk of the Central Bank regulating the monetary base by setting a bond mechanism such as Leliqs for banks. As for the bonds issued by the Argentine Treasury, it is issuing debt to avoid issuance, which has an impact on inflation. So it is also a normal practice. As long as the market demands Treasury securities as a way to make good placements, it is a mechanism that works well. And as long as those bonds do not have any risk of default in the medium term, shall we say. So far it has been working well to finance the deficit. The question is until when Argentina is going to continue financing deficits and when is it going to start having a balanced cash flow to balance the monetary base or what would be better to start generating counter-cyclical funds as so many countries have for investments or to prepare for adverse situations such as the pandemic.
What are the changes in your clients’ habits that are going to remain and which are likely to reverse in a post-pandemic scenario?
If there were still some people who made a fixed term deposit in a branch or made a placement in a mutual fund, all that today is almost 100%. But there are still issues to be solved in Argentina. One is that Argentina still has a gigantic volume of cash in circulation, which is the fuel of the informal economy. The country needs a policy to eliminate the use of cash in the long term. One of the factors you have to work on is to eliminate disincentives and generate incentives. Today, for moving money from a bank account for a small company, you are charged 1.2% Tax on Debits and Credits. This is a huge disincentive to move money through banks and an incentive to use cash. The same applies to withholding taxes. When a business sells through debit or credit systems, taxes are withheld when the sale is settled, so the business prefers to sell in cash.
What percentage of the population uses its bank account actively every month?
Sometimes when people talk about banking penetration they say that there are 60 million accounts open in Argentina, which is true. But if you go to the bank, to the ATM, they pay you 20,000 pesos, and you take the 20,000 pesos, the truth is that you are not banked. Someone is banked when that money is paid electronically. They receive their money, they have their debit or credit card, they can make transfers, they can pay with a wallet, with a QR code, with all these payment methods that are so fashionable today. Our estimation is that if 100 have an account, less than half of them are actively using the account, so you still have enormous possibilities to bank.
That number grew in the pandemic, didn’t it?
Something good that the governments in Argentina did many years ago was that all social plans are paid in accounts. This is very good because it avoids the middleman issue that existed many years ago. Then, people collect in an account with their debit card and go to withdraw the money. This has greatly improved the fact that today it is more recordable. What we have to work on now is that this person uses the money electronically and if possible saves. And here we fall back into the fact that since there is no currency, there is no savings in that currency. We know that there are savings in other currencies. But there are no savings in pesos.
In Brazil, neobanks are gaining market share from traditional banks. In this trend, Bradesco launched Next, which is a digital spin-off. In Mexico, Banorte is going to do the same with a new bank that will be 100% digital, and with a totally separate management. Is Naranja X a bet in that sense?
They are taking part of the market. In Argentina as well. And I think it is a virtuous phenomenon. People will have more options. As for Naranja, Naranja X, yes, the bet is to give all those individuals a comprehensive financial solution. This means that they can have their own account, that they can place a mutual fund, that they can pay with all available means of payment, that they can have a system of discounts and benefits, that they can save, put in a fixed term. So Naranja is going to be a neobank, a bank that has a different format from the traditional format.
In Mexico, the owner of Banco Azteca announced that they are working to integrate a cryptocurrency solution. How does Galicia see this growing trend of cryptocurrencies? Are there any plans to integrate them in the future?
I don’t rule it out. We are obviously looking at it. Banco Galicia is very big, it has many marketing sectors and product managers, so there are probably at this moment those meetings where this is being analyzed. For now we do not have a concrete project to implement it. I think we are still a little bit far away from that.
Galicia’s ADR rose to around US$70 at the end of 2017, and today it is closer to its historical average, around US$10. What is your opinion about the current market valuation, and how is the dividend distribution ban affecting the relationship with shareholders?
It is not a Galicia issue, it is a general market issue. If you look at Galicia, it is probably the asset that best defended itself from all this that started with the PASO [of 2019], let’s say. The positioning of the Argentine macro is a huge barrier for the revaluation of Argentine assets. The relationship with investors is very good because for many years we have been a company that has been very open to provide all the necessary information. Argentina today is in a moment, and after the elections Argentina needs to propose a new horizon and a new economic plan. And for that it is obviously necessary to terminate the agreements with the Paris Club and the International Monetary Fund. If Argentina presents a credible plan that its debts will be paid in the medium and long term as a result of the growth of its economy, with macroeconomic variables such as inflation under control, well, there may be a revaluation of Argentine assets.
Do you have any notion of when you might distribute dividends again?
Dividends are in place, the Central Bank has just renewed the prohibitions until the end of 2021, recently. So not 2021, probably 2022. That also obviously goes against the value of Argentine assets. If you ask me an opinion, it will depend a little bit on whether Argentina can normalize its economy from new agreements.
If the banks are in a solid position, well capitalized and in a good liquidity position, why is this decision to extend the ban being made?
All the large Argentine banks, as you said, are in a very good capital and liquidity position; perhaps there are small banks that are not. When you pay dividends that implies access to the foreign exchange market to pay dividends abroad, so I think that may have influenced the decision, the issue of limiting the demand for dollars in the Argentine economy which, as we all know, is very tight, let’s say.
Opportunities often arise in crises. Can Galicia make an acquisition this year or next year?
Hopefully. We have the vocation and the decision to grow. This was part of the strategic plan we made last year. Even with the endorsement of all the shareholders that are part of Grupo Galicia’s board of directors. That is to say, there is a vocation to grow. We have a team of people working on these opportunities and we have the vocation to do it and we have the capital to be able to carry out this type of transactions.