Argentine banks receive rating upgrade due to reduced foreign currency risk: S&P Global

Investing.com -- On February 5, 2025, S&P Global Ratings confirmed its ’CCC/C’ long- and short-term foreign and local currency sovereign credit ratings on Argentina, maintaining a stable outlook. The agency also increased its transfer and convertibility (T&C) assessment to ’B-’ from ’ CCC (WA:CCCP)’, signaling a lesser risk of interference from the sovereign in domestic entities’ ability to manage foreign currency transactions.

Following these decisions, S&P Global Ratings upgraded its long-term issuer credit rating on Banco De Galicia Y Buenos Aires S.A.U. (Banco Galicia) to ’B-’ from ’CCC’. The senior unsecured debt rating was also raised to ’B-’ from ’CCC’, and the subordinated debt rating was increased to ’CCC’ from ’CC’. Concurrently, the issuer credit ratings on Banco Patagonia S.A. were lifted to ’B-/B’ from ’CCC/C’.

The outlook for both banks is now stable, mirroring the sovereign rating. This outlook takes into account the risks associated with ongoing economic vulnerabilities and the recent improvements in fiscal outcomes, easing inflation, a closing gap between the official and blue-chip exchange rate, and structural reforms aimed at addressing long-standing weaknesses that have negatively impacted economic performance for several years.

The ratings action for these financial institutions is a consequence of the sovereign’s upgrade and the upward revision of the T&C assessment. This assessment limits the rating on banks in Argentina.

At the same time, the economic risk trend in the Banking Industry Country Risk Assessment on Argentina was revised to positive from stable, and the industry risk trend was revised to stable from negative. The BICRA group classification remains at ’9’, with an economic risk score of ’10’ and an industry risk score of ’7’ (on a scale from ’1’ to ’10’, ’1’ being the strongest).

The positive trend in economic risk reflects the expectation that the current administration’s comprehensive measures to reduce inflation, improve the central bank’s balance sheet, and lower interest rates are gradually addressing existing imbalances in the banking sector. These actions are paving the way for economic stabilization and a return to sustained growth, which could enhance banks’ operating performance and mitigate risks.

The stable industry risk trend reflects a decrease in the risk of deposit volatility due to improving economic conditions and greater deposit confidence, as demonstrated by the high participation of Argentines in the tax amnesty. Despite Argentina’s fragile economic conditions and the sovereign’s limited access to external capital markets, banks’ high levels of liquidity and strong regulatory solvency help mitigate these challenges.

The stable rating outlook on the entities mirrors that on the sovereign rating. The outlook on the latter balances the risks posed by persistent economic vulnerabilities with recent progress in fiscal outcomes, easing inflation, a narrowing gap between the official and blue-chip exchange rate, and structural reforms aimed at addressing long-standing weaknesses that have negatively impacted economic performance for several years.

In a downside scenario, the ratings on both banks could be lowered in the next six to 12 months if the risk of the sovereign interfering with the ability of domestic banks to access, convert, and transfer money abroad rises.

In an upside scenario, the ratings on both banks could be raised if the sovereign ratings are increased to ’B-’ and the banks meet the stress scenario for a sovereign default. This could be more challenging, as it is anticipated that banks will increase lending, which could reduce their regulatory capital ratios.

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