A risk rating agency assured that lower rates will increase the supply of credit but warns about default

A risk rating agency assured that lower rates will increase the supply of credit but warns about default
A risk rating agency assured that lower rates will increase the supply of credit but warns about default

Banks increase the supply of loans to avoid losing profitability due to lower rates (Moody’s)

Since the president took office Javier Milei It lowered the reference rate in pesos six times, taking it from 133% to 40% today. According to Moody’s, this will increase bank credit and securitizations, as the sale of debt portfolios in the capital market is called. However, they warn that the demand will be low and warn about the default risks given the recessive economic context.

“Banks will increase their supply of credit although we do not expect demand to increase significantly in the short term,” Moody’s said. In fact, different banking entities have already begun to offer UVA mortgage loans.

“Due to the strong reduction in the PASES rate and in order not to lose profitability, banks are increasing the supply of loans for both individuals and companies, among which those denominated in UVA stand out. However, given the economic contraction, we do not expect demand to be sufficient to increase credit penetration of banks’ assets until the end of 2024 or early 2025,” the credit rating agency said in a report.

Moody’s: “Given the economic contraction, we do not expect demand to be sufficient to increase credit penetration of banks’ assets until the end of 2024 or beginning of 2025.”

And he added that the banking system will migrate part of its assets to treasury securities in the short term, which increases its exposure to sovereign risk. While the demand for credit from the private sector is not sufficient for loans to represent a relevant proportion of assets, Banks will increase their position in Treasury securities.

Evolution of holdings of securities of financial entities (Moody’s)

In turn, Moody’s pointed out that securitizations, that is, the conversion of credits or financial securities into more liquid negotiable securities; backed by consumer assets will test credit improvement mechanisms in the short term. “The significant fall in wages in real terms, together with the eventual increase in unemployment, will have an impact on the payment capacity of loan takers,” the report stated.

The significant fall in wages in real terms, together with the eventual increase in unemployment, will have an impact on the payment capacity of loan takers (Moody’s)

Then, banks will increase their credit offering in order to look for profitable alternatives for the placement of their assets. However, the impact will be seen in the medium term since current demand is not sufficient to increase credit penetration.

“In the meantime, we expect an increase in the banking system’s exposure to sovereign risk due to a migration of a portion of its assets to Treasury securities from BCRA instruments,” Moody’s projected.

“In relation to the underlying assets that prevail in the local market, we do not expect changes in the immediate future, with consumer assets – particularly personal loans – continuing to have a substantial participation. However, in the medium term and, to the extent that greater credit penetration by the banking sector materializes, we expect new potentially securitizable assets to appear such as collateral and mortgage loans, in addition to loans to the corporate sector. Although the current context still poses numerous challenges for the rest of the year in economic terms, the recent appearance of an incipient supply of mortgage loans by several financial entities and the strong inflationary slowdown lead to an eventual emergence of securitizations backed by mortgages. in the medium term, possibly from 2025,” he considered.

“The development of a local residential mortgage-backed securities (RMBS) market will depend on two pillars: the volume of origination of said assets, which will generate the need for banks to transfer them in exchange for liquidity ; and a more stabilized macro in terms of activity and inflation that allows increasing investor appetite for longer-term instruments,” the rating agency concluded.

 
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