Dollar loans: Moody's anticipates a new boom in bank loans but warns of growth in non-performing loans

The Central Bank's most recent decision to relax the requirements for banks to issue loans in dollars could cause the debt issuance boom in the local market that occurred during 2024 to extend this year, although it may also affect the entities' default ratios.

This was stated by the local branch of the Moody's risk rating agency, which, while welcoming the fact that the Government has not made progress in modifying the so-called "macroprudential rules" that prohibit entities from using their clients' dollar deposits to lend to people or companies that do not generate those dollars to ensure their payment, warned that the rule carries with it the risk of "currency mismatch."

Through Communication “A” 8202 of February 20, 2025, the BCRA relaxed the provisions that limited the granting of credit in foreign currency to companies that did not genuinely generate income in dollars. "The new regulations encourage the expansion of credit in dollars to the private sector," Moody's said.

As a result of the normalization of the macro economy, with a drop in inflation and interest rates and a dollar that remained more or less stable, in the last year loans in dollars grew 212% compared to 2023 and jumped more than 16% in December alone. "This increase was funded to a greater extent by the increase in foreign currency deposits from the asset regularization regime that was established in the second half of the year," Moody's explained.

"The regulatory change will allow the unmet demand for credit in foreign currency to be met by companies in non-exporting or foreign currency-generating sectors," they explained. In this way, banks could broaden the range of their potential borrowers to other companies that are not part of the export chain, and even be encouraged to offer secured or mortgage loans in dollars to private clients.

Entities may only use "their own" dollars, which they obtain through credit lines abroad or debt placements in the capital market. For Moody's, this is "a positive consideration that protects the credit profile of banks and limits the decrease in liquidity in dollars."

"In addition, Article 23 of Decree 905/2002 was maintained, which establishes that deposits in foreign currency can only be used to finance borrowers with regular income from foreign trade operations. In this way, deposits in USD are protected against currency mismatches and the bank's exposure is limited to its own funds," the local branch of the credit agency emphasized.

The downside of this measure will be a possible increase in bank non-performing loans , which are currently at minimum levels in general in Argentina. " Bank non-performing loans could be pressured by the risk of currency mismatch . By allowing access to credit in dollars to companies that do not generate foreign currency, the risk that, in the event of an increase in the exchange rate, borrowers will fail to meet their obligations increases," Moody's warned, while considering: "This is partly mitigated by the exchange rate stability expected for 2025 and by the historically low levels that the banking system currently presents."

For Moody's, this change in the rules of the game could generate greater interest from banks to seek financing in the capital market. Since the second half of last year alone, the entities have issued debt equivalent to US$ 10 billion, with the banks Comafi, Galicia and Supervielle leading the way.

"The demand for these instruments was correlated with the dollar liquidity prevailing in the market after the money laundering," Moody's explained, adding: "Likewise, the drop in the crawling peg rate generated greater demand for hard dollar instruments to the detriment of dollar-linked instruments, which creates a favorable context for the issuance of bonds for funding loans."