Boston, MA -- (SBWIRE) -- 08/29/2012 -- BMI View: Argentina's unsustainable macroeconomic trajectory will continue to pose moderate risks to the country's commercial banking sector. While low levels of penetration suggest financial institutions have great potential for growth in the country, we believe double-digit inflation and the Argentine government's interventionist policies will continue to undermine the industry's performance in the short term. As we have repeatedly highlighted, the Argentine banking sector continues to be characterized by significant untapped potential, and remains a regional laggard by conventional metrics. Banking sector assets as a percentage to GDP declined to 36.7% in December 2011, from 39.1% in January 2011. The ratio is well below the 50% to 60% levels reached in 2002 and 2003, and is one of the lowest among major economies in the region, compared to Brazil's 131.6%, Chile's 111.0%, and Colombia's 53.6%. Government The Main Player While financial services penetration remains low, client loans continued to expand at record levels in 2011, posting y-o-y growth rates between 42.3% and 52.2% throughout 2011, mostly due to an increase in lending to the private sector, which now represents roughly 45% of total bank assets, compared to just Argentina Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 28 33% at the end of 2006. Lending to companies was a key driver of the observed expansion in credit, accounting for more than 61% of the increase in total credit to the private sector over the first nine months of 2011. Despite this increase, client loans per capita in Argentina remained at US$1,600 at the end of 2011, a fraction of Brazil's US$8,500 and Chile's US$10,000. In order to encourage the use of banking services, the Argentine authorities have adopted measures such as a reduction in the cost of bank transfers, the introduction of the Free Universal Account (CGU), and new guidelines for the authorization of branch openings. According to the new guidelines, which were introduced at the end of 2010, while reviewing application for new branches in areas of the country that are well-supplied with financial services, the Central Bank will assign priority to those applications that simultaneously include requests for branch openings in areas where the penetration of financial services is particularly low. Despite the efforts from the authorities, we believe one of the main obstacles to a greater penetration of banking services in the country stems from the macroeconomic imbalances that have emerged over the past few years. Annual inflation above 20% will continue to make peso-denominated deposits unattractive. At the same time, however, access to foreign-currency assets has become increasingly difficult, leaving some Argentineans with no choice but to invest in anything from real estate to secondhand cars to protect the value of their savings. Moreover, we highlight that much of the new credit has come from public banks, rather than p

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