OREANDA-NEWS. The victory of Mauricio Macri in the Argentine presidential election may lead to improvements in the operating environment for the local banking system, says Fitch Ratings. The new government is expected to intervene in banking matters less and this could potentially alleviate market distortions and improve long-term funding access over the medium term.

Fitch does not expect an immediate effect on banks' ratings and outlooks. Bank ratings remain constrained mostly as a result of the low sovereign ratings and the weak operating environment. Therefore, any upside potential would stem only from positive developments on these two factors.

In the short term, the economic environment will remain challenging. Argentina needs to address difficult fiscal and monetary measures in facing the country's profound economic imbalances.

Argentine banks have maintained sound profitability, based on diversified revenues, reasonably well-contained operating costs and moderate credit costs. However, banks are facing the pressure of slower loan growth, regulatory caps and floors on interest rates and certain fees, upward pressures on expenses, and provisions for credit losses. Results should improve in the medium term if the new government succeeds in reducing high inflation levels. Better results are also contingent upon stronger GDP (and loan) growth, which could pick up due to the higher levels of confidence generated by the change in government.

Although higher demand for consumer loans had fueled some acceleration in overall loan growth in first-half 2015, Argentina still suffers from lower-than-average credit demand due to the slowdown of the economy. Fitch expects the economy to continue to grow at a very slow pace at least until 2017, which will continue affecting credit demand. However, banking system health is benefiting from loan delinquency rates at historically low levels and adequate loan loss reserve coverage. Fitch expects a moderate deterioration in asset quality.

With the new authorities, Fitch expects to see significantly less government intervention in the financial system. For the past three years, the government has increased its intervention by imposing new regulations that limit financial sector activity. In Fitch's opinion, the new government will reduce this intervention and adopt regulations that will result in greater flexibility for banks. However, changes could be gradual.

Fitch believes the most important sovereign credit issue for the new administration is to achieve a final solution to the legal battle with the sovereign's holdout creditors that would allow Argentina to resume service on its restructured debt. This would provide both the government and the private sector with the ability to access foreign funding.

The main challenge for banks is to rebuild long-term assets and liabilities. The Argentine systems' deposit base has maintained pace with loan growth. However, retail deposits, the systems' primary funding source, can become volatile if the operating and political environment deteriorates. Also, liquidity levels may decrease in the medium term if credit growth accelerates. More access to long-term foreign funding would be beneficial for alleviating these issues.