PREPARED BY

Dobariya gautam mansukhbhai

HASC BANKING IN ARGENTINA

A CASE STUDY PRESENTATION ON

BANKING ON ARGENTINA

PREPARED BY: DOBARIYA GAUTAM MANSUKHBHAI

BACKGROUND OF HSBC London based HSBC drives its name from its founding member, the Hong Kong and

Shanghai banking Corporation Limited.

Established in 1865 to permit trade between China and Europe.

It is the world's fourth largest bank by total assets, with total assets of US$2.67 trillion.

HSBC has around 6,600 offices in 80 countries and territories across Africa, Asia, Oceania,

Europe, North America and South America, and around 60 million customers. As of 2012, it

was the world's second largest bank in terms of assets and sixth-largest public company,

according to a composite measure by Forbes magazine

HSBC’S ENTRY IN ARGENTINA(1990s)

HSBC Bank Argentina S.A. is the

principal HSBC operating company in Argentina.

The seventh-largest bank in the country, it provides

a full range of banking and financial products and

services, including commercial, consumer and

corporate banking, to over 1.2 million customers.

In 1997, the Group acquired the remaining shares in

the Roberts Group holding company and renamed it

HSBC Argentina Holdings SA.

Principal business groups and divisions

Commercial Banking

HSBC provides financial services to small, medium-sized and middle-market enterprises.

The group has more than 3 million of such customers, including sole proprietors,

partnerships, clubs and associations, incorporated businesses and publicly quoted

companies.

Global Banking & Markets

Global Banking and Markets is the investment banking arm of HSBC. It provides

investment banking and financing solutions for corporate and institutional clients,

including corporate banking, investment banking, capital markets, trade services,

payments and cash management, and leveraged acquisition finance. It provides services in

equities, credit and rates, foreign exchange, money markets and securities services, in

addition to asset management services.

Continue…

Global Private Banking HSBC Private Bank is the marketing name for the private banking business conducted by the

principal private banking subsidiaries of the HSBC Group worldwide.

Retail banking and wealth management HSBC provides more than 54 million customers worldwide with a full range of personal

financial services, including current and savings accounts, mortgage loans, car financing, insurance, credit cards, loans, pensions and investments.

HSBC Ventures into Argentina

HSBC united with New York Life to form and retirement insurance company so

acquisition of Roberts was a strategic fit in both banking and insurance.

HSBC Argentina also acquired companies in pension fund management and medical

care

The outlook for HSBC in Argentina looked good in starting years.

In 1998, its first year full year of operations, the bank had pre-tax loss of $13 million

but earned a profit of $67 million in 1999 and expected profits to continue growing at

100%

IMPACT OF ARGENTINA CRISIS ON HSBC BANKING

Argentina Crisis 1999-2001

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Background Before 1930 (the 7th on the world per capital income)

Argentina enjoyed 70 years of political stability that facilitate rapid economic development.

1940 to 1989 Argentina experienced significant political instability:

military rule & internal conflictions

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How did it all go wrong with Argentina?

1989 to 1991 Carlos Menem was elected president of Argentina Privatization Trade Liberalization Adoption of currency board (1 peso = 1 USD)

1991 to 1999

The government decided to peg the Peso to the US dollar (one to one fixed rate) restore

confidence and combat the hyperinflation. The new strategy worked at the time. The economic Growth Rate: 5.5% in 1996, 8.1% in 1997

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How did it all go wrong with Argentina?

Current Account Deficit = ∑ X - ∑ M

= - 42%

Argentina’s exports became vastly expensive compared with its neighbor after Brazil crisis.

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Impact & Effect

Lower export plus world price decline especially in the farm products limited Argentina’s ability to earn the foreign currency needed to repay USD foreign debts.

Peso fallen 70% against the dollar after ending the fixed link with dollar.

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Impact & Effect

The investments values in the country became less after Peso’s huge decline.

Bad news for those borrowed in $ and are paid in Pesos.

Imported goods much more than exported goods which increase the inflation

Social violence widespread.

The country went on borrowing on international market, until debt reached $140 bn.

First Crisis The Argentinean peso was legally pegged to the dollar, on a one-to-one basis, a

decade ago by Economy Minister Domingo Cavallo. In the hope to end hyperinflation.

But due to devaluation of Brazilian Real investors were attracted to invest in Brazil rather than Argentina.

Results: Argentina lost the trust of investors The cash outflow from the country increased

Second Crisis The president Carlos Menem acquired lot of debt, in both domestic and foreign which

lead domestic interest rates to increase In early 1990s, privatization was done which had already thrown lot of people out of

work As privatized companies were utilities, so the prices of the utilities increased The economy was facing recession from quite few years but it grew steadily worst as

domestic demand decreased

Results: Higher the borrowings, higher the credit became for businesses Due to which many companies were closed Increase in unemployment The downward domestic demand increased debt burden

Third crisis

The peso was believed to be devalued So people rushed to their banks to convert their peso into dollars So to avoid draining of banks, Cavallo enacted a set of measures that froze only small amounts

of cash were allowed to be withdrawn.

Results: Higher the borrowings, higher the credit became for businesses Due to which many companies were closed Increase in unemployment The downward domestic demand increased debt burden

Domestic comparison Total exports is about half of the total imports

Imports about $56bn

Exports about $30bn

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The problem was mainly divided in the following two factors: Currency devaluation after breaking the link between Peso and USD. The huge international debt that reached $140bn.

As per the old saying: “if you owe the bank $1000, it’s your problem, but if you owe it

$140bn, then it’s the bank problem” The new president desperately seeks assistance from the IMF on December 1999. IMF expanded its agreement for a 2nd time after Argentina’s congress passes “Zero

Deficit Law” that requiring a balanced budget by the 4th Q of 2001. The government conducted a 2nd debt for $60 billion of bonds with 7% interest rate

instead of 11% - 12% interest rate for extended maturity.

Attempted Solutions

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Attempted Solutions

The central bank reserves were falling by $2billion a day, so that the president limited dollar withdrawal to $1000 per month, which lead to more instability in the market and IMF took hold of 1.24 billion loan till Argentina’s meets its financial targets.

The disturbance spread to major cities with increasing the unemployment rate, and deep budget cut.

The congress selected a new president (Eduardo Duhalde) Jan 2002. The new president established the following economic policy: Devaluate Peso by 29% (1.4 to the dollar) only for major foreign

commercial transaction. Smaller deposits can withdraw by converting to Peso with 1.4 exchange rate.

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Attempted Solutions The IMF approves request for one year extension on $926 million

payment due in Jan 2002. In 2003 a new president was elected (Nestor Kirchner) - Made bold policy move in the area of human rights - Institutional reform and economic policy The faith in democracy in Argentina restored In Jan 2006, Argentina paid off its $9.5 billion debt to international

monetary fund. Reducing poverty, controlling inflation rates. Maintain strong economy growth.

ECONOMIC CONDITION DURING CRISIS

The economy shrank by 20 percent from 1998 to 2002

In terms of income, over 50 percent of Argentines were poor

Seven out of ten Argentine children were poor at the depth of the crisis in 2002

ARGENTINA’S RECOVERY

At the end of 2002 the situation could be normalized to a certain extend and new elections were hold

The devalued peso made exports more competitive abroad, while discouraging imports.

Due to many exports, the Peso became more stable GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7%

in 2007 Unemployment has been considerably reduced (it has hovered around 7% since

2011)

CONCLUSION

Brazil got a competitive advantage against Argentina regarding exports

Privatization made the recession of the country go worst The measures taken to avoid draining of banks caused lots of protest Argentina’s government undertook very important steps to recover

from the crisis like devaluation of the currency

HSBC’S REACTION HSBC’s reaction to the crisis was similar to that of other banks in the country.

It was forced to rethink loans and to decide if the political and economic instability of

the country was worth the risk of continued operation

HSBC lost $977 million in 2001 in Latin America, compared with profit of $324

million in 2000 because of depreciation of the peso

HSBC holdings doubled its bad debt charges to $2.4 billion and pre-tax profits fell by

14% in 2001

THE PROBLEM WITH PESIFICATION Because of pesification instituted by the Argentine government , loan repayments to HSBC

were deeply discounted In June 2002, HSBC refused a loan payment by Perez Companc, an energy holding company

because the payment was in pesos. The original loan was for $101 million and Perez’s offered payment of 104.57 pesos only

equalled about $28 million at market rates, HSBC argued that debt was not covered by pesification.

Despite early losses after the initial economic collapse, HSBC has remained in Argentina throughout its financial crisis and turmultuous recovery.

HSBC paid on all its external obligations and has continued to capitalize its Argentine subsidy to maintain stability.

However, after the initial crisis, HSBC refused to infuse new capital in the Argentina operations, forcing HSBC to operate on funds generated in Argentina.

After suffering a $210 million loss in 2002, the Argentine subsidiary of HSBC recorded profits of $48 and $156 million in 2003 and 2004, respectively.