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(Refiles to fix typo in paragraph 2)
By Richard Lough
BUENOS AIRES, Feb 10 (Reuters) - Argentine banks are gearing up for a potential lending boom that could push depressed private credit demand to a 16-year high, bolstered by the reforms undertaken by newly-elected President Mauricio Macri.
A recovery in Argentine banking also depends on whether Macri can seal a deal with U.S. creditors over defaulted bonds but talks with these debt holders have lately shown signs of progress.
An end to the 14-year standoff between Argentina and the lenders who refused to participate in the earlier debt restructuring could pave the way for Argentina's return to global credit markets and help revive investment flows into the South American country's economy.
Macri has fueled confidence by installing a more free market central bank chief, floating the currency and unwinding capital controls, leading banks to maneuver to take advantage of the reforms.
Banco Santander Rio S.A., one of the country's largest foreign-owned banks, has recently started offering a 4.0 percent annualized interest rate on 30-day U.S. dollar deposits. The move is aimed at winning business from Argentines who, scarred by past crises, often hide an estimated $200 billion under their mattress, in a safe deposit box or abroad.
Moreover, the bank plans to expand its retail network to 500 branches nationwide from 390, part of 6 billion pesos in annual spending planned through 2018, said Sergio Galvan, the bank's chief economist.
"We're very upbeat about credit demand," Galvan said, referring to the sector overall. "But we'll have to see how the capitalization of banks evolves and whether it can keep apace with this appetite for credit."
Galvin forecasts that private lending could leap to 23 percent of GDP by 2018 if accompanied by strong growth in deposits, surpassing levels last seen before the crippling 2001-2002 economic depression.
Industry players view Santander Rio, owned by Spain's Santander, as one of the quicker, more aggressive movers among a wider group of foreign banks poised to benefit from a recovery. They also include Banco Bilbao Vizcaya Argentina S.A., HSBC Argentina and Citibank Argentina.
Portfolio managers and banking analysts cite local lenders Banco Galicia, the largest subsidiary of parent company Grupo Financiero Galicia S.A., and Banco Macro as the two big domestic winners, leading local private banks in deposits and loans.
Shares in Banco Galicia and Banco Macro have rallied 10 percent and 14 percent respectively so far this year.
"The ones to take the risk first will be the local banks. International banks will come back when they have a clear view, said Gabriel Arguissain, head portfolio manager at Consultatio Asset Management.
Banco Macro declined to comment and officials at Banco Galicia were not available for interview.
A lending boom would mark a turnaround for Argentina's banking industry, where credit penetration, measured as private credit against gross domestic product (GDP), is a paltry 14 percent, roughly a third the regional average in Latin America.
"The potential for Argentina banks once demand picks up is huge because you have well capitalized banks, with strong capital ratios and a lot of liquidity," said Juan Vazquez, head of equity research at Buenos Aires-based brokerage Puente.
To be sure, Galvan said the extent of the recovery would depend on whether the government hits its forecast of 4-5 percent annual economic growth from 2017 and succeeds in hauling down inflation estimated at 30 percent.
The banking sector recovery could be rocky in the short term. Vazquez forecast a possible dip in lending in the first half of 2016, after December's currency devaluation, a jump in inflation, and higher electricity charges which are forecast to erode household disposable income.
Some financial regulations are also a problem. Banks are still obliged to lend to small companies at negative real interest rates and caps remain on fees and commissions.
Still, in another sign competition is heating up as the free-market reforms progress, one commercial lender said it was poised to launch an aggressive push for more market share by compressing its margins.
"We have room to make a trade off between profitability and market share," said the bank's chief financial officer on condition of anonymity to protect its strategy.
Moreover, flush with pesos, banks will not need to raise capital to expand their loan portfolios.
"We are so liquid right now," the executive said. "Our capital ratio means we can double the size of our loan portfolio without needing extra capital."
Such moves would represent a sharp shift from the past five years, when the banks suffered a profit-sapping cocktail of high inflation, a downturn in economic growth and heavy-handed regulation that both suffocated credit demand and deterred banks from lending long-term.
Instead banks remained profitable by parking their excess pesos in low-risk, high-yielding public securities.
As a result Argentine bank assets are high quality with non-performing loans averageing about 2.0 percent.
Most lenders are likely to keep buying 35-day central bank bills as long as the central bank drives rates higher to drain pesos from circulation and tame inflation, Vazquez said.
The central bank's new chief, free-market economist Federico Sturzenegger, has moved quickly to ease regulations, scrapping a minimum rate on term deposits and a cap on lending rates that had compressed profit margins.
That has given a confidence boost to banks frustrated by the regulator's lack of independence under the country's former leftist president, Cristina Fernandez.
"We have a regulator that is willing to resolve the problems left over from the past," said Claudio Cesario, president of the Argentine Banking Association (ABA).
Argentine banks should trade at a premium of no less than 20 percent against regional peers in 2016 on growth potential alone, says investment bank Raymond James. (Editing by Christian Plumb)