If investors reviewing the latest quarterly earnings from Argentine banks didn't know otherwise, they would find it hard to believe the country was facing twin local and international crises.

Much as American financials did last month, Argentine banks Grupo Financiero Galicia SA (GGAL), Banco Frances SA (BFR), Banco Macro SA (BMA) and Banco Hipotecario SA (BHIP.BA) announced improved first-quarter net profits this week. But unlike their U.S. counterparts, the gains didn't reflect a rebound from multi-billion-dollar losses in the fourth quarter but rather a continuation of a solid year-long performance.

And yet, while the banks' shareholders have been rewarded with a big recent market recovery, the contrast with the country's difficult economic situation is striking.

Unlike U.S. behemoths Bank of America (BAC) and Citigroup (C), Argentine banks couldn't thank a rally in world financial markets for their impressive first quarter.

Argentina's stock and bond markets severely underperformed in the first three months of the year, with the banks' most market-sensitive balance sheet items - their government bond holdings - suffering most. After congressional elections were expedited to June, speculation over a 2009 default and devaluation grew, with the benchmark Discount bond dropping 32.7% and the Argentine peso shedding 8% over the period.

While neighboring currencies rebounded as last year's rout appeared to bottom out, Argentine banks faced intermittent waves of deposit withdrawals from nervous savers last quarter. Meanwhile, private economists pronounced that the Argentine economy had sunk into a severe recession.

So, how did Banco Frances attain an 86-million-peso ($23 million) profit, up 15.5% on the year and four times higher than the first quarter of 2008, while Galicia almost tripled both its fourth-quarter and year-earlier results?

How did Banco Macro - whose shares had swooned on concern over its exposure to a shrinking Argentine consumer credit sector - pull off a 3% on-year increase to post a respectable ARS152 million net profit?

And what about Banco Hipotecario, whose government-dictated mandate is focused on Argentina's virtually nonexistent mortgage market? It announced a ARS30-million profit, double the fourth- quarter result and 13% higher than the first quarter of 2008.

According to Santiago Gallo, a bank analyst at Fitch Ratings, the banks' success lies in isolation and conservatism. Conditions that have kept bank credit in Argentina lingering at a puny 14% of gross domestic product were a blessing in disguise when the crisis hit.

Not only were Argentine banks unexposed to the toxic U.S. mortgage assets, they faced only modest long-term foreign liabilities. They've maintained high levels of liquidity and have built earnings on fee-based income rather than financial intermediation.

"It's not as if the international crisis hasn't found its way into the country - it has done so via falling commodity prices, weaker exports and a downturn in economic activity generally," said Gallo. "But the country is isolated in a certain way from the financial transmission of the crisis."

Gallo said banks turned conservative following the huge losses and PR headaches they suffered during the deposit freezes of 2001-2002. After that crisis, he said, "they saw that the only way to make income was through commissions" instead of credit.

This conservatism, which translates into a highly selective approach toward prospective borrowers, has especially paid dividends for consumer-focused Banco Macro, whose shares have gained 61% since March 31.

Admiring Macro's capacity to get its non-collectible loan charges down from ARS200 million in the fourth quarter to just ARS26 million in the first, local consultancy Research for Traders said Tuesday that the bank had "consolidated to become the most profitable institution (in the country) despite the international context."

Banco Hipotecario's outlook is cloudier, partly because of increasing government intervention. State-owned Banco Nacion owns more than 50% of the bank, but until recently the government had played a passive hand in management. That changed with the ouster of long-term Chief Executive Clarisa Lifsic and the appointment of two new government-assigned directors to Hipotecario's board. Even so, the bank's shares are up 43% so far this quarter.

Meanwhile, the two biggest private banks, Banco Frances and Grupo Galicia - might now be indirectly benefiting from last year's otherwise harmful pension fund nationalization.

Recent Treasury debt placements to the newly cashed-up state retirement agency Anses, while angering pensioner activists, have assuaged market fears over some coming payments on government bonds, which loom large in these two banks' portfolios. The Discount bond is up 36% since March 31; Galicia and Frances shares are up 49% and 50%, respectively.

-By Michael Casey, Dow Jones Newswires; michael.j.casey@dowjones.com; 54-11-4103 6740