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Should You Stay Long Argentinean Banks?

October 13, 2013 | About:
fedezaldua

fedezaldua

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Argentina's political landscape is about to change. The change will be towards a more market friendly environment. Recent primary legislative elections turned Sergio Massa into a national political leader that will surely compete for Argentina's presidential post. The market has perceived that a change is in the air and equities rallied aggressively. Banks such as Banco Macro (BMA) and Grupo Financiero Galicia (GGAL) – which controls Banco de Galicia – are up by 28% and 48% year-to-date. Is it too late to join the party?



Amazing performance



Banco Macro is a great bank which has been expanding throughout Argentina thanks to an aggressive acquisition spree during the last two decades. Besides, the bank's operational performance is indeed impressive. For its second quarter, Banco Macro reported solid results as net income increased 18% year-over-year (in US dollar terms) owing to credit growth coupled with an increase in average private sector lending interest rates. The bank's lending growth can be explained by higher consumer loans (both personal and credit card lending) coupled with an increase in mortgage and pledge loans in the commercial portfolio.

Besides, the bank's metrics are truly strong. Banco Macro's return on average equity is around 26% and its return on average assets is as high as 3.5%. Meanwhile, it has one of the best asset quality ratios in the country (NPLs to total loans should average 2% for the current financial year).

Even when the bank's price has already gone up strongly, it has some scope to keep out-performing the market. Macro now trades at 1 time its book value and 4 times earnings. I would put the bank a target of 1.2 times its book value. Hence, according to me, there is a 20% up-side potential from the current market price.



One bank, one M&A target



Banco de Galicia's fundamentals are weaker. Banco Galicia's net income increased by 16%year-over-year in local currency terms but deteriorates by 1% in US dollar terms. Meanwhile, asset quality deteriorated as the bank’s NPL ratio increased to 3.9% in the second quarter mainly due to higher non-performing loans in the consumer portfolio. Galicia's profitability ratios are similar to Macro's. Its return on average equity is 28% and its return on average assets is 2.3% . That said, given the company's shareholder structure, I think this bank is more prone to M&A than Banco Macro or any other big private bank in the country. In Galicia's case, the ownership is highly atomized among three (very) numerous families: the Braun, the Ayerza and the Escasany families. Other banks such as Banco Frances – which is controlled by Spain's Banco Bilbao Vizcaya Argentaria (BBVA) – and Banco Macro – which is controlled by two much smaller families – are less prone to be acquired in the near term. Hence, since acquisitions are always made at a premium, I think Galicia should be valued at a slightly higher multiple than Macro.

Currently, Galicia trades at 1.1 times its book value and 4.5 times earnings. I would give the bank a target price of 1.5 times its book value which would result into a 36% up-side potential from the current level.



Bottom line



Both Galicia (which is held by Louis Bacon from Moore Capital Management) and Macro (held by Acadian Asset Management) still have good up-side potential. But their valuation is not as cheap as it used to be a couple of months ago and, as a result, your margin of safety is considerably smaller. If you go long, set in mind a price target and sell as soon as your target is reached.

Rating: 3.3/5 (3 votes)

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