2023-12-01 10:32:33 ET
Summary
- Helped by its investment gains, Banco Macro delivered a resilient quarter despite the macro headwinds.
- With Javier Milei’s anti-establishment platform winning the election, though, big changes are afoot for the bank.
- Having rallied massively post-election, the stock now offers a limited margin for error ahead of a potentially challenging fundamental outlook.
Having delivered impressive earnings growth through the country's volatile macro cycles while also maintaining higher returns on equity ((ROE)) than its larger peers, Argentina's Banco Macro S.A. ( BMA ) is generally the go-to name for quality-focused investors. The bank's resilience was on show again in Q3, delivering a mostly stable operating income result after adjusting for one-off monetary adjustment losses (inflation-related) and higher taxes.
Crucially, Banco Macro is also entering Q4 (when Milei's presidency begins) from a position of strength, backed by well-managed asset quality, strong capital ratios, and high-teens % adjusted ROEs. Meanwhile, the approval of the Itau Unibanco ( ITUB ) Argentina purchase adds expansion optionality in Buenos Aires at an attractive $50m price tag (implying a ~30% P/Book valuation at the floating exchange rate). Even post-acquisition, the bank should have more than enough capital deployment headroom as well, helped by its industry-leading capitalization.
The only catch here is the added macro and political uncertainty in the coming months. The bank remains uniquely exposed to a host of potential headwinds, including a big inflation reset (likely the first step in a dollarization effort) via its monetary position, lower loan growth in a fiscal consolidation scenario (Milei has promised massive public spending cuts, as well as any structural changes to the Argentine central bank, the BCRA; recall Milei's pre-election pledge to dismantle the central bank). Following the post-election rally, market valuations (~1.7x book) don't offer enough safety margin to protect against the massive uncertainties either. On balance, I am content to sit this one out.
A Decent Q3 Beneath the P&L Volatility
Banco Macro's latest quarter featured some hefty balance sheet adjustments, but on an underlying basis, there were silver linings. Headline net interest income, for instance, was down sequentially on the back of a sequential decline in private sector loan demand, as well as funding headwinds from higher average deposit rates. Management is keeping a handle on non-interest expenses (down QoQ), though, supporting overall margins via a solid efficiency ratio. Other one-offs that impacted the Q3 result include adverse swings in the net monetary position due to higher inflation-related losses and a higher effective tax rate. In essence, core operating income (excluding these one-offs) would have been stable QoQ.
Assessing Banco Macro's results wouldn't be complete, however, without also taking into account its sizeable investment portfolio. In contrast with net interest income, the bank saw significant investment income growth from its dollar-linked and dual-bond portfolio (effectively its currency hedges), mirroring the steep peso depreciation. This, in turn, more than offset mark-to-market losses on a government securities portfolio already being managed lower ahead of the elections (down ~5 percentage points QoQ). Balanced with its strong investment income result, the bank's overall bottom line would have been up YoY for the quarter - impressive given the domestic inflation backdrop. While the former will continue to add P&L volatility, management feels confident in a high teens % ROE guidance this year (even after incorporating the impact of a 1500bps hike by the BCRA). The guidance falls, however, to 10-15% in 2024 - below the historical ROE trend but still ahead of larger peers like Grupo Financiero Galicia (GGAL).
Well-Capitalized Ahead of the Uncertainty
Heading into one of the most significant regime changes in Argentina's history, the bank's strong capitalization and pristine asset quality leave it well-prepared. As of Q3, total NPLs were stable QoQ at 1.4%, with overall write-offs even coming in lower despite broader inflation pressures.
Also notable is the highly liquid balance sheet (99% liquid assets to deposits ratio) and sequential rise in its tier-1 ratio to an industry-leading 35%. A strong capital position bodes well not only for the bank's resilience but also for its ability to capitalize on accretive acquisition opportunities without tapping into external funding - something management has excelled at in recent years. The latest acquisition of Itau's Argentina operations is a case in point, offering good financial (steep discount to book) and strategic sense (adds scale in Buenos Aires, where BMA has a limited presence).
The key source of uncertainty, in my view, comes from the portfolio investments side, a major source of income in recent quarters. At the top of near-term concerns is the high % mix of BCRA-issued securities on Banco Macro's balance sheet, particularly in light of Milei's negative stance on the central bank. To some extent, management appears to be preempting this regime shift - while deposit remuneration likely also played a role, the extent of the Q3 decline in net securities investments (as % of total assets) indicates timely risk aversion. In any case, expect some volatile swings on Banco Macro's investment income line, adding considerable risk to its 2023/2024 guidance.
Cautious Ahead of Argentina's Milei Era
Over the years, Banco Macro has compounded its earnings per share at an impressive rate. The backdrop for Argentine banks is poised to change drastically, though, now that Javier Milei is poised to begin his presidency over the coming weeks. Depending on the new government's success in pushing through Milei's pre-election promises (fiscal consolidation, dollarization, abolishing the central bank, etc.), the bank could see quite a bit of P&L volatility ahead. Not only in its core borrowing/lending business but also in its investment portfolio, which has traditionally been heavy on BCRA-issued Leliq securities. And in the likely event that Argentina swallows the bitter fiscal consolidation pill at a time when inflation is running in the triple-digit %, ROEs could underwhelm expectations into 2024.
In contrast, the market has repriced shares significantly higher post-election (now at a ~70% premium to book), leaving limited downside protection as the bank enters a very tricky operating environment. Net-net, the risk/reward doesn't strike me as particularly appealing here.
For further details see:
Banco Macro: Cautious Ahead Of Argentina's Milei Era