Banco Macro: Strong Fundamentals Are Overshadowed By Macro Risks

seekingalpha06-25

Banco Macro is a leading private bank in Argentina with a strong presence in the interior provinces.The bank's financial performance is solid with high profitability, efficiency, and asset quality....

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Business Overview Banco Macro is an Argentinian bank that operates as a retail and commercial bank throughout the country, being a leading private bank in Argentina. The bank was founded in 1981 and has grown organically and through acquisitions throughout its history, having nowadays about 460 branches in Argentina and serves close to 5 million retail customers and some 140,000 corporate clients. Geographically, the bank is more exposed to the interior provinces than its competitors and less to Buenos Aires city and province, being a distinctive factor compared to other Argentinian banks and foreign banks operating in the country, such as Banco Santander (SAN) or HSBC Holdings Plc (HSBC).   Branch network (Banco Macro)Its shares are listed in the Buenos Aires stock Exchange and in the U.S. as ADS on the New York Stock Exchange since 2006, having a current market value of about $3.6 billion, being a relatively small bank by this measure. Its core business is taking deposits and providing loans to low and mid-income individuals, small and medium-sized enterprise and provincial governments. At the end of 2023, its loans market share to the private sector was about 9.1% and its deposit market share was around 6%, showing that Banco Macro is a medium-sized bank within the Argentinian banking system. Most of its deposits come from retail customers, accounting for some 59% of total deposits, while 35% comes from corporates and the rest from public institutions. The vast majority of its deposits are sight deposits, while the rest are time deposits and other, which means its deposit base is a source of low-cost funding. By currency, the vast majority is in its local currency, while about 30% are in USD. On the loan side, contrary to banks in developed countries which usually are very exposed to mortgage loans, Banco Macro has a different loan mix with a relatively low weight of mortgage loans. Indeed, only about 4% of its loan book are mortgages, while the most important credit product are credit cards (29% of total loans), followed by documents, overdrafts, and other types of loans, as shown in the next graph.   Loan book (Banco Macro)About 66% of its loan book is generated in individual customers, which are funded by consumer deposits, while the rest is mainly corporate (33%), while public institutions only represent 1% of total loans. By currency, only 10% of loans are in USD, and the rest is in local currency, which means loans in USD are vastly funded by deposits in USD. Banco Macro’s loan-to-deposits ratio was 54.4% at the end of 2023, which is somewhat higher than its peer average of about 45%, but it’s still a conservative ratio and shows that its loan book is comfortably funded by deposits and the bank does not need to raise funding in the capital markets. Usually, a loan-to-deposits ratio between 90-100% is considered acceptable within the banking system, but in developed countries, banks have easy access to wholesale funding, something that is not the case in Argentina and therefore banks have to finance their loan books through customer deposits, explaining why the L/D ratio is much lower when compared to banks in the U.S. or Europe. Regarding its growth strategy, investors should note that the bank has increased its size over the past couple of decades through several acquisitions, the last one being the Argentinian unit of Banco Itaú (ITUB) in 2023, a strategy that is not expected to change much in the future as the banking system in Argentina continues to be more fragmented when compared to developed countries. Beyond potential acquisitions, the bank also wants to cross-sell products to its customers and gain market share across the country, especially in the regions where it has a stronger market share compared to its competitors. Financial Overview Regarding its financial performance, Banco Macro has a very good track record given that its earnings have increased in recent years and its profitability is quite high. Indeed, due to several macroeconomic imbalances in Argentina and very high levels of inflation, interest rates are much higher compared to developed countries, leading to extremely high business margins compared to banks operating in other regions. While Argentina’s central bank has been cutting its key rate over the past few months, its key rate is still at 40%, being very high compared to ‘normal’ standards. As seen in the next graph, interest rates have been quite high in Argentina in recent years, being a strong support for high net interest margins across the banking system in the country.   Central bank rate (Trading Economics)This happens because banks rely heavily on deposits to finance their balance sheet, which is a low cost funding source. Banco Macro is no exception, and its business model benefits greatly from high interest rates, leading to a net interest margin of 40.5% in 2023, compared to 34% for its peer group. However, as inflation is cooling down, even though it remains at extremely high levels, and the economy is expected to contract in 2024 (by about 3.6%), interest rates are expected to maintain their downward trajectory in the coming months, with Argentina’s central bank expected to cut its key rate to about 28% by the end of 2025, according to Bloomberg data. This should have a negative impact in Banco Macro’s net interest margin ahead, but most likely will remain between 30-40% during the next couple of years, which is a very high margin compared to developed banks. For instance, Wells Fargo (WFC) which is also mainly a retail and commercial bank reported a net interest margin of 3.13% in 2023, showing how high Banco Macro’s margin is. Investors should note that due to the hyperinflation in Argentina, the bank’s financial figures are adjusted according to IFRS IAS 29 as established by the central bank, thus its ‘underlying performance’ has been adjusted since 2020 due to this effect. In 2023, its net operating income amounted to $3.1 billion, an increase of 224% YoY, supported by higher interest rates and forex gains. While operating expenses also increased at very high rates, the bank’s operating leverage is significant and its efficiency rate improved to 18% (vs. 41% in the previous year), which is a very good level of efficiency in the banking sector. Indeed, its peer group average is close to 45%, showing that Banco Macro’s efficiency is extremely good. Regarding credit quality, despite the hyperinflation and very high rates, the bank’s credit underwriting criteria is sound and asset quality has remained quite positive in recent years. The only exception was 2020, related to the pandemic, when the bank increased provisions in a conservative way.   Allowances for credit losses (Banco Macro)More recently, its allowances for credit losses have been slightly above the financial system in Argentina, but its non-performing loans (NPLs) ratio is only 1.3% (stable compared to the previous year), showing that Banco Macro’s allowances have been conservative. Moreover, its NPL ratio is significantly below Argentina’s banking sector at 3.1% in 2023, thus its asset quality is quite good and future credit losses are expected to remain moderate. Due to this combination of higher revenues, improving efficiency and stable asset quality, its profitability improved markedly in 2023, considering that its return on equity (ROE) ratio, a key measure of profitability in the banking sector, was 33% in 2023. This is a very high ROE and above peer levels, showing that Banco Macro has a very sound business model and that it has benefited more than most from higher rates over the past few quarters.   Return on average equity ratio (Banco Macro)During the first quarter of 2024, Banco Macro’s operating performance remained quite good, reporting an operating income of $176 million, up by 149% YoY, and an ROE ratio of 37%. These strong results continued to benefit from high interest rate levels, while its loan book declined by 8% YoY and deposits were down by 11% YoY. Asset quality remained quite strong, with the bank reporting an NPL ratio of only 1.14% at the end of last quarter. Regarding its capital ratio, it was about 44.5% at the end of last March, boosted by strong organic capital generation, being comfortably above its capital requirement. The bank has an excess capital position of more than $2.8 billion, which allows it to have an interesting capital return policy. Its distribution policy is quite irregular, but considering its distributions over the past twelve months, it’s currently yielding close to 8%, which is quite attractive to income investors. Considering that Banco Macro has an excess capital position, high profitability and good capital generation capacity, this capital return policy is likely to be maintained in the near future, even though current consensus expects lower distributions over the next couple of years, leading to a dividend yield in the 4.5%-7% range from 2024-26. Regarding its valuation, Banco Macro is currently trading at 1.5x book value, which seems to be quite undemanding for a bank that has a very solid capital ratio, high profitability, and offers a high-dividend yield. However, as an Argentinian bank the market doesn’t seem willing to value Banco Macro, or its peers, at higher multiples due to high political risk and volatile rates, which can have a great impact on its profitability and lead to high forex volatility. Indeed, the bank’s historical book value multiple over the past five years is only 0.87x and its peers trade slightly above book value, thus Banco Macro doesn’t seem to be undervalued right now. While its fundamentals are good, Banco Macro faces several political and macroeconomic headwinds which make investor sentiment cautious toward Argentinian banks, namely a big inflation reset and a fiscal consolidation scenario following the new government election some months ago. Conclusion  Banco Macro is a quality banking play due to its sound fundamentals leading to very good levels of efficiency, profitability, asset quality, an industry-leading capital position and good capital return prospects. Despite that, the macroeconomic landscape and potential economic reforms in Argentina are headwinds that investors shouldn’t overlook, plus its valuation is not exactly cheap, thus I think investors should remain on the sidelines on Banco Macro for the time being.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2446002243"}