Banco BBVA Argentina: Not The Best Play Among Argentine Banks

seekingalpha11-22

Banco BBVA Argentina S.A. is expected to benefit from Argentina's economic reforms, but has weaker fundamentals compared to peers, making it a less attractive investment.The bank's loan-to-deposit ...

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(NYSE:BBAR) is expected to benefit from economic and social reforms in Argentina, but it has worse fundamentals than its peers and may not be the best way to play this macro theme. Business Overview Banco BBVA Argentina is part of the Spanish banking group BBVA (BBVA), operating as a full-service bank for large corporates, middle market businesses, and consumers. It offers a wide array of banking products and services, including consumer and corporate lending, credit cards, securities trading, insurance, beyond others. It has a relatively small weight within the BBVA Group, representing only about 2% of its net attributable profit, and its market value is about $3.9 billion (compared to some $56 billion for the group as a whole). BBVA Argentina’s has about 4 million customers and hold some $10.5 billion of assets at the end of last June. It has a market share of about 10.5% regarding loans to the private sector, being a mid-sized bank in Argentina. Indeed, measured by total assets the BBVA Argentina is the fifth-largest bank in the country, having a similar size to Banco Macro (BMA), which I’ve also covered recently. Its loan book amounted to about $4.2 billion at the end of Q2 2024, representing about 40% of its total assets, while private and public debt securities represented some 29% of total assets, and 15% was held in cash and deposits in other banks. Compared to Banco Macro, it has a higher weight of loans on total assets and less reliance on debt securities. This is a business mix that should lead to relatively more stable revenues and earnings over the long term compared to its competitor. On the liabilities side, BBVA Argentina finances itself mainly through deposits, which are more than enough to finance its loan book. Indeed, its loans-to-deposit ratio was 66% in Q2 2024, which is a conservative level and shows that the bank has plenty of room to push for loan growth ahead, as a ratio below 95-100% is usually considered acceptable in the banking sector. Its loan mix is highly geared to the retail segment, which represents close to half of its loan book, while mid-sized companies represent 35% of total loans, and large corporate has a weight of 17%. By economic activity, the loan book is well diversified, with manufacturing being the largest industry with a weight of about 14% on total loans, while related to other sectors the bank has smaller exposures, as shown in the next graph.   Loan book (BBVA Argentina) In the consumer segment, the bank has a large exposure to credit cards, which represents 31% of total consumer loans, while other important lending products are discounted instruments, pledge loans, overdrafts, and consumer loans. Contrary to banks in developed countries, the bank’s exposure to mortgage loans is quite low, representing only about 4% of its total loan book, and the bank has a very low market share in this product (only 0.7% compared to around 10% for overall retail loans). Regarding its deposits mix, the vast majority (around 72%) are in local currency, while the rest is in USD, and are spread between time deposits and savings accounts, while checking accounts only represent about 22% of total deposits. This means most of its deposits are interest-bearing, which has a negative impact on its net interest margin (NIM), but despite that, its NIM was above 37% in 2023, a level that is slightly above average in Argentina (around 34%). Regarding its exposure to the public sector, BBVA Argentina has a lower exposure than compared to its closest peers. This means its operations are more similar to a “normal” bank than its Argentine peers, but nevertheless, represented some 26% of its total assets at the end of last June. From an accounting perspective, most of its exposure is classified as available-for-sale and impacts its capital through Other Operating Income (OCI), while only 10% of its exposure is reflected in its P&L account (accounted at fair value). This is important because Argentine banks have a lot of exposure to government bonds. This justified their very high levels of NIM, but this can lead to high volatility in revenues and earnings on a quarterly basis, particularly if accounted at fair value.   Public sector exposure (BBVA Argentina) Macroeconomic Background & Financial Overview The political and economic backdrop has improved quite significantly over the past year in Argentina, as Javier Milei’s economic and public sector reforms are progressing quite well and recent achievements have been excellent. Indeed, the government’s efforts to cut public spending and control inflation are delivering good results, with the country being able to report a fiscal surplus recently, the first in twelve years. Regarding inflation, it has declined considerably recently, from its monthly peak of more than 26% last December, to only 2.7% in October. This clearly shows that Milei’s economic reforms and crackdown on public spending is bearing fruit, which is also visible in the country’s risk premium. Indeed, Argentina’s risk premium compared to the U.S. has declined considerably recently, measured by the spread between its government bonds and U.S. treasuries. In the 10-year maturity bond, the spread of Argentina’s sovereign bonds has declined from around 1500 basis points (bps) a few months ago, to around 750 bps nowadays. This indicates that investors have rewarded Argentina’s debt for its economic and public reforms lately, being supportive of the country to have access again to international debt markets in the near term. While economic growth is still expected to be negative in 2024 (real GDP growth is expected to be -4%), an economic rebound is expected next year, given that Argentina’s GDP growth is estimated to be about 3.5% in 2025. Given this improved economic background and more moderated inflation levels, rates have come down in the first half of 2024, to its current level of 40%, while further cuts are expected ahead and, according to Bloomberg data, the central bank’s key rate should decline to 25% by the end of 2025.   Interest rates (BBVA Argentina) This macroeconomic background has been quite supportive for the banking sector. Not surprisingly, the sector has performed quite well recently, as shares of Argentine banks have re-rated as the market is forecasting a new period of economic liberalization and growth in the sector. This is supported by low penetration of the banking sector in the country, compared to its South America peers and other emerging countries, boding quite well for loan growth over the coming years. As shown in the next graph, the penetration of loans and deposits in Argentina is very low compared to other LatAm countries. Thus, there is a significant opportunity for business growth ahead, if Argentina continues to move ahead in its economic reforms.   Credit penetration (BBVA Argentina) This setback is clearly supportive for BBVA Argentina’s growth in the coming years. In addition, the bank continues focused on its strategy of acquiring clients and improving its customer service, namely by developing its digital channels and being at the forefront of the digital transformation. Regarding its operating performance, BBVA Argentina’s has reported a mix performance recently. This is given that its NII declined by 1.5% in Q2 2024 to $680 million, due to lower income impacted by declining interest rates and a fall in inflation impacting the CPI-linked bonds. In addition, operating expenses were up by 0.5% YoY to $343 million in the quarter. Due to negative jaws, its efficiency ratio increased to 55.3% in Q2 2024, which is a higher level than compared to Banco Macro which has reported an adjusted ratio of around 30% (excluding one-off factors) in recent quarters. In the third quarter of the year (Q3 2024), the bank’s revenues were impacted by lower interest income due to declining average monetary policy rate, lower interest from CPI-linked bonds, and lower forex results. Due to these effects, its net interest income declined by 45% YoY to $461 million in the quarter, while net fees and its financial margin were positive during the quarter, but only had a small impact on the overall NII. Its operating expenses also declined considerably, down by 25% YoY to $317 million, but this was not enough to offset revenue weakness, leading to an efficiency ratio of 59% in Q3. This ratio was up by close to 400 basis points compared to the same quarter of 2023, which is negative for the bank and was a main reason why its operating income declined by 41% compared to the previous quarter. Loan losses remained quite low at only $5 million in the last quarter, a similar trend to other Argentine banks, and its net income amounted to $99 million in Q3, down by 22% QoQ.   Income (BBVA Argentina) Its return on equity (ROE) ratio, a key measure of profitability in the banking sector, was 16.9% in Q3 2024, which is a good level, but it’s below the average of its peers (at around 27%). This weaker level of profitability is mainly justified by the bank’s worse operating efficiency compared to peers. Regarding its capital ratio, it’s also lower than the sector’s average, considering that its capital ratio was 22.2% at the end of last September, while its peer’s average is around 26%. Despite that, its capital requirement is around 11.5%, thus BBVA Argentina is well capitalized, and can distribute a large part of its profits to shareholders. However, investors should consider that its dividend decisions are highly influenced by its regulator and capital controls in Argentina. The Central Bank needs to manage its USD reserves and can restrain the bank from distributing dividends, and also has decision power regarding how many installments the bank can make per year. Based on its dividend distributions made during the past twelve months, BBVA Argentina is yielding above 9%. This is quite attractive to income investors, but they should be aware that its earnings are volatile. Its dividend is expected to be cut, according to analysts’ estimates, by almost half related to 2025 earnings. Thus, its dividend yield is likely to be much lower ahead and lead to lower income appeal. Regarding its valuation, BBVA Argentina is currently trading at about 1.8x book value, which is at a significant premium to historical value of about 1.1x book value over the past five years. However, looking at a long-term historical range, the market has given Argentine banks much higher valuations during periods of improved economic conditions, such as during 2015-19. Therefore, if economic conditions continue to improve in the short term, and the country’s risk premium continues to decline, the market is likely to re-rate Argentine banks and BBVA Argentina should be no exception. Conclusion  Argentine banks should continue to perform well ahead, if economic reforms in the country continue in the right direction, but Banco BBVA Argentina S.A.'s below-average profitability and capitalization are weak points of its investment case. I think Banco Macro may be a better play right now, as both banks have a similar valuation, but Banco Macro appears to have more upside potential over the medium term.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","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":"4.29.3","shortVersion":"4.29.3","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/2485427408"}