In this sense, we believe that the government’s agreement with the IMF (International Monetary Fund), recently approved in the National Congress by the majority of the members of the opposition, can be the initial kick of the beginning of a path of economic recovery. , and this is something that could benefit the banking sector.
Solvency with low penetration
First of all, it is important to highlight that, unlike other difficult times for the Argentine economy, such as 2001, the local financial system is today very solvent. Unlike that time, banks do not have a currency mismatch between assets and liabilities in dollars; exposure to the public sector -excluding Central Bank short-term bills- is low, leverage is adequate, capitalization and liquidity levels are robust, and non-performing loans are at healthy levels. Otherwise, entities remain profitable in most cases.
As for the rest of the economy, the successive acceleration of inflation seems to be the main impediment to growth in the banking sector. High inflation rates make it almost impossible to grant long-term loans (for example, mortgage loans), and in the short term, interest rates tend to be too high for the demand for loans to be sustained and increase in size. time.
The result of this is a mostly transactional system, which bases its profitability on the wide margins that result from capturing sight deposits and savings accounts (with practically 0% interest), while the rest of the funding is completed with fixed terms.
Today, the proportion of bank deposits is approximately 50% of deposits that do not pay interest, and the remaining 50% of fixed terms. A slowdown in the inflation rate, as happened in 2017, when it went from 39% to 25%, will make financial institutions more profitable. Although they will resign the aforementioned margins, these will be more than compensated by the higher volumes of loans.
What was said in the previous paragraph is reflected when observing banking penetration, measured as loans over GDP or deposits over GDP. According to data from the Central Bank, banking penetration in Argentina today stands at around 12% and 23%, respectively.
In a comparable country, such as Colombia, the same proportion stands at 49% and 51%, respectively, while in Peru it is 55% and 39%, respectively. Far away is Chile, with a more developed capital market, where loans represent 99% of GDP and deposits are 81%. In 2017, Argentina had the highest banking penetration, and even so it was a proportion of loans at 15% and deposits at 22%.
We understand that Banco Macro (BMA AR) and Grupo Financiero Galicia (GGAL AR) are the best ways to bet on the growth of the banking system in our country.
According to the market consensus surveyed by Bloomberg, Banco Macro trades at a PER (price/annual earnings) multiple of 7.1x as of December 2022, while Galicia does so at 7.5x, which represents a discount of 35 % and 32%, respectively, compared to the average of the other banks with ADRs. Alternatively, measured by 2022 price/book value, Banco Macro and Galicia are trading at 0.8x and 0.9x, respectively. Financial entities in Latin America (not counting Argentine ones) trade at 1.4x, which represents a premium over Argentine banks of 65%.
In conclusion, we believe that the Argentine banking system is healthy, and under current conditions, we do not see that there are risks of crisis in the sector as at other times in history.
In any case, we believe that in order to grow and generate value that compensates risk-taking investors, the growth of the economy and the ordering of its main variables is essential.
We believe that Banco Macro and Grupo Financiero Galicia are the best way to bet on this growth, both because of their low valuations compared to their peers in the country and the region, but also because of their healthy balance sheets, and because they are the most traditional way of betting on the local banking system.
Head of Equity Sales & Trading at Adcap Grupo Financiero
Source: Ambito
