Banco Macro: very good prospects

Miguel Braun · Apr 10, 2024 · 7 min read

Banco Macro began operating in 1985, as a non-bank financial institution, and grew to become one of the largest private banks in Argentina. It was founded by members of the Brito and Carballo families, who are now majority shareholders.

The group has 8,768 employees, 1,538 ATMs, 955 self-service terminals and a structure of 463 service points, currently being the private bank with the largest branch network across the country. It is one of the private banks with the most organic and inorganic growth over the last 10 years.

The shares have traded on the Buenos Aires Stock Exchange since November 1994 and on the New York Stock Exchange (NYSE) since March 2006.

https://www.macro.com.ar/relaciones-inversores/informacion-financiera/principales-indicadores On 02/28/2024 BMA reported very good results for the latest Q4 2023, which it also accompanied with good annual numbers.

With a market value of almost 4 billion USD, BMA appears to be a very well-managed bank with very solid ratios. To start, it has liquid assets representing 118% of its bank deposits, so it runs no risk of a bank run. Also, USD deposits represent 30% of its total deposits and it has only 30% of its assets in the public sector. In turn, net worth increased 28% YoY measured in USD.

Let's go to the results:

In Q4 2023 alone they earned 438 million USD, which annualized gives 1,750 million USD. This leaves us the following ratios:

The Q4 2023 results seem too good, so for the analysis it is better to look at the full-year ones.

But also, these results they had in 2023 were achieved in a country in recession, with a tremendous dollar rise and galloping inflation, in an election year and with a constant sense of economic crisis. Even so, the bank stayed very solvent and was able to make a lot of money, with a return on equity of 28% in USD.

The explanation for the impressive profit they had in Q4 2023 comes from a revaluation of their mark-to-market holdings (the valued holding of their investments).

This would seem to indicate that BMA's assets are rising in price, which increases the value of the bank's net worth. This is explained partly by the drop in country risk and the rise in price of Argentine assets, such as sovereign bonds, private debt and equity. That is: the investments BMA holds are worth more and more.

In addition, the drop in country risk in Argentina will be very beneficial to re-incentivize credit to the private sector in our country. In this sense, BMA is one of the best-positioned banks to capture this new economy coming, given the large number of private-sector clients it has. On top of that, whenever the interest rate falls, the discount rate at which companies are valued decreases and therefore the present value of their future flows increases. That is, stocks tend to rise in price.

The other day I heard an interview of Milei with Fantino where he talked about the financial reform he wants to do, and he said one of the people from the private sector working on the matter is precisely one of the Britos, so BMA will be very well positioned for everything coming. They know in advance where the economy is heading and what they have to do. The other person of course working on the matter is Santiago Bausili, president of the BCRA.

From what I understood from Milei, the idea is to move toward a free-banking system, where there can be no bank runs because banks are required to hold more liquid assets than total deposits. The idea is to eliminate the need for the BCRA as a lender of last resort and have banks together with the capital market have a system that can solve this scenario.

Milei also explained that:

These 3 things eliminate any type of monetary issuance: issuance to remunerate liabilities, issuance to buy USD, issuance to finance the deficit and issuance for rediscounts (the Central's anti-run insurance).

All this implies they will slash the interest rate, because if there is no inflation or devaluation there is no sense in having such high rates. This will strongly reactivate consumption and activity will take off.

The outlook for investing in Argentina right now is very encouraging. BMA is very well positioned and is now benefiting from the rise in asset prices, as well as taking advantage of very high peso interest rates while the dollar remains stable.

Besides the fact that that rate is a tremendous gain in USD if the dollar stays stable, the scenario seems to be that the peso will in fact appreciate against the USD. This is tremendous. Before, the scenario was that there were fewer and fewer USD and more and more pesos, the amount of pesos (monetary base) expanded. Now the scenario seems to be the opposite: the peso monetary base stays stable but more and more USD will come into the economy. A priori this would mean the peso would become scarcer than it is now relative to the USD, so it should appreciate. We said the peso rate was good if the dollar stays stable; now imagine how good it is if the dollar also falls.

They will lower the rate soon anyway, and that is why I prefer to invest in productive assets rather than earn a rate in pesos. In the long run, I think the peso interest rate can fall very sharply. USD inflows will come from exports: agriculture, oil & gas, mining, services, etc.

Argentina may be facing a tremendous plot twist in its history: if Milei eliminates monetary issuance and manages to pass the anti-issuance law he wants, the Argentine peso could become one of the strongest currencies in the world. In this scenario, the peso and the dollar coexist freely and people can choose which currency to save in. Milei's promise is fulfilled because the BCRA is left with no functions other than replacing old bills, and the dollar circulates freely in the economy, with the option to pay in dollars or pesos interchangeably. Milei would thus design a system that backs a currency that could be even stronger than the dollar.

The point is that BMA will benefit from the high rate now, will benefit from the rise in the price of its assets, and will benefit from the whole reactivation of consumption and the Argentine economy that is coming very strongly. Milei also already announced he wants to do a new tax amnesty and that he literally "couldn't care less if someone came and spent 50 million USD".

I think we will gradually move toward a large integration of the informal economy we have in Argentina, which will become formal once we lower taxes and simplify regulations. This will obviously hugely increase banks' deposits. If the political caste doesn't accompany this year, Milei already warned that on December 11, 2025, after the midterm elections where they will sweep, he sends all the reforms.

Sooner or later, whether politics accompanies or not, Javier Milei, Toto Caputo and the rest of the team will get the economy running no matter what. They have been doing a fabulous job, having achieved a fiscal surplus in the first two months of their administration and having made the largest adjustment in the history of humanity, and even so increased their popularity.

They are the first liberal-libertarian government in world history. I think we are heading toward an Argentina with an explosion of economic activity and that BMA will undoubtedly be well positioned for everything coming.

Back to BMA, if we do a DCF valuation discounting the 2023 profit at a 10% rate and assuming 0% growth for the next 20 years, we get that BMA should be worth 4,750 million USD. That is 20% more than it is worth now, assuming 0% growth.

This tells us the company undoubtedly has the margin of safety Benjamin Graham recommended. Graham explained that a margin of safety could be achieved by buying stocks and bonds only "when their quoted price was below their intrinsic value".

That gap between price and value provides a cushion to absorb the impact of an investor's own "calculation errors" and the unknown conditions of the future. It is a very wise strategy in an uncertain world, based on the recognition of human fragility and the dangers of history: sometimes we make mistakes or have bad luck, and the future is unknown.

BMA comes from an impressive rally, having risen more than 170% since Milei won, in the last 6 months, far exceeding the rises of Banco Galicia, Vista Oil & Gas and Pampa Energía:

Even so, it is still very cheap and far from its all-time highs. Below, how far Argentine assets are from their all-time high in dollars:

As we can see, it is still more than -60% below its 2017 all-time highs, where it reached more than 100 USD per share for almost a year.

Milei is not Macri and this time it is different. We are world champions and we have the first liberal-libertarian government in history. The bull market in Argentina has started.

Recommendation: STRONG BUY.

It has a margin of safety, a positive track record, good management, good future economic prospects and a very attractive valuation. This goes up or up.

Date: 04/10/2024. Share price: 50 USD.