Will Argentina's Debt Downgrade Impact Its Bank ADRs?

What's the outlook for Grupo Financiero Galicia, Macro Bank, and Bbva Banco Frances?

Mar 21, 2014 at 2:35PM

Moody's Investor Service further downgraded its rating on Argentina's government bonds to junk on Monday. According to the agency, the downgrade to "Caa1" from "B3" owes to the drop in official reserves and growing concerns over the country's ability to service its foreign debt. What's going on?

Argentina is going through a period of high uncertainty over its inflation rates, which grew to about 30% for last year -- one of the highest in the world. Since 2011, the country has established currency exchange restrictions as its citizens turned massively to the dollar to avoid the erosion of their savings. As a consequence, the country's reserves fell to $27.5 billion from a high of $52.7 billion in 2011.

The issue here is that Argentina does not currently have external funding options, so it has to rely on its official reserves to pay debt. Considering that the government faces dollar debt payments of more than $20 billion between 2014 and 2015, with the current level of reserves it will be tough to make those payments and maintain currency stability.

Will this affect Argentine Banks?
To address this question, let's take a look at three Argentine banks that trade on U.S. exchanges: Grupo Financiero Galicia (NASDAQ:GGAL), Banco Macro (NYSE:BMA), and BBVA Banco Frances (NYSE:BFR). These three banks are highly correlated and have recently posted their fourth-quarter results. Performance-wise, the strong devaluation in late January pushed their stock prices down, but since the beginning of February, prices have recovered.

Grupo Financiero Galicia is up 5.7% year to date. This is the No.1 private bank in Argentina, and it has shown a good performance in 2013. In fact, net income in pesos grew 67% in the fourth quarter year over year. Grupo Financiero Galicia's net income for the quarter represented an annualized return of 3.4% on average assets and 39.5% on average shareholders' equity. Not bad.

Banco Macro isn't in bad shape, either, continuing to show a strong solvency ratio with a 25.3% capitalization ratio in excess capital in the fourth quarter. This means that the bank's core equity capital compared to the total of all assets held by the bank weighted by credit risk is high, and thus the bank holds excess capital, making it solvent. In addition, the Bank's liquid assets remained at an adequate level, growing to 33.3% of total deposits -- the highest quarterly figure for the whole year. The bank's stock is up 4.2% year to date.

BBVA Banco Frances is showing the best performance of the three in year-to-date terms, up 8.6%. The bank's net financial income grew 36.6%, and its private-sector loan portfolio increased 28.1% in 2013. The institution has maintained excellent asset-quality ratios despite the increase in its non-performing loan ratio to 0.76% in the year and the deterioration of the economic environment that prevailed in the second half of the year.  

Looking forward
As you can see, last year was not bad for Argentine banks, but the situation in the country remains complex, and it will certainly affect banks looking forward. Why? There are basically three government measures that give us a hint of what could happen. First, there's the increase in local interest rates, which is meant to capture excess liquidity in pesos and cool down the pressure on the exchange rate. Although this has worked and brought tranquility to the money markets, it makes loans more expensive and less attractive. Second, in early February the central bank limited foreign exchange holdings to banks, forcing them to sell their hard-currency-denominated assets and become a lot more exposed to the peso, elevating risks. Third, new restrictions on bank financing of foreign trade transactions will considerably reduce this business, which was big among grain producers and exporters.

Bottom line
It is true that the Argentine official reserves are free-falling and that there is an increased risk of not meeting foreign-currency debt-service obligations. But the country is also looking at ways to avoid a default by stabilizing the exchange rate and reenter the international debt market. In fact, some clear steps have been made toward this objective. This week the country won France's support in its debt disputes against the "Paris Club," an informal group of official creditors that could unlock future credit for the country. In addition, the country has changed its statistics methodology in order to better reflect its inflation rate. This step will prevent sanctions and improve Argentina's relationship with the IMF, which could also unlock fresh cash.

So far, these steps have worked, and the past two months -- after a 17% overnight devaluation of the peso -- have been relatively calm in terms of expectations. However, almost nothing has been done to ease the rising inflation pressure, and this could lead to another devaluation in mid-2014, starting a new vicious cycle of higher inflation and uncertainty for the peso.

Regarding the outlook for local banks, you have to understand that banking is a heavily regulated business, and in a country like Argentina, where problems are manifested mainly through its monetary variables, it will not be easy for local banks to maneuver the turbulent waters coming ahead.

Looking for Safer Stock Picks?
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers