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Why Grupo Financiero Galicia S.A. Stock Just Dropped 13.5%

By Rich Smith – Updated Aug 30, 2018 at 1:47PM

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Yes, there was a downgrade -- but that's only half the story.

What happened

Shares of Argentine bank Grupo Financiero Galicia S.A. (GGAL 1.49%) are down 13.5% as of 1:05 p.m. EDT, and for at least a couple of good reasons.

This morning, analysts at Citigroup announced they're downgrading the company's shares from "buy" to "neutral." Also this morning, Argentina's central bank announced it is hiking interest rates to 60% -- a one-third increase from the previous 45% rate -- in an attempt to attract more investors to its currency, and halt the devaluation of the Argentine peso.

A masonry wall reading BANK

This bank looks pretty sturdy. Citigroup thinks GFG, on the other hand, is anything but. Image source: Getty Images.

So what

One side effect of raising interest rates is to increase the cost of borrowing, which one would expect to hurt profit at a bank like Grupo Financiero Galicia S.A. For foreign investors in the company's stock, the continual decline in value of the Argentine peso, when translated into U.S. dollar terms to determine whether profits or growing or shrinking, may pose an additional concern.

Now what

Already, the Argentine peso has lost nearly half its value over the past year, so some might say that the damage here has already been done. The decision to downgrade Grupo Financiero Galicia stock after the interest rate hike, however, suggests that Citibank, at least, thinks there may be more bad news to come.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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