BANCO MACRO S.A.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

A leading Argentinian bank providing a range of financial services to individuals, SMEs, and corporations, with a strong presence in the domestic market and some regional influence.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Banco Macro S.A. (BMA), headquartered in Argentina, is a prominent financial institution that offers a wide array of services, including lending, deposit-taking, and transactional services to individuals, small and medium enterprises (SMEs), and larger corporations.

Business Overview

BMA operates primarily within Argentina, where its business is influenced by local economic conditions and regulations. The bank’s revenue streams are diversified across various services, but its core business revolves around interest income, derived from the difference between interest earned on loans and other credits and interest paid on deposits.

  • Revenues Distribution:
    • Net Interest Income: The largest contributor to BMA’s revenue, derived from lending activities to individuals and businesses as well as from investments in government securities. BMA tries to make profits in this area by increasing the interest on loans while providing lower interest on deposits.
    • Fees and Commission Income: A significant income source, including various transactional fees, asset management fees, and commissions from financial and insurance products.
    • Trading Income: Income from the buying and selling of bonds, foreign exchange, and other financial products.
    • Other Income: Income from a range of non-banking activities, which may include real estate, investment in other companies, and sales of assets.
    • In its quarterly report ending December 31, 2022, the bank recorded a 21% increase in total net operating income compared to the previous year, driven primarily by an increase in interest and service income as well as a decrease in operating expenses. In 2021, net interest income from loans and advances was approximately $51.3 billion pesos vs $134.5 billion pesos in 2022. Net commission and services income was also increased from $29.8 billion to 48.3 billion. This has continued to the latest report in 2023 as can be seen from the financials.
  • Industry Trends:
    • The banking industry in Argentina has been characterized by volatility, influenced by economic and regulatory changes.
    • The industry is slowly getting more and more digitized.
    • Rapidly growing fintech market.
    • Increased levels of inflation.
    • High interest rates are typical in the industry.
    • Government interventions in the financial market such as capital control, exchange regulations and tax increases.
  • Competitive Landscape:
    • The Argentine banking sector is moderately fragmented, with BMA being one of the larger players. Competition exists from other private and public banks, as well as some foreign-owned institutions.
    • In Q423 the financial system in the Argentine region experienced a substantial contraction in the value of its assets, with declines in total deposits, and the percentage of credit risk loans.
  • What Makes BMA Different:
    • Strong presence throughout Argentina.
    • Focus on serving multiple customer segments.
    • A history of delivering financial services in Argentina for over 25 years.

Financials

Banco Macro’s financial situation is a mixed bag, with some good indicators of performance but also some red flags that need to be addressed. Overall though its financial position seems to be stable with an upwards trend in profits and other key financial metrics.

  • Profitability:
    • BMA has demonstrated solid profitability over the years. The latest reports shows the net income was about $47.5 million pesos for Q124 which had a year over year growth of 113%!.
    • Recent financial reports (Q1 2024) highlights increasing profitability with YoY growth in net income.
    • Operating efficiency is improving, though the high inflation in Argentina affects comparisons on a YoY basis. The increase in administrative expenses was 63% YoY while operating income was up by 97% YoY.
    • BMA reported total net interest income of $110.2 billion pesos which is a 79.4% year over year growth!
  • Balance Sheet:
    • Total assets as of Q1 2024 were $14,002,290 million pesos while liabilities were $10,497,910 million pesos with a resulting equity of $3,504,290 million pesos.
    • A healthy level of liquid assets is maintained, which serves as a cushion against potential financial shocks. For Q124 this amount is 67.3%.
    • The company has a debt to equity ratio of 0.263 which is lower than the average of its peers meaning it is less leveraged. This can be viewed positively.
    • In recent years the company has improved its loan and credit quality indicators, decreasing the Non-performing loan ratio from a high of over 3.5% to about 1.2%.
    • BMA had a strong solvency ratio and exceeded regulatory minimums for financial institutions. This provides a buffer for unforeseen events.
  • Cash Flow:
    • As reported in the financials and earnings calls, the company is able to generate positive cash flow from operating activities.
  • However, in Q1 2024 the bank did experience a large increase in cash outflow related to investments and a large decrease in cash from funding activities, especially the payment of subordinated notes. This could be a cause for concern if cash outflow continues in the future, this does not effect operations much since there are other reserves to maintain the cash outflow.
  • Key Ratios:
    • The ROE of the company has increased dramatically over the last 3 years. 2021 had an ROE of 12% while the ROE for 2022 increased to 47%. Similarly, for Q1 2024, ROE was 44.4%.
    • In Q124 the company’s NIM (net interest margin) was 21.6% which has increased drastically from the 7.5% reported in 2021 and the 14.8% in 2022. These metrics are very strong and a signal of increasing profitability in the company.
    • The efficiency ratio is also improving, down to 48.7%. However, while it has improved substantially, it is still quite high indicating the need for improvement in efficiency.
  • Recent Concerns/Controversies:
    • The Argentinian economy is volatile and has seen various challenges in recent times, including high inflation rates and changes in currency exchange rates, which has impacted the financial sector.
    • BMA is exposed to the high levels of inflation as well as the volatility in the Argentine peso.
    • There are increased regulatory uncertainties for Argentina’s financial institutions that affect the company’s performance.
  • Management Commentary:
    • The management has been implementing initiatives to improve efficiency and productivity.
    • The managements main aim is to increase profitability, maintain credit quality, and strengthen the bank’s financial position.
    • The CEO is very optimistic about the future growth opportunities of the business due to improved profitability and stability.

Moat Analysis

Rating: 2/5

BMA possesses some characteristics that can be considered moats, but they are not exceptionally strong or lasting. The moat of the company can be considered weak to narrow.

  • Intangible Assets: While BMA has a significant brand presence in Argentina, it may not be as strong as other global banks. Their brand recognition makes them well known, but not necessarily does it help them extract more value.
  • Switching Costs: The switching costs for customers in the banking industry are moderately high, but the market has seen disruption due to fintech and neobanks. People are generally reluctant to move from their existing banks due to the process and possible risks.
  • Network Effects: There is a slight network effect in the region due to presence, but not enough to make them a winner takes all company.
  • Cost Advantages: BMA has developed process and scale related advantages in the region, but these advantages do not provide substantial benefits over other similar banks.

Risks that Can Harm the Moat and Business Resilience

  • Economic Instability: Argentina’s economy is prone to high inflation and currency volatility, which can significantly impact BMA’s profitability and capital adequacy.
  • Regulatory Changes: Frequent changes in banking regulations and government policies can affect the business of BMA.
  • Competition: BMA faces competition from other banks, including both traditional and neobanks as well as other financial service companies.
  • Technological Disruption: Rapid technological innovation, especially in the fintech space, can challenge BMA’s traditional business model and make traditional banks redundant.
  • Geopolitical Risk: Global economic uncertainty can negatively affect the Argentinian economy, thereby having implications for BMA.
  • Operational Issues: Difficulty in managing and maintaining the large, nationwide network of branches and technology systems.

Understandability Rating

Rating: 4 / 5

While BMA’s business model is not overly complex, some aspects, such as regulatory and accounting matters, may require a decent understanding for an average person.

  • The core banking business is easy to understand.
  • However, details of investment banking, international operations and derivative trading are complex to understand.
  • Interplay of government regulations is sometimes difficult to wrap one’s head around.

Balance Sheet Health Rating

Rating: 4 / 5

BMA’s balance sheet is quite healthy, with good solvency and liquidity ratios. However, the level of debt and off-balance sheet items are noteworthy and could have an impact in negative situations.

  • Adequate capitalization and high liquidity ratio.
  • Reasonable asset quality and low NPL ratio, with most of its risk assets in stage 1 and 2.
  • But has high leverage.
  • Debt to equity ratio is below industry average.
  • Relatively large and improving cash reserves.
  • Off-balance-sheet obligations can become a threat.