President Milei proves boon and curse for Argentine bank stocks

Argentine banking stocks in New York are tumbling as the government slashes interest rates and crimps new borrowing, robbing them of the easy money that had been driving profits higher.

New York-listed shares of Banco Macro, BBVA Argentina, Grupo Supervielle and Grupo Financiero Galicia have dropped at least 18 percent from their highs for the year. That’s a turnaround for a group of stocks that handed investors the best returns among the 30 Latin American banks with American Depository Receipts in the first five months of the 2024.

The problem is, the banks are being forced to ween themselves off earnings from Central Bank debt and return to their traditional role as lenders to individuals and industry — at a time when the economy is in deep recession. Argentina’s gross domestic product contracted 5.1 percent in the first quarter from the year earlier and probably extended the decline in the next three months.

For lenders to resume their rally, “there has to be a economic rebound that will push banks to start lending to the private sector,” said Juan José Vázquez, head of research at Cohen SA in Buenos Aires.

Not only does lending need to grow, it needs to grow a lot as it’s coming off a low base. Traditional loans made up roughly a third of the assets of Argentina’s four largest private lenders in the fourth quarter of 2023, compared with at least 55 percent a decade ago, during the same period.

Falling rates

The rally in shares earlier this year came after the industry reported roughly 2.42 trillion pesos (US$2.65 billion) in net income in its best first quarter since 2010, according to Buenos Aires-based consultancy Econviews and data from Argentina’s Central Bank.

Returns on public securities, including inflation-linked notes, made up some 47 percent of Grupo Galicia’s banking division’s total net income in the quarter, according to company data.

But analysts and traders warn that the easy money that drove those earnings is now over.

The central bank has slashed the key interest rates by 93 percentage points to 40 percent since December. At the same time, five months of budget surpluses have crimped supply.

Index-linked treasury notes also face limited upside, as President Javier Milei’s team manages to slow the pace of monthly inflation. Consumer prices rose 4.2 percent in May, compared with 8.8 percent the month before and a whopping 25.5 percent in December.

What’s more, Argentine authorities said on Friday that they will phase out the one-day repo notes, replacing them with treasury notes as a tool for handling monetary policy.

Back to lending

The government now hopes that banks pivot toward consumer loans, such as mortgages, which haven’t been available for several years in Argentina.

“For the past 20 years, the only thing that banks have done is to take people’s deposits and lend them to the public sector, either to the Central Bank or to the Treasury,” Economy Minister Luis Caputo said during remarks to reporters on Friday. “We are so accustomed to this that we hardly imagine that banks should actually be banks that lend to the private sector, which is what we’re aiming for.”

Wall Street strategists and banks are bullish on the outlook. Bank of America analysts expect loan growth for the sector to take off in 2025. Grupo Galicia officials said during a May earnings presentation that they expect loans to grow around 30 percent in real terms by the end of the year. Supervielle also forecasts lending to expand, telling analysts that it plans to maintain its focus on corporate over retail loans.

To be sure, analysts and strategists also tie market optimism over banks to Milei’s rise to power. ADRs for BBVA, Galicia, Macro and Supervielle posted returns of at least 120 percent since the firebrand libertarian won in a November vote.

Milei wooed investors with pledges to stabilise a cratering economy, reverse years of budget deficits and attract back the billions of dollars Argentines hold abroad. Many investors remain optimistic he will achieve just that, reviving the credit market and sending bank stocks back up. But it is likely to be a rocky ride.

“If banks manage to shift the share of assets exposed to the public sector and begin to lend to the private sector, that will be a very gradual process,” said Cohen’s Vázquez. “I don’t see it being immediate.”