Argentinian Funding Costs And Loan Challenges Will Persist Then Ease

Key Takeaways

• Elevated funding costs and economic volatility in Argentina threaten Banco Macro's profitability, asset quality, and the sustainability of earnings improvements.
  
• Intensifying competition from fintechs and regulatory changes may limit digital growth opportunities and constrain loan and deposit expansion.
  
• Elevated funding costs, asset quality pressures, weak deposit growth, and digital disruption risk eroding profitability and competitiveness against fintech and digital-first rivals.

Catalysts

Provides various banking products and services to retail and corporate customers in Argentina.

• While Banco Macro continues to benefit from rising demand for banking products-evident in strong loan growth guidance of 60% for 2025 and ongoing expansion in underserved regions-stubbornly high real interest rates in Argentina are driving up funding costs and placing pressure on net interest margins, potentially reducing net income and profitability in upcoming quarters.
  
• Although the bank's investments in digital infrastructure and efficiency improvements have led to an improved cost-to-income ratio, the rapid acceleration of digital adoption in Argentina could see increased competition from agile fintechs, threatening long-term fee income and slowing deposit base growth if Banco Macro cannot keep pace with innovation.
  
• Despite resilient capital adequacy (with a projected Tier 1 ratio near 29% by year-end) and prudent risk management, persistent inflation and macroeconomic volatility in Argentina continue to erode the real value of assets, raise operating risks, and could undermine returns on equity and the sustainability of recent earnings improvements.
  
• While expansion of credit markets and financial inclusion across Argentina offer long-term growth potential for revenue and customer acquisition, the near-term outlook is clouded by rising nonperforming loan levels-expected to reach up to 3% of total loans by year-end-raising the cost of risk and threatening asset quality, which may drag on net margins.
  
• Even though Banco Macro's retail-focused and regionally diversified deposit base confers some funding cost advantages, ongoing regulatory interventions such as heightened reserve requirements add further challenges in a tight funding environment, potentially constraining growth in both loans and deposits and tempering future revenue expansion.

Banco Macro Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Banco Macro compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Banco Macro's revenue will grow by 18.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.0% today to 19.8% in 3 years time.
• The bearish analysts expect earnings to reach ARS 1015.8 billion (and earnings per share of ARS 2084.9) by about September 2028, up from ARS 307.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 29.62%, as per the Simply Wall St company report.

Banco Macro Future Earnings Per Share Growth

Risks

• Persistently high funding costs due to elevated interest rates on time deposits and ongoing government debt auctions risk compressing net interest margins, thereby negatively impacting earnings and overall profitability.
  
• Rising non-performing loans, especially in the consumer portfolio where NPLs deteriorated from 1.81% to 2.81% in the last quarter and may reach as high as 3% of total loans by year-end, could increase loan loss provisions and reduce net income.
  
• Slow deposit growth, particularly with private sector deposits only rising 4% quarter-on-quarter versus more ambitious full-year targets, may constrain the bank's ability to fund loan expansion and limit future revenue growth.
  
• Higher cost of risk, forecast by management at around 4% for the remainder of 2025, indicates sustained asset quality pressure that could necessitate elevated provisions and further erode net margins.
  
• The branch-heavy and retail-focused operating model may struggle to keep pace with broader digitalization trends, exposing Banco Macro to rising competition from fintechs that could erode revenue streams generated from traditional banking services.

Valuation

• The assumed bearish price target for Banco Macro is ARS12688.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Banco Macro's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ARS18960.0, and the most bearish reporting a price target of just ARS12688.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ARS5132.2 billion, earnings will come to ARS1015.8 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 29.6%.
• Given the current share price of ARS7720.0, the bearish analyst price target of ARS12688.0 is 39.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.