Banco Macro SA (ADR) (BMA), BBVA Banco Frances S.A. (ADR) (BFR): Banking in Buenos Aires? Buyer Beware

Argentina has gone through many cycles of blockbuster economic growth and spectacular economic collapse, and now the country is facing renewed economic trouble under the government of President Cristina Kirchner. Argentine stocks traded in foreign markets have been very volatile and are headed down. The biggest Argentine financial stock by market capitalization is Banco Macro SA (ADR) (NYSE:BMA), followed by BBVA Banco Frances S.A. (ADR) (NYSE:BFR), which is a division of the Spanish bank BBVA. The political and economic situation in Argentina means that the volatility will continue for some time, and likely with an overall downward trend.

Roller coaster stocks

Both Banco Macro SA (ADR) (NYSE:BMA), with a beta of 1.31, and BBVA Banco Frances S.A. (ADR) (NYSE:BFR), with a 1.71 beta, have higher than average volatility as measured by beta and a wide spread between their 52-week highs and 52-week lows. The volatility of these stocks is reinforced by the fact that the other Argentine bank in the peer group, Grupo Financiero Galicia S.A. (ADR) (NASDAQ:GGAL), has a similar beta at 1.41.

Out of the three stocks — Banco Macro SA (ADR) (NYSE:BMA), BBVA Banco Frances S.A. (ADR) (NYSE:BFR) and Grupo Financiero Galicia S.A. (ADR) (NASDAQ:GGAL) — Grupo Financiero Galicia has the lowest P/E ratio and the highest return on equity. While its results have been mostly lower on the whole, it seems to be the best bet out of the three. Another positive for Grupo Financiero Galicia S.A. (ADR) (NASDAQ:GGAL) is that despite the fact that it has a negative return over the last year, its stock price has gone down the least out of the three Argentine banks. The worst performing of the three is Banco Macro SA (ADR) (NYSE:BMA), which has both the highest P/E ratio and the lowest return on equity. BBVA Banco Frances S.A. (ADR) (NYSE:BFR) is squarely in the middle, and is a better investment than Banco Macro SA (ADR) (NYSE:BMA) because BBVA Banco Frances S.A. (ADR) (NYSE:BFR) has the backing of a global bank behind it. The fact that BBVA owns BBVA Banco Frances means that it has potentially greater resources than Banco Macro.

More than meets the eye

Without a discussion of Argentinian government policy, one cannot understand the issues that Argentine banks face. One of the largest issues facing Argentina is the inflation rate, which is estimated at between 25%-30%, but officially is much less. The false numbers produced by the government led the International Monetary Fund to censure Argentina and The Economist to no longer publish the official statistics, calling them “bogus.” According to a recent report by Reuters, the Argentine peso has lost over 22% of its value this year on the market. This devaluation, and the risk of further devaluation after the mid-October elections, is causing investors and businesses to be wary of investing due to financial uncertainty. Argentina already has a bad reputation in the worldwide financial sector, thanks to the 2002 debt default. This has very wide ramifications for banks like Banco Macro SA (ADR) (NYSE:BMA), BBVA Banco Frances S.A. (ADR) (NYSE:BFR) and Grupo Financiero Galicia S.A. (ADR) (NASDAQ:GGAL).