Grupo Financiero Galicia S.A.: Argentina's Old-Money Financial Group Is An Interesting Call On Stabilization
Summary
- GGAL is trading below Book Value, and has a hard-to-estimate but double-digit real ROE.
- Importantly, the Argentine peso itself looks undervalued.
- Additionally, Argentina has a minuscule financial system. If the country finances stabilize, banks could experience significant real growth at zero cost.
- GGAL's corporate structure is dominated by a few old-money families. Management compensation looks reasonable, and the company has been paying a cash dividend for the past 15 years.
About getting exposed to emerging markets
I believe most investors who are residents in developed countries shouldn't bother with picking individual securities in emerging markets. The main reason is that some emerging market exposure can be gained through well-chosen global companies. Companies such as Unilever, Nestle, Nike, and many others, are expected to grow because of such exposure to key emerging markets.
Many companies might be stagnant in their home countries for structural reasons, but might be redeploying capital somewhere else in the world where they can find room for growth. However, not every company is a truly global one. Walmart, for example, has had a very tough time being profitable outside of its core market in the US.
When it comes to stock market investing, the only downside to looking for EM exposure in this fashion is that there is a lot of competition in the hunt for value. Direct stock-picking of emerging market companies could be attractive for enterprising value investors, as it is in the small and obscure corners of financial markets where inefficiencies and therefore value is more likely to be found.
Risks of emerging market investing part II
In my last article about Central Puerto (CEPU), I discussed an emerging-market-specific investment risk, which is capital controls. Capital controls are a situation that can arise when there are no foreign reserves in the country in question. As a result, dividend payments can be suspended for no company-specific reason, but for macroeconomic ones, as is the case with Central Puerto.
In this article, I will discuss the ARS currency itself and its dynamic. Importantly, I will discuss another very serious risk - corporate governance and institutional quality - which cannot be underestimated.
Worthless stocks
My approach to the Argentinean stock market (my local market) is mostly to avoid certain value-destroying propositions. Therefore, I look for companies with a long and easily identifiable track record of value creation, and I also demand a cash dividend record as well, which to me acts as a confirmation of alignment of interests and good corporate governance.
By scrutinizing my local market I have come across some really ugly stuff, like companies where management compensation is historically much higher than dividend payments - and you can even tell that from public information - while simultaneously, value creation is hard to identify.
Giving money to a crook is certainly a huge risk, no doubt, when investing in any country, and probably that's one of the main points behind favoring large, truly public corporations with no controlling shareholders, as investment vehicles.
Institutional quality matters substantially, at all levels, when giving long-term capital to complete strangers, as we do when we invest in stocks.
But as counter-intuitive as "giving long-term capital to complete strangers" sounds, this activity has been at the backbone of the western civilization's economy for several centuries already.
Looking for valid investment vehicles
I have developed the habit of trying to take a really long-term look at a company before deciding if it's a valid investment vehicle for me, or not. In particular, I want to know how the company was created, who is their controlling shareholder, and which could be their long-term interests.
Grupo Financiero Galicia (NASDAQ:GGAL) is a large financial institution that has its roots in Banco Galicia, a bank founded in 1905. The bank was created as a true corporation by around 3000 shareholders, most of them Spanish immigrants and business people (hence the name "Galicia", which refers to one of the Kingdom of Spain 5 nations). They IPOed in the Buenos Aires stock exchange in 1907. Later on, financial difficulties in the 30's led to the incorporation of a controlling shareholder, which is itself a company comprised by 3 aristocratic or extremely wealthy families.
To the best of my knowledge, the corporate structure has been largely unaltered ever since, with members of those same families taking seats in the corporate board. Management compensation looks within normal bounds, which is a big concern when it comes to Argentinean companies with controlling shareholders. As a reference, Banco Macro's management compensation has been significantly higher.
GGAL has historically paid a dividend, with the exception of the aftermath of the 2001 Argentinean crisis. After that crisis, Argentinean banks were essentially all broke but were allowed to survive thanks to government intervention. As they had to renegotiate their sizeable international debt and purge their bad-loan portfolio over time, it took GGAL 5 years to be able to reinstate its dividend in 2006. And the dividend has grown to represent a reasonable fraction of its book value (around 5%).
GGAL's hard-to-estimate ROE
Everything is distorted in a highly inflationary economy like Argentina's, where the most recent data shows inflation is sitting at 4.8% per month. In particular, keeping track of a bank's real profitability becomes non-trivial.
A longer-term look at GGAL's book value (which requires also not to be fooled by re-expressions of previous numbers in inflation-adjusted balance sheets) and dividends shows the company has been able to make a double-digit real ROE (that is, adjusted for ARS inflation) during the last few years.
| Date | Book value in ARS (M) | Inflation-adjusted ARS | Real book value |
| 12/2015 | 14.485 | 12.35 | 1.17 |
| 12/2016 | 20.353 | 17.29 | 1.17 |
| 12/2017 | 39.300 | 21.19 | 1.85 |
| 12/2018 | 54.878 | 31 | 1.77 |
| 12/2019 | 156.241 | 47.23 | 2 |
| 12/2020 | 179.859 | 63.93 | 2.8 |
Source: own elaboration on the basis of company filings and Argentina's Central Bank inflation data.
In addition to book value growth, GGAL was able to pay a dividend that was around 3-4% of book value.
Argentinean banks and the ARS currency
As GGAL should be viewed as an inflation-adjusted-ARS proxy, the second question to ask (after the ROE) is whether the ARS currency is undervalued or not.
While I'm not a currency trader, I believe certain metrics are rather obvious indicators of a currency's situation - most importantly, the trade balance and the level of foreign reserves.
Source: own elaboration on the basis of apis.datos.gob.ar
As it can be seen in the plot above, the 2018/19 crisis was an inflection point in Argentina's trade balance, and the deficit was corrected. Right now, the price of key commodities for Argentina, such as soybeans, is at near all-time highs. See macrotrends.
The level of foreign reserves is, however, near-zero, but slowly rising. It is not rising more quickly because of the Central Bank's intervention in trying to bring some calm to the market. It is interesting to note that, thanks to capital controls, the Central Bank is buying the trade surplus at a much cheaper FX rate (the official one) than the one in which it is selling USD to the private sector (the free, parallel, or financial one). Therefore, the Central Bank is accumulating fewer reserves than it could, but it is absorbing unwanted ARS in the process.
Deep value: Argentina's minuscule financial system
The absolutely small size of the Argentinean financial system can be summarized in one sentence:
In Argentina, people buy sneakers on credit and Real Estate in cash.
Long story short, there is an interesting metric to watch in this regard, which is Book Value per customer. As banks have a rather stable pool of customers, it is worthwhile to note how valuable each bank customer is in different countries.
| Book Value (billion USD) | Banking clients (millions) | BV/Client | |
| GGAL | 2.07 | 6.1 | 339 |
| Bancolombia | 7.8 | 9.4 | 829 |
| Credicorp | 7.821 | 9.7 | 806 |
Source: own elaboration on the basis of company's filings.
Interestingly, both Bancolombia and Credicorp are banks in countries (Colombia and Peru) where the per-capita GDP is (historically) about 30-50% lower than in Argentina, and their BV per client is more than 2x than Argentina. Of course, these are countries with a strong financial sector, with low inflation, and where people have access to mortgages.
Final remarks:
While owning individual stocks in emerging markets, and in Argentina in particular, is not for the faint-hearted, the recent massive decline in Argentine asset prices has created some bargains. Considering GGAL as a valid investment vehicle, private-sector, and inflation-adjusted-ARS proxy, which is trading below book value and where the ARS currency is itself undervalued, it is not difficult to project scenarios in where the stock could be worth a multiple of its present valuation in USD terms.
This article was written by
Analyst’s Disclosure: I am/we are long GGAL, CEPU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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