3 Banks With Huge Upside Potential

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Given the Argentine government's anti-market attitude and a tough sentence at a NY court, Argentina almost falls into a new default. The ruling mentioned above, ordered Argentina to pay 100% of what was owed to hold outs from its debt restructuring. That should not have been a problem for current bondholders but the judge was asking Argentina to deposit those funds into an escrow account by Dec. 15. Otherwise, the 'Republic' could not complete the payment to its exchange bondholders due that very same day. Given Argentina's declared intentions of not paying a dime to hold outs, the ruling did put the country into default risk. Luckily for exchange bondholders, a US court of appeals suspended the sentence. A new default has been avoided. How can we profit from this non-event? You can go long on Argentinean banks trading at the NYSE. Let's see three possibilities. 

Banco Macro (NYSE: BMA), trading at $15, was not only down by 61% in 2011 but its also down by 22% this year although the bank's operations have become even more profitable. During Q3 net income grew by 31% Year over Year. As for today, BMA trades at 2013 x3.3 P/E and at a .75 price to book value. Generating a normalized 32% ROE and a normalized 4.1% ROA, BMA is one of the better managed and most stable banks in Argentina. The bank is controlled by the Brito and Carballo families and it has been consolidating the local banking industry for the past 20 years. Its market capitalization is $900 million.

Grupo Financiero Galicia (NASDAQ: GGAL), trading at $5, is my favorite Argentinean banking conglomerate. GGAL owes 95% of Banco de Galicia. Despite its Q3 net income Year over Year growth of 26%, the stock is down by 10% in 2012 after a 61% fall in 2011. Annualized ROE and ROA for GGAL are 31% and 2.7%, respectively. The bank trades at 2013 x2.8 P/E and at a .86 price to book value. But GGAL is not only cheap, its controlling shareholder is EBA holdings with an ownership at below 23%. This fact plus a market capitalization of $650 million makes GGAL a perfect M&A candidate.

Banco Frances (NYSE: BFR) is the Argentinean branch of Spanish international bank BBVA (BBVA owns 76% of BFR). The stock trades at $4.10 and is down 16% in 2012 after a 58% slide in 2011. That said, and even if at 2013 x3.6 P/E it looks extremely cheap, BFR is more expensive than its competitors. The bank trades at a .91 price to book value and the stock has very low liquidity at the NYSE (which is a problem for any investor). The big upside here could come if BBVA decides to remove its Argentinean branch from the public market, but I think this is highly unprovable given the troubles Spanish banks are currently going through

My favorite among this three banks is GGAL. It has ample presence in the whole country, great capital ratios, its cheap from any valuation standpoint and could be an M&A target going forward. I always like to buy good assets when I consider there is some trigger for a short term upside. The margin of safety in the case of Argentinean banks is provided by the fact that we just came out from last week's Armageddon scenario. Hence, valuations are now irrationally low. Argentina does not have a single reason to default on its debt; foreign currency denominated government debt in private hands to GDP is well below 10%. Over time, I believe the current bank prices will look ridiculously cheap. Last week's nightmare could provide a solid entry point.


Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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