Banking: Consolidation starting in Argentina as Macro targets Patagonia

By:
Rob Dwyer
Published on:

Banco Macro seeks equity sale to finance Patagonia acquisition; outlook for banking consolidation heating up.

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Source: Banco Patagonia

Banco Macro has signalled its serious intent to buy Banco Patagonia by proposing an equity sale of up to $750 million to finance the acquisition.

According to a regulatory filing made last week, Macro’s board will seek authorization for the sale of up to 74 million ordinary B-series shares – with an over-allotment option of up to 15%.

The statement claimed the sale was “advisable given the favourable outlook for growth of the banking business in the country and the bank in particular”.

However, while not being explicit about the use of proceeds for its proposed equity transaction, Macro is rumoured to be in pole position to acquire Banco Patagonia.

The amount of equity being raised is consistent with the bank financing the acquisition of 84% of Patagonia for around $1.9 billion with 50% equity and 50% debt – as the bank currently has $265 million on its balance sheet available for M&A.

The remaining 16% of Patagonia is listed and it is expected that this float would remain on the stock exchange.

Banco do Brasil owns 59% of Patagonia, with the other leading shareholders being the Milne and Moreno families (a combined 21%). The Brazilian bank is seeking to sell non-core assets to avoid having to conduct a dilutive equity transaction in its domestic market.

Patagonia’s management has been exploring the options for the sale and the most likely strategy is now the sale of the 84% unlisted stake to a single buyer.

Patagonia is the 11th largest bank in the Argentine banking system and offers a strong opportunity for inorganic growth. However, its size – with $4.7 billion in assets and 200 branches – shortens the list of potential buyers.

Macro is understood to be the most likely, but Galicia has also expressed an interest and Banco Frances is also a possibility.

If Macro succeeds it would become the country’s largest private bank in terms of deposits – according to data from the Argentine central bank – with Ps134.6 billion, overall behind Nación (Ps350.8 billion) and Provincia (Ps163.1 billion), and pipping Santander Río (which would become fourth largest bank in the country with Ps127 billion and Galicia (fifth, with Ps116.7 billion). Banco Frances would be sixth with deposits of Ps91.9 billion.

The bank isn’t commenting on the M&A rumours, but, according to Debtwire, its management did express its intention to participate in the auction for Patagonia on its 4Q16 conference call.

UBS expects a sale price of about $1.9 billion based on a 20% premium over current price, and implying a 3.8-times book multiple. The bank has strong fundamentals, reporting return on assets of 5% and returns on equity of 38% in 2016.

Patagonia also has a healthy loans-to-deposit ratio of 83% and an attractive branch network and a valuable agreement as financial agent of Rio Negro.

Dilutive

However, UBS’s financial analyst Frederic De Mariz warns that the transaction would be likely to be dilutive for an acquirer in the first year, adding: “While Patagonia is one of the most meaningful assets to be considered in Argentina’s consolidation story, we flag the risk of an acquirer overpaying.”

Should Macro sell the equity – and Credit Suisse estimates that it would dilute current shareholders by 12.7%, or 14.6% if the over-allotment option is exercised – it would become the second Argentine bank to do so as the market heats up.

Banco Supervielle was the first to do an equity issuance and although its management expects M&A consolidation in the country’s banking sector – specifically with the exit of the smaller foreign banks – it is pursuing a wholly organic strategy.

Banco Macro is already well-positioned to take advantage of expected economic growth this year. In its 4Q16 results – released in February – it reported strong results, with net income up 3.8% quarter-on-quarter, equating to return on equity of 32%.

The bank had better-than-expected asset quality, with a non-performing loan ratio of 1.1%, especially in the corporate sector – down 60 basis points to 0.6%. Its loan growth accelerated to 37%, albeit against annual inflation of 41%.

Argentina’s banking sector is looking increasingly attractive. The country’s central bank is slowly dismantling the myriad regulations that prevented profitable banking growth. The central bank is also slowly returning the economy to normalization – the country now enjoys positive real rates that are slowly feeding through into growing deposits – and positive economic growth is forecast for 2017.

In March, the Institute of International Finance projected GDP growth of 2.5% in 2017, accelerating to 3.8% next year. Argentina also has the lowest credit-to-GDP ratio in Latin America (at 13.8%) and so the opportunities for credit catch-up growth are high.

Also, in a client report, Bank of America Merrill Lynch pointed to the positive impact of the country’s recent tax reform. In relative terms, the exercise was the second most successful ever seen after Indonesia’s, raising $117 billion of declared funds or 1.7% of GDP. Eighty per cent of the declared funds were held abroad.

The bank argues that if just 3% of these funds are repatriated “given improved investment opportunities and favourable taxation of domestic investments, it could represent $3 billion per years of domestic investments” and Argentina’s banks are already preparing to capitalize on those flows.