Last week, Grupo Galicia (GGAL), a leading Argentinian bank, reported fourth quarter financial results which demonstrated significant financial improvement. As we noted when we first wrote up GGAL, the company´s financial statements are quite complex, and as such we´ll just focus on two big picture points in this post and reiterate why we remain bullish on the shares for the remainder of the year.

Balance Sheet Strengthened

Perhaps, the most important event for the company in the quarter, were a series of deals with the Argentine Central Bank that both increased the company´s cash position, while simultaneously significantly decreasing its liabilities to the Argentine Central Bank.

As the company explains:

The execution of the above-mentioned advance and its repayment, strengthens the Bank’s balance sheet by reducing risk concentration and making an asset of a very significant amount available for the expansion of the business.

Standard & Poor’s in considering an upgrade of the bank commented on the: 

“improvement in the Bank’s medium term operating results, following the significant repayment of debt with the Central Bank and the subsequent reduction in the cost of funding” and that it also reflects Standard & Poor’s “expectations of an increase of the Bank’s capitalization as a result of the forthcoming stock offering”.

Deposit Growth Is Very Strong and Loans are Increasing

Reflecting renewed faith in banks, and solid economic growth, the Bank’s deposits in Argentina reached Ps.10,592 million by year end 2006, representing a 30.7% increase from December 31, 2005. Total loans to the private sector granted by the Bank’s Argentine operation increased 50.1% between December 31, 2005 and December 31, 2006, while the regional credit-card companies’ total loan portfolio increased 36.2% during the same period.

Interestingly, as we predicted in our initial write-up, mortgage loans and mortgage interest were among the fastest growing parts of the banks balance sheet and income statement.

Where to Now?

We still think that the vast majority of US investors and market commentators are completely oblivious to the revival of the, previously-bankrupt, Argentinian economy. As more investors discover Argentina, particularly its lively real estate market,  they will gravitate towards shares of GGAL, one of the leading banks in Argentina, and one of only a handful of Argentinian ADR’s. In fact, the low supply of Argentinian ADR’s, and the potentially strong demand for foreign investment in the country from emerging market funds, supports the notion that GGAL could perform very well for quite some time. Interestingly, it was only last week that JPMorgan finally decided to upgrade shares in GGAL, demonstrating that Wall Street is only beginning to warm up to the story here. 

At the same time, from a basic economic perspective, GGAL should continue to benefit for quite some time, from the renewed growth in Argentina and the booming real estate business in Buenos Aires.

Based on the above, we still remain bullish on GGAL for the remainder of the year. However, please refer to our first post on GGAL for the risks you face when investing in Latin American stocks, like GGAL. As you may have already noticed, these stocks can be quite volatile. However, if you keep in mind the current strong underlying economics of the Argentinian economy, coupled with the lack of suitable ADR’s from the country, it should be easier to withstand the volatility and possibly buy more on any dips.  

Please Note: We first recommended GGAL at about $9.55 per ADR share, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.