Description

Overview:
Grupo Financiero Galicia is 94% owner of Banco de Galicia (“Galicia”) Argentina’s largest bank. As such, it was one of the biggest losers in the Argentine devaluation. The bank, like other Argentine financial institutions, blinded by bias and laws, was forced to invest in Argentina and at the end of 2001 had the majority of its capital loaned to local companies, real estate and individuals and the Argentine government. At the end of 2001, fear started running rampant through the minds of Argentine bank depositors, which caused a bank run throughout the financial system. Subsequently, to stop the impending collapse of the Argentine banking/financial system, the Central Bank imposed a number of restrictive laws that prevented depositors from withdrawing their funds, except for miniscule amounts, from the banking system. These laws temporarily succeeded in stopping the cash from bleeding from banks, but the outflow continued because depositors became very resourceful at finding ways to get the money out. Concurrently, the government decided to devalue the Argentine peso, which had been pegged to the U.S. dollar for ten years, and let the currency float freely. It currently trades for about 3.75 pesos to the dollar. To put this in perspective, this devaluation precipitated the immediate drop of Argentine GDP per capita from approximately $8,500 (dollars) to $ $2,500 (dollars) which plunged the country into the worst economic crisis of its history. Furthermore, the devaluation was carried out in such a poor way and with so little clarity that most depositors still don’t know the ultimate fate of their funds.

What I have just described, under normal circumstances, would have cause the liquidation of any financial institution on the planet, in particular under G7 banking guidelines, which is what has happened with the bank’s foreign branches. However, the size of Galicia in Argentina in relation to the local market is so important that the government cannot allow it to go bankrupt because the bank has the largest number of deposits in the country and conducts more than 30 percent of all of the financial transactions. The collapse of Galicia would mean the collapse of the Argentine financial system something that mechanically, the government cannot allow to happen.

The bank is undertaking a recapitalization plan which calls for :

1) selling off its mortgage and commercial loan portfolio (400 mln Ps.);
2) receiving two loans which sum 300 mln Ps.
3) Selling an additional $300 mln in subordinated debt to foreign credit creditors and investors.
Total amount raised at current Fx = $490 mln dollars

Presently, the bank operates in a precarious environment where its fate lies in the lap of the Argentine Central Bank.

I believe that its possible to compare Galicia’s current state to that of Citibank’s in the early 90’s with some very important differences.

1) Argentina is bankrupt, the U.S. Fed was not
2) There is no Prince Al-Whalid (yet), but the IMF is looking to come to the rescue and will most likely allow Argentina to roll on its debt as soon as Argentine politicians show a semblance of aptitude in their decision making thereby stabilizing the prospects for the country

Although these differences definitely helped both aforementioned firms there are some aspects of the Argentine system that will help Galicia.

1) In Argentina, unlike the U.S, you can bribe the equivalent of the Fed chairman guaranteeing lenient/favorable treatment. Considering the shareholders of Galicia I would be hard-pressed to believe it was not getting favorable treatment
2) There is no possibility that foreign creditors capitalized Galicia without government guarantees as to their investment indicating value for the franchise

From a macro perspective this investment can be looked at as purchasing an option on 30% of the Argentine banking systems for 110 mln dollars. In many comparable circumstances this has turned out to be a good investment.

Description Capital multiplication CAGR
Citibank in the US in the early 90s 23 times 29%
Russian banks/firms after 8 times 99%
the collapse of the Russian economy
Asian banks/firms after 2 times 26%
the collapse of the Asian markets

Russia returns based on FTSE Russia dollar index
Asian returns based on FTSE Thailand dollar index

Catalyst

There are no present real catalysts to affect the price of this security. Potential catalysts are a supposed upcoming agreement with the IMF, which was expected at the end of October. Presidential primaries expected in March 2003. Further resolutions to outstanding problems within the Argentine banking system.