Fitch Ratings has affirmed Banco Macro S.A.'s (Macro) Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'CCC'.

Fitch has withdrawn Macro's Support Rating of '5' and Support Rating Floor of 'NF', as these are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on Nov. 12, 2021. In line with the updated criteria, Fitch has assigned Macro a Government Support Rating (GSR) of 'ns' (No Support).

Key Rating Drivers

In Fitch's view, regardless of its overall satisfactory financial condition, Macro's Viability Rating (VR) and IDRs are highly influenced by the operating environment (OE) and are constrained by the low IDRs of Argentina.

Highly Challenging Operating Environment: Macro's VR and IDRs are highly influenced by Fitch's assessment of the operating environment and are constrained by the low IDRs of Argentina, despite the bank's comparably stronger financial profile relative to other private sector commercial banks in similar operating environments. The operating environment remains highly challenging as asset quality continues to be pressured by a long recession, which has been exacerbated by the coronavirus pandemic and severe political uncertainties.

Additionally, low loan growth (negative in real terms for more than 4 years), rising nonperforming loans at certain banks, significant margin pressure due to regulatory imposed interest rates caps and floors, and increasing operating costs due to continued high inflation will continue to affect profitability.

Ample Capitalization: Macro's capitalization is supported by consistent earnings retention and a conservative risk appetite. As of March 2022, the bank's CET 1 ratio was at a very comfortable 33.7% an increase from 30.9% at Dec. 31, 2021. The ratio was strengthened in part by the internal capital generation and lower loan growth rate of 6.3% during the first quarter. This ratio compares very well to the bank's local and international peer groups and far exceeds the regulatory capital minimums.

Given the bank's conservative risk appetite, Fitch expects Macro's capital cushion to remain at comfortable levels even though this cushion is likely to decline in the coming quarters as the economy recovers and exposure to credit-worthy borrowers is increased. As the economy improves and credit demand grows, Fitch expects Macro's CET 1 ratio to decrease, but to remain conservative when compared to peers.

Diverse Business Profile: Banco Macro is a universal bank, which focuses on low, and middle income, individuals and small and mid-sized companies (SMEs). It differentiates from most of the other large banks as its strongest presence is outside of Buenos Aires. The bank benefits from its strong nationwide presence, which places it among the top four private sector banks in Argentina in terms of loans and deposits. As of March 31, 2022, the loan and deposit market share was approximately 7% and 5.5%, respectively.

Although Macro benefits from its diverse business profile and strong nationwide franchise, its business profile score has been assigned below its implied score as the majority of its activities are concentrated in a high-risk operating environment

Asset Quality Remains Strong: Macro's risk appetite is relatively higher than its closest peers due to its middle market focus, and its retail focus on low to middle income individuals. However, these generally higher risks are usually mitigated by management's conservative underwriting policies and sound risk controls, which benefit asset quality metrics. In addition, the semi-secured nature of the bank's payroll/pension-backed loan portfolio contributes to a lower-level of impairments.

The bank's impaired loans to gross loans ratio as calculated by Fitch as of March 31, 2022 was at a satisfactory level of 1.6%. Although not as strong as the 0.9% reported as of Dec. 31, 2021, this higher level still compares favorably to the averages of its private-sector peers. The impaired loan coverage ratio stood at a satisfactory 1.6x as of the end of 1Q22.

Adequate Profitability despite Challenges: Since 2018, Macro's profitability as measured by operating profit to risk-weighted assets (RWA) saw a significant decrease especially during fiscal 2021 driven by low loan demand and growth. The ratio fell from 8.4% to 4.1%. The same ratio for the first-quarter of 2022 came in slightly lower at 3.9% as lower demand from wary clients, as well as the current high level of government intervention (through interest caps on loans, interest rate floors on time deposits, and restrictions on fee increases) weighed on revenues.

Fitch expects Argentine bank performance to remain under pressure until the political and economic situation recovers and enables an increase in credit and services, which seems unlikely in the short term.

Satisfactory Funding and Liquidity Metrics: The bank's liquidity metrics remain at very comfortable levels, which benefit from Macro's diverse funding profile. This funding profile is supported by a generally stable retail deposit base and complemented by demonstrated access to capital markets. As of March 2021, customer deposits accounted for 81% of total funding and the bank's Loan to Deposit ratio was at a low 64%.

Macro also provides financial agency services to four provincial governments, and thus benefits from the related mobilization of public sector institutional deposits. In addition, the bank provides payroll services to over two million retail clients, providing another source of stable and low-cost funding.

No Government Support: Macro's GSR of 'no support' (NS) reflects Fitch's view that despite the bank's systemic importance, government support cannot be relied upon given constraints on the government's ability to provide support.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The IDRs and VRs would be pressured by a downgrade of Argentina's sovereign rating or a deterioration in the local operating environment beyond current expectations that leads to a significant deterioration in its financial profile;

Any policy announcements that would be detrimental to the bank's ability to service its obligations, including a tightening of capital controls to the extent that they restrict debt payments, would be negative for creditworthiness.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Macro's VR and IDRs would benefit from an upgrade of Argentina's sovereign rating.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Macro's subordinated debt's 'C'/'RR6' rating is two notches below the bank's VR reflecting Fitch's base case notching for loss severity. These securities are plain vanilla subordinated liabilities, without any deferral feature on coupons and/or principal. The 'RR6' for subordinated debt reflects poor recovery prospects due to a low priority position relative to Macro's senior unsecured debt.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Sensitivities: Any change, either positive or negative, to Macro's VR could result in a similar change to the subordinated debt rating.

VR ADJUSTMENTS

The implied Viability Rating of 'ccc+' has been adjusted to 'ccc' due to operating environment/sovereign rating constraint (negative);

The Operating Environment score of 'ccc' has been assigned below the implied score of 'b' due to the following adjustment reason: Sovereign Rating (negative);

The Business Profile score of 'ccc+' has been assigned below the implied score of 'bb' due to the following adjustment reason: Business Model (negative);

The Earnings & Profitability Profile score of 'ccc' has been assigned below the implied score of 'bb' due to the following adjustment reason: Earnings Stability (negative);

The Capitalization & Leverage score of 'ccc+ has been assigned below the implied score of 'bb' due to the following adjustment reason: Historical and Future Metrics (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Banco Macro S.A. has an ESG Relevance Score of '4' for Management Strategy, which has a moderately negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. The '4' score reflects the current high level of government intervention in the Argentine banking sector. The imposition of interest rate caps can lead to inadequate loan pricing and, together with the imposition of interest rate floors on time deposits, puts significant pressure on banks' net interest margins. Also, restrictions on fee levels can negatively affect performance ratios. This challenges Banco Macro's ability to define and execute its own strategy.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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