The recent Q1 2024 earnings call for BBVA Argentina (NYSE: <a href="https://seekingalpha.com/symbol/BBAR" alt="BBVA Argentina Stock">BBAR</a>) left analysts puzzled. While the bank boasts an impressive market share, exceeding double digits at 10.08%, its profitability, measured by Return on Equity (ROE), took a significant hit, dropping to 6.6% compared to the previous quarter's 15.3%. The culprit? A seemingly mundane accounting choice: the method BBVA Argentina uses to value its securities portfolio.

Most analysts, fixated on headline numbers, missed the deeper story lurking beneath the surface. BBVA Argentina, unlike its Argentinian peers, uses a "fair value through profit and loss" (FVPL) model to assess its securities. This method, while arguably more transparent, subjects the bank to the whims of market fluctuations, especially in a volatile economy like Argentina. The FVPL model, unlike the "amortized cost" method preferred by competitors, forces BBVA Argentina to recognize both unrealized gains and losses in its quarterly income statement.

This is where the plot thickens. In Q4 2023, BBVA Argentina experienced an exceptional gain in its Other Comprehensive Income (OCI) due to the appreciation of its Dual National Treasury bonds. This boosted the bank's equity by an impressive 25% in real terms. However, this seemingly positive event set the stage for a silent killer of profitability in the subsequent quarter.

Here's the catch. The hyperinflationary environment in Argentina necessitates constant restatement of figures for inflation adjustment. Because BBVA Argentina's equity base, inflated by the Q4 OCI gain, was substantially larger than its peers, the inflation adjustment in Q1 2024 led to a disproportionately larger loss. This loss, directly attributed to the FVPL model, dragged down the bank's ROE.

To illustrate, let's play a hypothetical game. If BBVA Argentina had adopted the amortized cost method, its equity would not have been bolstered by the Q4 OCI gain, remaining closer to its peers. Consequently, the inflation adjustment loss in Q1 2024 would have been significantly lower, resulting in a higher reported ROE. <a href="https://seekingalpha.com/symbol/BBAR/transcripts" alt="BBVA Argentina Transcripts">Lanusse</a>, the bank's IRO, suggests that this hypothetical ROE, adjusted for the FVPL effect, could be in the "early 20s" range.

This accounting nuance unveils a hidden truth: BBVA Argentina's true operational performance may be significantly stronger than the reported 6.6% ROE suggests. The bank's focus on long-term asset protection through the FVPL model, while resulting in short-term volatility, could ultimately deliver sustainable profitability in the long run.

Hypothetical Comparison of ROE

The following table shows a hypothetical comparison of BBVA Argentina's Q1 2024 ROE under the FVPL and Amortized Cost methods:

<table> <thead> <tr> <th>Accounting Method</th> <th>Q1 2024 ROE</th> </tr> </thead> <tbody> <tr> <td>Fair Value Through Profit and Loss (FVPL)</td> <td>6.6%</td> </tr> <tr> <td>Amortized Cost (Hypothetical)</td> <td>Early 20s</td> </tr> </tbody> </table>

<a href="https://seekingalpha.com/symbol/BBAR/transcripts" alt="BBVA Argentina Transcripts">Lanusse</a> confidently projects a mid-teens ROE for 2024, citing the bank's strategic shift towards fixed-rate LECAP bonds and anticipating a positive loan growth for the Argentinian banking system. BBVA Argentina, known for its strong commercial lending focus, is well-positioned to capitalize on this anticipated growth, further reinforcing its dominant market position.

The key takeaway for astute investors? Don't be misled by superficial comparisons. BBVA Argentina's apparent dip in ROE reflects a deliberate accounting choice aimed at long-term stability, not operational weakness. This accounting method, like a silent weapon, might be suppressing the bank's true profitability potential, making it a potentially undervalued opportunity for discerning investors.

"Fun Fact: Did you know that BBVA Argentina, established in 1886, is one of the oldest banks in Argentina? It has weathered numerous economic storms, including hyperinflation, demonstrating remarkable resilience and adaptability."