Banco Macro SA (BMA) Risk Analysis

The ability of Argentine private sector debtors to repay their loans has deteriorated significantly in the past years as a result of certain economic events in Argentina and challenging macroeconomic conditions. This trend has significantly impacted the asset quality of financial institutions, including our own. However, in the recent period, there has been a noticeable enhancement in the quality of the portfolio across the financial system and within our portfolio. This improvement was partially driven by measures introduced by the previous government, which provided incentives for consumer spending, such as installment plans with subsidized interest rates on credit card payments, and created special credit lines for small and medium-sized enterprises (SMEs) to fund working capital in an advantageous environment for borrowers, characterized by negative real interest rates. Although the agreement with the IMF has significantly reduced uncertainty about short-term macroeconomic policies, the external situation remains fragile. Against the background of a change of government, high inflation, tightened import restrictions, low international reserves and severely limited fiscal space, risks remain elevated, which will keep investment and private consumption subdued. The high and persistent inflation of recent years is leaving a very negative balance for the purchasing power. This resulted in wages losing purchasing power by -11.5 points, approximately, in the period between January and December 2023. The irregularity ratio of credit to the private sector remained at the same levels during 2023, with a slight increase at the end of 2023 reaching a level of 3.7% as of December 2023. The irregularity levels in corporate financing reached 4.4% and with lower irregularity levels in household financing, as is the case of mortgage lines. We cannot assure that the current economic situation and the international context will be favorable and that private sector debtors will improve their ability to pay. Despite the current quality of its portfolio, we may not be successful in recovering substantial portions of outstanding loans. If Argentina's economic growth continues to slow or the financial condition of the private sector deteriorates further, the financial system, including us, could experience an increase in the incidence of non-performing loans.

Since most deposits are short-term deposits, a substantial portion of the loans have the same or similar maturities, and there is a small portion of long- term credit lines. The proportion of long-term credit lines, such as mortgage loans, is low and long-term loan originations were significantly reduced in 2021, 2022, and 2023, as a result of high interest rates and the difficult financial and macroeconomic backdrop. The uncertainty of the level of inflation in future years is a principal obstacle to a faster recovery of Argentina's private sector long-term lending. This uncertainty has had and may continue to have a significant effect on both the supply of and demand for long-term loans, as borrowers try to hedge against inflation risk by borrowing at fixed rates while lenders hedge against inflation risk by offering loans at floating rates. If longer-term financial intermediation activity does not grow, the ability of financial institutions, including us, to generate profits will be negatively affected.

There is an increasing concern in Argentina and the world over the risks of climate change and related environmental sustainability matters. Argentina has experienced relevant environmental disruptions such as droughts, the historic drop in the Paraná River (the country's main tributary) and a large number of wildfire outbreaks in multiple provinces. The effects from such environmental disruptions in agriculture caused and will cause significant economic problems in the country as there were significant drops in harvests and cuts in projected results. In addition, adverse weather conditions may affect the production of commodities by the agricultural sector, which represents a significant portion of Argentina's export revenues. On average, precipitation levels have been about 20% below the 30-year mean. The drought persisted until October 2023 and was responsible for leaving a negative balance in the annual accumulated rainfall. After October 2023, the rainfall recovered, which generates a good projection for the 2023/24 heavy season in the region, with 60% of the first soybean crops and 90% of the early corn reported to be in excellent to very good conditions. A continued decrease in the international prices of the main commodities exported by Argentina or adverse weather conditions (including, but not limited to, droughts) may adversely affect agriculture activities, which in turn could have a negative effect on the level of government revenues and its ability to service its public debt and generate recessionary or inflationary pressures, depending on the government's reaction. A decrease in commodity prices could adversely affect the Argentine economy and the Argentine government's tax revenues, thereby affecting our business, financial condition and results of operations. As evidenced by the above, climate change implies multiple drivers of financial risk that could adversely affect us: -   Transition risks: The move to a low-carbon economy, both at idiosyncratic and systemic levels -such as through policy, regulatory and technological changes, and business and consumers preferences- could increase our expenses and impact our strategies. -   Physical risks: Discrete events, such as flooding and wildfires, and extreme weather impacts and longer-term shifts in climate patterns, such as extreme heat, sea level rise and more frequent and prolonged drought, which could result in financial losses that could impair asset values and the creditworthiness of our customers. Such events could disrupt our operations or those of our customers or third parties on which we rely and do business with, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. -   Liability risks: Parties who may suffer losses from the effects of climate change may seek compensation from state entities, regulators, investors and lenders, among others. -   Credit risks: Physical climate change could lead to increased credit exposure and companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts. -   Market and liquidity risks: Market and liquidity changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation. Companies could face liquidity risks derived from cash outflows targeted to improve their reputation in the market or solve climate-related problems. -   Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours operations. -   Regulatory compliance risks: Increased regulatory compliance risk may result from the increasing pace, breadth and depth of regulatory expectations requiring implementation in short timeframes across multiple jurisdictions and from changes in public policy, laws and regulations in connection with climate change and related environmental sustainability matters. -   Conduct risks: Increasing demand for "green" products where there are differing and developing standards or taxonomies. -   Reputational risk: Our reputation and client relationships may be damaged as a result of our practices and decisions related to climate change, social and environmental matters, or to the practices or involvement of our clients vendors or suppliers, in certain industries or projects associated with causing or exacerbating climate change. As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our risk management strategies; however, because the timing and severity of climate change may not be predictable and is rapidly evolving, our risk management strategies may not be effective in mitigating climate risk exposure. Additionally, we may become subject to new or heightened regulatory requirements relating to climate change, including the final rules adopted by the SEC in March 2024, which requires registrants to include extensive climate-related disclosures in registration statements and annual reports. The implementation of such rules may result in increased regulatory, compliance or other costs. As the risks, perspective and focus of regulators, shareholders, employees, and other stakeholders regarding climate change are evolving rapidly, it can be difficult to assess the ultimate impact on us of climate change-related risks, compliance risks, and uncertainties. The application of these measures is currently suspended by a U.S. court order. Any of the conditions described above, or our failure to identify other climate-related risks, could have a material adverse effect on our business, financial condition and results of operations.

Substantially all of our operations, properties and customers are located in Argentina and, as a result, our business is to a large extent dependent upon macroeconomic, political, regulatory and social conditions prevailing in Argentina, including but not limited to, the following: (i) international demand and prices for Argentina's commodity exports; (ii) competitiveness and efficiency of domestic industries and services; (iii) stability and competitiveness of the Peso against foreign currencies; (iv) foreign and domestic investment and financing; (v) level of foreign exchange reserves in the Central Bank which may cause abrupt changes in currency values and exchange and capital control regulations; (vi) interest rates, inflation, wage and price controls; (vii) labor disputes and work stoppages; (viii) the level of expenditure by the Argentine government and ability to sustain fiscal balance; (ix) changes in economic or fiscal policies implemented by the Argentine government; and (x) the level of unemployment, political instability and social tensions. In the last few years, developments in economic, regulatory and social conditions in Argentina, and measures taken by the Argentine government, have had and are expected to continue to have a significant impact on our business, results of operations and financial condition. The Argentine government has been directly intervening in the economy and in private sector operations and companies, limiting certain aspects of private sector businesses, establishing (i) minimum salary levels and mandatory employees' benefits, (ii) price controls, (iii) requirements for business to submit monthly information on prices, quantities sold of final and intermediate goods and stock, and (iv) controls over tariffs for public services. Employers, both in the public and private sector, have also been experiencing intense pressures from their personnel, or from the labor unions representing them, demanding salary increases and certain benefits for the workers, given the high inflation rates.

Argentina's economy remains vulnerable to external shocks that could be caused by a variety of adverse regional or global developments. This includes global economic instability driven by uncertainty about trade policies, the economic conditions in its major trading partners (including Brazil, the European Union, China and the United States), and geopolitical tensions. The geopolitical conflicts, notably the ongoing dispute between Russia and Ukraine, and between Israel and Hamas in the Gaza Strip, contribute to this instability by causing heightened inflation, supply chain problems, interest rate increases, market volatility, and impacts on commodity prices, particularly crude oil and gas. These conflicts could further slow the global economy and affect the payment capacity of our customers, especially those with exposure to the Russian or Ukrainian markets. In October 2023, the Israeli-Palestinian conflict intensified as Hamas, which has controlled the Gaza Strip for over 15 years, infiltrated the militarized border into Israel. This incursion led to swift Israeli military responses, including the declaration of a state of war and the launch of Operation Iron Sword. The Israeli army mobilized to reinforce the borders, encircle the Gaza Strip, and search for Hamas terrorists within Israeli territory. The armed conflict continues, and additional tension in the region has increased as Israel was involved in the bombing of an Iranian consulate in Syria, which escalated tensions with Iran. As a consequence of the ongoing conflict between Israel and Hamas, which already involved several jurisdictions (given that Israel has received attacks from Hezbollah cells spread across the region -which in many cases it responded to-), on, April 13, 2024, Iran launched an unprecedented attack on Israel in a new escalation of the violent situation in the Middle East. Iran's offensive is in retaliation for an Israeli attack on its consulate in Damascus, Syria, which resulted in the death of an Iranian military commander. This attack signals the beginning of an open conflict between two nations, and it cannot be assured that there will be no other countries involved. As of the date of this annual report, the conflict is ongoing, and the potential consequences of a broader regional escalation remain uncertain. The imposition of economic sanctions and trade restrictions against Russia by the United States, European Union, United Kingdom, and other major economies could lead to an increase in severity, resulting in raw material shortages, higher inflation levels, and supply chain interruptions. Interruptions in the global supply chain could affect various sectors, particularly energy, and create difficulties in local markets. Furthermore, global economic and financial crisis, the general weakness of the global economy and instability in the international financial system, negatively affect emerging economies like Argentina. The Argentine economy could suffer from lower international demand and lower prices for its products and services, lower capital inflows and higher risk aversion, which may also adversely affect our business, results of operations, and financial condition. In addition, the long-term effects of the expansionary monetary and fiscal policies adopted by central banks and financial authorities in some of the world's major economies, including the United States and China, are uncertain. The Argentine economy may also be affected by conditions in developed economies, such as the United States, which are significant trading partners of Argentina or have an influence on international business cycles. If interest rates increase significantly in developed economies, including the United States (which has occurred in recent years), Argentina and its developing economy trading partners, such as Brazil, could find it more challenging and burdensome to borrow capital and refinance existing debt, which could adversely affect economic growth in those countries. Reduced growth in Argentina's trading partners could have a material adverse effect on Argentina's export markets and, in turn, adversely affect economic growth. During the first quarter of 2023, the failure of significant banking entities including Silicon Valley Bank on March 10, 2023 the largest U.S. bank to fail since the collapse of Washington Mutual in 2008, and Signature Bank shortly thereafter, sparked concerns about liquidity and stability in the global banking system. These events have had a ripple effect, influencing the shares of banks such as Credit Suisse and causing concern at the European Central Bank due to the sell-off of Deutsche Bank's shares. Although the U.S. government decided not to bail out the institutions, it assured depositors that their holdings would not be affected. Subsequently, U.S. bank First Citizens agreed to purchase all Silicon Valley Bank ‘s loans and deposits. We cannot assure investors that developments in other markets will not affect macroeconomic, political, or social conditions in Argentina. Consequently, there is a risk that our business, results of operations, and financial condition may be adversely impacted by these multifaceted external influences. The exact consequences of these developments on the global economy and financial markets, and by extension on the Argentine economy, are challenging to predict due to the complexities involved.

According to the Corruption Perceptions Index published on January 30, 2024 by the organization Transparency Corruption, Argentina dropped four positions in relation to 2022 and finished 98th out of 180 countries in terms of corruption. A lack of a solid institutional framework has been identified as, and continue to be, a significant problem for Argentina. Failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina's international reputation and ability to attract foreign investment, and consequently, may negatively affect our business, financial condition and results of operations. Although the Argentine government has taken several measures aimed at strengthening Argentina's institutions, we cannot guarantee the implementation of measures to ensure transparency and integrity in a highly polarized political context.

During the last years, the Argentine government has substantially increased public expenditure and has resorted primarily to the Central Bank's monetary issuance to source part of its funding requirements. The fiscal deficit was Ps. 1,407,641 million in 2021, Ps. 1,955,140 million in 2022 and Ps. 1,991,316 million in 2023. Public spending was Ps. 7,733,816 million in 2021 and Ps. 13,191,168 million in 2022. It is worth mentioning that the new government is actively pursuing measures to streamline the public administration and curtail public expenditure. This involves the termination of employment contracts previously initiated by the prior administration, adjustments to public service fees, and the temporary suspension of public works, among other strategic initiatives. We cannot assure you that the government will not seek to finance its deficit by gaining access to the liquidity available in the local financial institutions. In that case, government initiatives that increase the exposure of local financial institutions to the public sector could affect our liquidity and assets quality and have a negative effect on clients' confidence in the financial system. In addition, further deterioration in fiscal accounts could negatively affect the Argentine government's ability to access the international financing markets and could result in increased pressure on the Argentine private sector to cover the Argentine government's financial needs. This could adversely affect the Argentine economy and our business, financial condition and results of operations.

In the past, inflation has materially undermined the economy and Argentina's ability to create conditions conducive to growth. High inflation may also weaken Argentina's competitiveness abroad and lead to a decline in private consumption which, in turn, could also affect employment levels, wages and interest rates. In addition, a high inflation rate could undermine confidence in Argentina's financial system, reducing the peso deposit base and negatively affecting long-term credit markets. Currently, inflation remains high and is likely to remain at similar levels in the future; according to the official data published by INDEC, consumer price inflation was 50.9% in 2021, 94.8% in 2022 and 211.4% in 2023. Regarding year 2024, inflation in January, February and March was 20.6%, 13.2% and 11.0% respectively. In reference to the above, the newly elected government is lifting price and tariff restrictions imposed by the preceding government. This impactful policy shift has, in turn, played a crucial role in the inflation dynamics over the past few months. There can be no assurance that inflation rates will not continue to escalate in the future or that the measures adopted or that may be adopted by the Argentine government to control inflation will be effective or successful. Inflation remains a major challenge for Argentina. Continuing significant inflation could have a material adverse effect on Argentina's economy and in turn could increase our costs of operation, in particular labor costs, and may negatively affect our business, financial condition and results of operations.

Despite the positive effects of the real depreciation of the Peso on the competitiveness of certain sectors of the Argentine economy, the depreciation of the Peso has had and may continue to have a negative impact on the ability of certain Argentine businesses to service their foreign currency-denominated debt, lead to inflation, significantly reduce real wages and jeopardize the stability of businesses whose success depends on domestic market demand and adversely affect the Argentine Government's ability to honor its foreign debt obligations. The Peso has suffered significant devaluations against the US Dollar in the past. The Peso depreciated by 14.7% in 2021, 42.9% in 2022 and 77.9% in 2023, against the US Dollar. As of December 29, 2023, the exchange rate was Ps. 808.4833 per US Dollar, reflecting an increase of approximately 78.0% compared to the same period of the previous year. In reference to the above, it is important to note that in recent years the level of inflation has exceeded the level of official devaluation. In an effort to address the fiscal deficit, the newly elected government implemented a currency adjustment, leading to a devaluation of the Peso close to 55% in December 2023 and from then on, it is maintaining a monthly devaluation of 2%. Should the Peso undergo a substantial devaluation, all of the negative effects on the Argentine economy related to such devaluation could recur, with adverse consequences to our business, financial condition and results of operations. On the other hand, a substantial increase in the value of the Peso against the U.S. dollar would adversely affect Argentina's economic competitiveness. A significant real appreciation of the Peso would adversely affect exports and increase the trade deficit, which could have a negative effect on GDP growth and employment, as well as reduce the Argentine public sector's revenues by reducing tax collection in real terms.