Latin American bank Banco Latinoamericano de Comercio Exterior (BLX 0.31%), or Bladex, announced second-quarter financial results on July 26, reporting higher revenue, a big jump in profits versus the year-ago quarter, and improvements in its expenses and efficiency ratios. Here's a closer look at the multinational Latin American bank's results.
|Metric||Q2 2016||Q2 2015||Change|
|Net income||$22.3 million||$13.5 million||65.2%|
|Earnings per share||$0.60||$0.40||62.9%|
|Operating expenses||$10.1 million||$12.7 million||-20.5%|
Keys to the quarter
They key drivers behind Bladex's financial results were as follows:
- Net interest income of $38.2 million was up $3.4 million, or 9.8%, from last year.
- Net "other income," which includes fees, commissions, foreign currency exchange, and gains or losses on financial instruments, was $6.2 million, up $4.9 million, or 377%, from last year.
- Total expenses were slightly down from last year, largely due to a 34% decline in salary and other employee expenses. The company took $2 million more in impairments from expected credit losses this quarter than in the year-ago period.
- Bladex's bread-and-butter commercial business reported strong results in the quarter, with segment profit up 30%, to $20.4 million.
- Average lending balances were down in the quarter, but net interest income was up, offsetting the impact of lower balances.
- Operating expenses were down 26% in the segment, mainly due to lower performance-based compensation expense.
- The treasury segment -- a mechanism to generate funding and provide liquidity for the bank -- produced a $1.9 million profit, versus a $2.2 million loss one year ago.
- Deposit balances stood at $3.2 billion at quarter-end, the same as one year ago and slightly up from $3.1 billion at the beginning of the quarter.
What management said
CEO Rubens Amaral commented on Bladex's sequential earnings decline and the underlying strength of the bank's core business:
Although net profit this quarter came in slightly below the previous quarter, our business performance has confirmed the positive aspect of the improved earnings generation capacity that Bladex has achieved. Total disbursements were up by $400 million, and our top revenues as well as the adjusted earnings per share increased by 15% year-on-year, which underlines once again the positive trends in our core business.
Amaral also addressed the cause of higher impairment-related expenses in the quarter, specifying that they were not part of a bigger trend, but isolated in nature:
Net profit has been negatively impacted this quarter mainly by an expected specific provisions, not stemming from deterioration in our asset quality, but rather from an isolated situation involving a group of companies and individuals which were listed as specially designated national under the (unclear) act by U.S. authorities in early May. The bank has undertaken all necessary actions to preserve its contractual rights and to recover the outstanding amounts from its obligors, including collected efforts with other creditors, who are maintaining constant communication with the government authorities to ensure that any such actions are conducted within legal parameters at all times.
CFO Christopher Schech highlighted Brazil's importance as a huge part of Latin America's economy, but he also cautioned about the risk it represents and explained why Bladex has actively "de-risked" there:
As the growth in dollar terms proved to be a challenge this quarter, mainly because of our active de-risking of certain exposures, especially in Brazil, which now accounts for nearly 18% of our total committed portfolio, as Rubens mentioned already. To put this in perspective, we are talking about a country that represents some 40% of total Latin American GDP. This de-risking, of course, has to do with the persistent recessionary environment in that country, and the fact that the majority of the nonperforming loans that we have and that the management intention are concentrated in that country.
Schech elaborated on how the de-risking in Brazil should allow Bladex to ramp up its growth efforts in the second half of the year and achieve its full-year stated growth goals:
I think that means we have to get cracking because, in the first half, we haven't shown that growth for obvious reasons because we we're mostly concerned about de-risking, especially Brazil, and I think we reached levels in Brazil that we're comfortable with that, as Rubens also mentioned. So this now gives us the opportunity to pursue opportunities in other countries, also mentioned by Rubens. And the focus will be on the short end of the curve.
Bladex had a few speed bumps in the quarter with the loan loss provisions, though it sounds like those are specific to individual companies and not indicative of a trend related to a particular region or business segment. Furthermore, the year-over-year profit increase was a product of falling costs and larger income generation, while the sequential decline was related to the aforementioned loan loss provisions.
Factor in the company's steps to reduce its exposure to Brazil, and Bladex seems poised to take advantage of growth opportunities outside of that country for now. Eventually Brazil will get back on its feet, but for now, Bladex management is looking at lower-risk lending in more stable markets. Considering how critically important risk management is in the banking world, that strategy probably bodes well for both the short- and long-term prospects for Bladex investors.