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Bladex Takes a Big Hit on Brazil's Political Crisis

By Dan Caplinger - Jul 21, 2017 at 10:27AM

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The Panamanian bank's second-quarter results were far worse than most foresaw.

Banks around the world depend on strong business conditions to help them make profitable loans, and Banco Latinoamericano de Comercio Exterior (BLX -0.10%), also known as Bladex, has long sought to capture Latin America's best opportunities from its centrally located headquarters in Panama. After a long slump throughout much of the region, a slight recovery in commodity prices during 2016 helped get Latin America back on track, and that had Bladex feeling more confident about its future.

Coming into the bank's second-quarter financial report on Friday, Bladex shareholders expected some pressure on top-line growth, but they hoped to see the bank making incremental progress in tapping into the region's strength to boost its profits. Unfortunately, the political crisis in Brazil put a stop to Bladex's forward momentum, and substantial declines in its results will force Bladex to move more aggressively to sustain its business going forward. Let's take a closer look at Bladex to see how it did, and what's ahead for the Panamanian financial institution.

Cargo ship holding globe pointed at South America.

Image source: Bladex.

Bladex feels Brazil's pain

Bladex's Q2 results were extremely weak. Revenue dropped by more than 22% to $34.4 million, which was even worse than the 14% drop that analysts were expecting. Net income also fell by more than a fifth, and that resulted in earnings of $0.44 per share, far below the consensus forecast among those following the stock of $0.63 per share.

Looking more closely at Bladex's numbers, many key metrics for the bank worsened from year-ago levels. Return on average equity plunged more than two percentage points from year-ago levels to 6.9%. Returns on average assets fell all the way to 1.08%, down a tenth and reflecting weaker interest rate conditions. Net interest margin narrowed from 2.06% last year to 1.80%, and net interest spread similarly fell from 1.83% to 1.44%. The bank's efficiency ratio declined to 37% as operating expenses soared by a quarter from year-ago levels.

Bladex's asset base also continued to shrink. The size of the company's commercial portfolio fell by a seventh to $5.84 billion, and its treasury portfolio was down by more than half from where it was at the midway point of 2016. That brought total assets down to $6.42 billion, lower by $645 million in just the past three months.

Just about the only good news regarded Bladex's financial strength. Tier 1 capital ratios under Basel III standards jumped above the 20% mark, making Bladex exceptionally well-capitalized. Nonperforming loans were down slightly in proportion to the size of the portfolio, although total allowances for expected credit losses climbed above the 2% mark, up from 1.6% 12 months ago.

What's ahead for Bladex?

CEO Rubens Amaral was downbeat about what's happened in the region lately. "The positive growth momentum in Brazil seen earlier this year experienced a significant setback in the wake of political developments in that country," he said. "There are faint signals of an economic recovery, but they are probably not strong enough to help us overcome the economy's significant challenges." The CEO said that the bank now expects that Brazil won't emerge from recession this year, and the poor conditions and nonperforming loans in Latin America's largest country are hurting Bladex's restructuring activity.

Still, not everything is working against Bladex. The bank anticipates that the second half of 2017 will bring seasonal strengthening in its business, and lending and pricing discipline within the company should help it sustain margin levels. Yet Bladex warned that its previous hopes for portfolio growth in 2017 were overly ambitious; its new guidance for the year predicts that it will merely get asset levels back to where they were at the end of 2016. Still, with attractive fee-based business conditions, a solid pipeline of future deals, and good credit quality, Bladex executives remain confident in its long-term prospects.

Shareholders weren't entirely pleased with the news from the bank; following Friday morning's earnings report, the stock was down by more than 6% at 10:20 a.m. For Bladex to bounce back, it really needs to get more support from the Latin American economy. Without Brazil pulling its weight, the Panamanian bank will have a hard time making the most of its potential.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Bladex. The Motley Fool has a disclosure policy.

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