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Bladex Points to Risky Lending Conditions as Profits Fall

By Dan Caplinger - Oct 20, 2017 at 1:34PM

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The Panamanian bank wants to maintain quality over quantity, but will that strategy pay off?

The hardest thing for banks to do is make smart loans when asset prices are soaring. When economic conditions are strong, lenders are tempted to stretch their credit quality guidelines, sometimes leading to problems like the financial crisis in 2008. Banco Latinoamericano de Comercio Exterior (BLX 1.65%), also known as Bladex, doesn't want to fall prey to an asset bubble in Central and South America, but being reluctant to lend on marginal projects has made it increasingly difficult for the Panamanian bank to find promising opportunities in which to invest its assets.

Coming into the bank's third-quarter financial report, Bladex shareholders were expecting some declines in revenue and profits, but the extent of those drops was somewhat greater than most had anticipated. Nevertheless, Bladex seems optimistic about its future, and investors appear to accept that the greater safety from maintaining high credit quality is worth accepting weaker internal returns within the bank's operations.

Glass globe on a tanker ship with images of various economic activities superimposed on the nations of South and Central America.

Image source: Bladex.

How Bladex is handling an economic upsurge

Bladex's third-quarter results didn't look good on their surface. Total revenue dropped by more than a quarter to $31.1 million, which was far worse than the $38 million that those following the stock were expecting to see. Net profit was also down more than 25% to $20.5 million, and that worked out to earnings of $0.52 per share, falling short of the consensus forecast for $0.56 per share on the bottom line.

Bladex's weakness showed up in many of its internal metrics. Return on average equity was down by more than three percentage points to 7.9%, and return on average assets was down by a fifth of a percentage point to 1.3%. Net interest margin fell by a more than a third of a percentage point, hitting 1.76%, and net interest spreads were down more than half a percentage point to 1.37%. The bank's efficiency ratio worsened to 32%, up six percentage points from year-ago levels.

Bladex has continued to struggle in finding ways to put its liquidity to use, and past trends stayed in place. Total assets hit $6.2 billion, down from nearly $7.3 billion a year ago, and the size of Bladex's commercial portfolio was down by nearly $1 billion to $5.7 billion.

Correspondingly, the good news for Bladex is that its credit quality has been superb. The bank's tier 1 capital ratio under Basel III standards jumped to 20.3%, up from below 16% in the year-ago quarter. Nonperforming loans made up 1.2% of the portfolio, down slightly year over year. Bladex is also well-capitalized in terms of having ample reserves to cover potential nonperforming loans in the future.

Can Bladex bounce back?

Bladex CEO Rubens Amaral blamed the tough lending environment on booming economic conditions. "Markets in our region continue to experience abundant [U.S. dollar] liquidity," Amaral said, "resulting at times in valuations and asset prices which do not meet our internal risk-reward targets." The CEO made it clear that Bladex would continue to use discipline so that it doesn't sacrifice sufficient return to ensure an adequate margin of safety in case something goes wrong with the loans it makes.

Bladex is more hopeful for the future. Even though the size of Bladex's asset portfolio shrank, the pace of its decline has slowed. Moreover, efforts to control costs are starting to pay off as Bladex aligns its cost structure with its current and anticipated future sources of revenue.

Bladex shareholders seemed satisfied with the report, and the stock climbed by three-quarters of a percent at midday on Friday following the morning announcement. It's entirely possible that the economies of Latin America are overheating, and if they are, then Bladex's strategy will give it a perfect opportunity to deploy capital when it can be the most effective for its clients and most profitable for its investors.

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

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