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De-Risking Boosts Bladex's Profits

By Dan Caplinger - Feb 9, 2018 at 2:50PM

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Shrinking revenue at the Panamanian bank has some worried.

Banks face a tough choice in balancing the quest to maximize profits against the desire to keep a safe loan portfolio. For Banco Latinoamericano de Comercio Exterior (BLX 1.73%), also known as Bladex, its experience in 2016 led the Panama-based bank to gravitate more toward the higher-quality side of the equation, even at the expense of growing its top line.

Coming into the bank's fourth-quarter financial report, shareholders expected further deterioration in revenue but still wanted to see profits rise. Bladex didn't disappoint on that front, but the bigger question is whether conditions in the Central and South American region will improve enough to warrant asset growth in the coming year. Let's take a closer look at Bladex and what its results say about the future.

Glass globe resting on a cargo ship at sea with a blue sky, with globe showing South America and pictures of various activities.

Image source: Bladex.

Revenue falls, profits soar

Bladex's fourth-quarter results showed a nice recovery from poor profit performance in the previous quarter. Total revenue plunged 20% to $34.5 million, which was an even bigger drop than most of those following the stock had expected. Yet net income of $20.6 million was up by more than half from the year-ago period, and even though the resulting earnings of $0.52 per share fell short of the $0.55-per-share consensus forecast among investors, it still showed impressive growth compared to 2016's fourth quarter.

Internal performance measures at the bank were mixed. Return on average equity rose to 7.9% and return on average assets came in at 1.31%, and both figures dramatically exceeded a particularly poor quarter a year ago but made no progress compared to the third quarter. Net interest margin fell more than a quarter point over the past 12 months to 1.78%, and efficiency ratios worsened by 10 percentage points.

Bladex seemed to show some signs, however, that its contraction has come to an end. Total assets of $6.27 billion were down almost 13% from year-ago levels, but they were higher than the third quarter, signaling a potential bottom. The commercial portfolio grew in size by nearly $300 million from three months ago, but it still shrank almost $450 million compared to where it was last year at this time.

Strong credit-quality metrics showed the benefits of deleveraging. The bank's tier 1 capital ratio under Basel III standards climbed to 21.1%, showing more than 3 percentage points of growth since the end of 2016. Nonperforming loans made up a slightly smaller part of the bank's loan portfolio at 1.07%, and total allowances for covering expected losses also fell.

What's next for Bladex?

CEO Rubens Amaral once again explained the bank's strategy. "We have adjusted the size of the bank to reflect the reality of our business," Amaral said, "and our determination to improve productivity and efficiency across the organization." He nevertheless said that positive trends appear to be taking hold in its business.

Bladex is also optimistic for the coming year. Projections for Latin American economic growth have improved, and that has the bank feeling more confident about selectively boosting loan volume while still remaining true to its overall strategy.

Shareholders weren't entirely satisfied with the report, and the stock fell almost 3% by midday on Friday following the pre-open announcement. If the bank actually sees the economic recovery in its core market that policymakers expect, then it's likely that Bladex will be able to benefit from it. Right now, though, it's anyone's guess whether growth across the globe will get back to its impressive pace from the past.

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