Most banks try to grow at all costs, even when that's exactly the wrong thing to do. Being too aggressive in extending credit during an economic boom can crush a lending institution when the good times end. With its extensive exposure to Central and South America as well as the Caribbean, Banco Latinoamericano de Comercio Exterior (BLX -3.12%), also known as Bladex, knows all too well what can happen to financial institutions when regional economic growth suddenly reverses course.
Coming into Friday's first-quarter financial report, Bladex shareholders were prepared to see modestly lower top- and bottom-line figures as the Panamanian bank continued to pursue a long-term strategy of finding the optimal size and quality for its loan portfolio. Yet the declines that Bladex suffered were more extensive than most had believed likely, and that called into question whether the bank's strategic vision is really consistent with what shareholders want to see. Bladex's response was interesting and could inspire more optimism about the financial institution's future.
A reversal of fortune for Bladex
Bladex's first-quarter results were an unfortunate shock to those who had hoped that the fourth quarter's profit gains could continue into 2018. Total revenue of $30.7 million was down almost 20% from year-ago levels, which was about three times the drop that most of those following the stock were expecting to see. Net income fell an even steeper 38% to $14.5 million, and earnings of $0.37 per share badly missed the consensus forecast among investors for $0.55 per share on the bottom line.
Bladex was quick to note that one big downward impact came from the timing of a variable compensation expense. Without that payment, adjusted net income would have been $19.3 million. Yet even so, that would still have been down 22% on a year-over-year basis and missed what investors had wanted to see.
The Panamanian bank saw most of its key internal metrics deteriorate during the period. Return on average equity fell almost 4 percentage points to 5.6%, and return on average assets was down more than a third to 0.91%. Net interest margin steepened its decline, dropping a third of a percentage point to 1.68% compared to the year-ago quarter, and net interest spreads were lower by almost half a percentage point to 1.26%. Efficiency ratios ballooned adversely to 47%, worsening by 18 percentage points over the past 12 months.
After a pause last quarter, sequential declines in assets at Bladex returned during the quarter. Total assets fell to $5.88 billion, down by almost $1.2 billion in just the past year alone. The size of the commercial portfolio fell by $268 million in just the past three months.
Just about the only positive was Bladex's continued strength in maintaining credit quality. The bank's tier 1 capital ratio under Basel III standards jumped to 22.6%, up from 19% this time last year, and nonperforming loans saw a slight drop as a percentage of the loan portfolio from year-ago levels to 1.12%.
Can Bladex pick up the pace?
New CEO Gabriel Tolchinsky, who replaced departing chief executive Rubens Amaral this month, tried to see the bright side of the situation. "While our first quarter results were below our expectations," Tolchinsky said, "we were encouraged by several positive performance trends during the quarter: average loan balances were higher, contingencies/letters of credit performed well, credit quality remained strong, and we have a robust syndications pipeline." However, Tolchinsky also pointed to tightening net lending spreads because of higher liquidity in the region.
Bladex has a strategy in place to address the situation. As Tolchinsky explained it, the Panamanian bank hopes to improve by extending the length of current short-term transactions, boosting loan origination volumes with medium-term maturities, and starting in general to get asset levels growing again. The bank will keep looking to cut costs as well, and the new CEO is "cautiously optimistic about the second quarter and the full year" as a result.
Bladex shareholders won't be happy about the way the bank has performed lately, but they might like the change in strategic vision that could lead to renewed growth in the near future. Bladex will have to be careful not to extend itself too far, but if it maintains credit quality while boosting revenue and profits, it should have a positive impact on the company in the long run.