Things are looking up for Banco Latinoamericano de Comercio Exterior (NYSE:BLX), also known as Bladex, a bank that specializes in trade finance in Latin America. Its second-quarter earnings report was highlighted by a return to growth in its balance sheet and improving credit metrics, despite continued clouds over Latin America's economic and political future.

Here's the skinny on this unique bank's second-quarter earnings results.

Bladex's second quarter: By the numbers

Bladex purposefully pulled back on originations in recent months, which resulted in declining net interest income this quarter. Fee income and lower losses for expected credit losses came to the rescue, however, helping the bank dodge a larger decline in earnings during the second quarter.

Metric Q2 2018 Q2 2017 Year-Over-Year Change
Net interest income $27.9 million $26.6 million (5%)
Net profit $16.6 million $17.5 million (5%)
Diluted earnings per share $0.42 $0.44 (5%)

Data source: Bladex.

What happened this quarter

Banks may be more complex than widget makers or service providers, but the truth is their performance from quarter to quarter and year to year is ultimately determined by just a few key earnings drivers. Here are some key figures and events from the second quarter.

  • Bladex benefited from rising rates and its appetite for longer-term loans. Net interest margin (NIM), or the difference between what a bank earns on its assets and pays on its liabilities divided by its average earning assets, expanded to 1.81% in the second quarter, up from 1.68% in the sequential quarter and 1.80% in the year-ago period. 
  • Credit metrics improved, as non-performing loans (NPLs) declined as a percentage of the company's loan portfolio. Bladex's NPL ratio fell to 0.98% at the end of the second quarter, down from 1.12% in both the first quarter of 2018 and the year-ago period, helped modestly by a 5.6% quarter-over-quarter increase in the size of its commercial portfolio.
  • After shrinking its balance sheet two quarters in a row, Bladex is putting more money to work. The bank reported that total assets stood at $6.3 billion at the end of the second quarter, up from $5.9 billion sequentially, but down slightly from $6.4 billion during the year-ago period. 
  • The bank's tier 1 capital ratio, calculated under Basel III standards, stood at 20% at the end of the quarter, giving it a cushion to weather rising credit losses and/or the capacity to grow its balance sheet to make more loans.

What management had to say

The conference call yielded interesting commentary about challenges facing Latin America, as well as potential drivers for earnings growth.

Starting with the good news first, management was upbeat about the bank's ability to put money to work at higher interest rates. In prepared remarks, the bank's chief financial officer, Ana Graciela de Mendez, said that longer-term loans offer meaningfully higher yields than the shorter-term loans that make up a majority of its balance sheet. She noted that medium-term loans that mature in less than three years offered spreads about 135 basis points (1.35 percentage points) higher than short-term loans that mature in as little as 120 days.

Unlike more traditional banking institutions, Bladex can quickly shift its balance-sheet composition to earn higher yields because trade finance receivables are repaid quickly. Notably, about 81% of its portfolio is scheduled to mature within one year, enabling the company to opportunistically rotate its loan book into longer-term loans as shorter-term loans are repaid.

Bank sign on a marble building.

Image source: Getty Images.

Of course, the downside of its business model is that Bladex is heavily exposed to borrowers in Latin America, a corner of the world that isn't exactly known for political or economic stability. The bank's chief executive officer, Gabriel Tolchinsky, summed up the challenges succinctly on the conference call, highlighting certain developments that have negatively affected Latin American economies during the second quarter:

In May, the Argentine currency started depreciating, leading to a $50 billion IMF rescue package. On May 21, a trucker's strike in Brazil protesting rising petrol prices brought the resignation of Petrobras CEO Pedro Parente by June 1. In Mexico, presidential candidate Andres Manuel Lopez Obrador, who was not viewed as pro-business, was the clear favorite for the July 1 Mexican election. These developments set the stage for what was going to become a more uncertain second half of the quarter.

He noted later that the International Monetary Fund (IMF) downgraded its economic growth expectations for Latin America this year, forecasting growth of 1.6% versus an earlier estimate of 2%. Tolchinsky was quick to point out that economic volatility also can present opportunities, as uncertainty means less competition on price and terms for the marginal loan.

Looking ahead

Any bank's earnings ultimately follow the performance of the economies in which its borrowers operate, as over the long run, the banking industry as a whole can only grow loans and deposits at a rate roughly equal to economic growth. With tepid forecasts for Latin America acting as a limit on balance-sheet growth this year, and Bladex's preference for a conservatively leveraged balance sheet, the company's ability to swap lower-yielding short-term loans for higher-yielding longer-term loans arguably remains one of its biggest opportunities to drive profit growth in the second half of 2018.

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