Latin America has been a challenging environment for businesses, as a combination of currency devaluations, political scandals, and macroeconomic pressure has made it difficult for investors in the region. In the financial industry, how adverse conditions could affect creditworthiness has been a rising concern, and Panama's Banco Latinoamericano de Comercio Exterior (NYSE:BLX), also known as Bladex, has seen what happens when things go badly for its home region.
Coming into Thursday's third-quarter financial report, Bladex shareholders wanted to see rising top-line growth but were ready to accept stagnant earnings. What they weren't prepared to see was a huge loss driven by credit concerns, but that's what Bladex delivered, and that sent the stock to levels it hasn't seen since the early 2010s.
Here's what hurt Bladex during the quarter
Bladex's third-quarter results were just the latest in a series of tough periods for the Panamanian bank. Total revenue of $29.7 million fell 4% from year-ago levels, which was a far cry from the 11% rise that those following the stock had wanted to see. But what was truly shocking was the bank's loss of $40.7 million for the period, reversing year-earlier profits of more than $20 million and translating into a $1.03-per-share loss. The consensus forecast among investors had called for a profit of $0.51 per share.
The key reason for the loss was Bladex's decision to boost its credit provisions for expected credit losses on non-performing loans. Bladex incurred $55.1 million in total credit provision charges for the quarter, raising the allowance to 2.26% of commercial portfolio assets. The move was necessary because the balance of nonperforming loans more than doubled during the quarter to $119 million, hitting 2.08% of total loan portfolio assets. Bladex pointed to one particular loan in the Brazilian sugar industry as playing a pivotal role in the deterioration of the bank's credit quality.
Elsewhere, Bladex saw mixed results. Net interest income slumped 2% to $27.3 million, while operating expenses were higher by 9% from year-ago levels. Net interest margin fell slightly to 1.74%, and spread figures weakened considerably. The bank's efficiency ratio worsened by 4.5 percentage points from 2017 results to 36.5%. Tier 1 capital ratios plunged 2.5 percentage points to 17.8%.
Strangely enough, the results came amid what's become a rare rise in bank assets. Bladex reported $6.31 billion in its commercial portfolio at the end of the quarter, up sharply from $5.71 billion a year ago. That boosted the bank's leverage ratio at what proved to be an inopportune time.
What's ahead for Bladex?
CEO Gabriel Tolchinsky explained some of what Bladex faced during the period. "A further deterioration in sugar fundamentals during the quarter," Tolchinsky said, "with prices trading significantly below the margin cost of production, became too much for many Brazilian producers to bear. This included one of our credits and impacted our financial results." The CEO also blamed rising U.S. interest rates, Latin American currency weakness, protectionist trade policies, and fears of recession in Latin America.
Yet the strategy Bladex seems to want to follow looks a bit disjointed. On one hand, Tolchinsky pointed to wanting to enhance the strength of the current loan portfolio. Yet the CEO also wants to improve overall originations by offering a wider mix of medium- and short-maturity loans. That balancing act between wanting to grow assets but retain quality could prove challenging, especially if economic conditions in the region remain volatile.
Bladex shareholders weren't pleased with the surprise loss, and the stock plunged 14% in morning trading following the announcement. Until things get better in Latin America, Bladex will have a lot of trouble finding its footing and posting a solid rebound for investors.