BLX - Bladex: A High-Yielding Bank Safe From The Current Crisis

2023-04-07 13:19:18 ET

Summary

• Panama's Bladex is a unique trade-focused bank.
• Thanks to its structure, it's in an advantageous position for dealing with current banking industry conditions.
• Shares reflect that fact, rallying over the past six months even as many other banks have plunged.
• I see further upside after its latest earnings report, which was sensational.

It's time for an update on Banco Latinoamericano de Comercio Exterior - "Bladex" (BLX). The name translates to Foreign Trade Bank of Latin America . I highlighted shares last summer as they were ridiculously cheap, paying a 7% dividend yield , and had a rapidly improving outlook thanks to rising commodity prices and economic activity in Latin America.

The original thesis still holds, and indeed has begun to play out, as can be seen comparing Bladex shares to other banking indexes:

To that point, over the past six months, Bladex shares have produced a 27% total return, compared to an 11% rally for the iShares Global Financials ETF ( IXG ), a 2% gain for the U.S. Financial Select Sector ETF ( XLF ) and a crushing 30% decline for the Regional Banking ETF ( KRE ).

What explains the outperformance, and why do I remain bullish?

Bladex: Not Exposed To Current Crisis

The banks that have run into trouble recently tend to share a few features. They were involved in more speculative verticals such as cryptocurrency or venture capital. They had huge piles of uninsured deposits. And they had concentrated customer deposit bases that could leave quickly.

Bladex is not impacted by any of these. Recall that it's run by a consortium of Latin American central bankers to facilitate trade within LatAm. The majority of its deposits come from the region's central banks, and these bankers make up a large chunk of the board of directors. Bladex also has special privileges in collecting on debt first in the event that one of its loans goes bad. All this to say this is a highly connected bank that has the best sort of institutional support - regardless of what's happening at weaker banks, one whose deposit base is central banks is not going to be exposed to garden-variety deposit flight.

Second, Bladex has no retail business. It doesn't take money from ordinary depositors. As such, there isn't a mass of people that could even attempt a run on the bank.

Rather than having the risks and rewards that come with being a retail bank, Bladex is a specialty bank whose fortunes will rise and fall with that of the Latin American economy. And, with the current inflationary environment, LatAm's fortunes are on the upswing.

Sensational Q4 Results

The company announced its Q4 and full-year 2022 results on Feb. 27. And they were, in a word, tremendous.

In fact, there's not really any need to write much here. Let's just review the year over year changes for Q4 '22

• EPS: 85 cents (+31c)
• Revenues: $53 million (+79%)
• Net Interest Income: $49 million (+100%)
• Net Profit: $31 million (+55%)
• Net Interest Margin: 2.11% (+69 bps)
• ROE: 11.6% (+370 bps)

These are simply jaw-dropping numbers.

I cover a lot of bank stocks. I can't recall many other situations where a bank posted 100% net interest growth, 79% revenue growth and 55% profit growth in a single year before.

The strength came across all fronts too. The banks saw far higher interest spreads thanks to the boom in commodity prices and resulting demand for more trade capital to facilitate dealing. BLX hasn't had a net interest margin of 2% or above since 2016. Now we jumped from 1.4% to 2.1% in a single year. Incredible.

And sure, in isolation, a 2.1% NIM may not sound amazing. U.S. banks usually earn 3-4%, and LatAm banks often run into the 5s. However, BLX is taking almost no credit risk to get that 2.1%. Trade financing tends to be exceptionally short term. A metals producer puts product on a boat, BLX finances the material during the voyage, and when the copper arrives in Asia and is paid for, BLX gets its money back with interest. That sort of thing. Trade finance isn't supposed to be glamorous or high-yielding. Seeing this sort of jump in profitability is a game-changer.

Let's expand on this a bit. Here's BLX's net interest margin, past 10 years:

• 2012: 1.6%
• 2013: 1.7%
• 2014: 1.8%
• 2015: 1.8%
• 2016: 2.0%
• 2017: 1.8%
• 2018: 1.6%
• 2019: 1.5%
• 2020: 1.4%
• 2021: 1.2%
• Now: 2.1%

Higher commodity prices and the new inflationary macro environment have flipped the switch for this bank to start making windfall profits. While there's some risk if the global economy goes into a recession, it seems the new floor prices for commodities are much higher. Look at the recent OPEC production cut for one example of that.

Bladex also put a lot more capital to work. This is a factor of both more opportunities in general and management deciding to get more aggressive after it had hunkered down during the pandemic. In any case, its loan portfolio grew 18% year-over-year. Grow your loan portfolio 18% and start earning 50% more in interest spread on your loans and you're going to see exponential profit growth.

So What's It Worth?

The bank, as of this writing, has a market cap of about $610 million against a book value of $1.07 billion. The bank also grew book value 8% year-over-year.

This works out to a book value of $29.50/share today, and one which should grow into the low $30s next year. Meanwhile, the stock is at around $17 now.

Previously, it was easy to say the bank should trade at a discount to book value, say 0.7 or 0.8x since the bank had been running a 8% ROE or so. Banks with an ROE below 10% often deserve to trade below book value.

However, ROE has now jumped up to 12%. Putting more capital to work at far fatter net interest spreads has a way of doing that. At a bare minimum, if Bladex can sustain a 12% ROE, it should be worth book value. Honestly, I think you could argue for a 1.2 or 1.3x book value here given the rapid growth and favorable macroeconomic backdrop. But at minimum, the stock should be trading for book, or $30.

Two other points back that up. The company is paying a $1.00 dividend, which works out to a 5.9% yield on last close. They will either raise the dividend or buy back a pile of stock in coming months as they are earning $3.40/share annualized now so the dividend is much too small in comparison to the earnings power. The company has retired close to 10% of its outstanding stock since 2021 thanks to the sharply depressed valuation which made a buyback advantageous.

That $3.40 annualized earnings figure also is interesting. A humble 7x P/E multiple on that gets us a $24 stock price. And I'm not sure how you could possibly argue for a lower rational P/E ratio on a bank that is backed by LatAm's central banks and governments, takes almost no credit risk, and is posting sizzling growth figures. A 10x P/E ... hardly too demanding ... gets us a $34 stock price.

You can approach valuation in a lot of different ways. But, in any valuation framework you might use, the current $17 stock price is not rational. BLX shares should be trading a lot higher in 2023. This earnings report was sensational. And given the reshoring, foreign direct investment influx to the region, higher commodity prices, etc., Bladex should be able to keep this momentum rolling in future quarters.

The fact that BLX stock has held its value during the current bank shake-out should be quite the interesting sign. There's real interest in the franchise even as the sector has plunged. When sentiment picks up for banks again, I expect BLX shares to be one of the leaders in the next rally.

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