BLX - Bladex Is Still A Lopsided Bet On Latin American Growth

2023-12-15 09:26:26 ET

Summary

• BLX is a Panamanian bank with Latin American central banks as its primary depositors.
• BLX has experienced recent outperformance due to more lending and higher interest rates, leading to higher net interest income.
• The bank's profitability in the future will depend on global interest rates and the growth of the Latin American economy. Still, it is currently priced to yield 10% even in the worst-case scenario.

Banco Latinoamericano de Comercio Exterior, or Bladex for short ( BLX ), is a Panamanian bank whose depositors are primarily Latin American central banks.

I wrote several times about BLX in October 2021 , June 2022 , and October 2022 , at one point stating that it was the most undervalued stock I had researched. Since I recommended the stock, it has returned 50% in the past year via price appreciation.

BLX is a very special bank, not only because of its special clients (Central Banks) but also because of its conservative lending practices, short-term, dollar-denominated book, and correlation with the Latin American economy. I recommend reading my previous articles for a detailed explanation of the company's history.

In this article, I review the company's performance and analyze whether or not it is still a promising holding at these prices. I believe it is because the company could still return a 9% earnings yield even during a severe recession and credit shrinking. Further, today, its earnings yield is 20%, and it is still leveraged to Latin American growth.

Recent outperformance

The thesis on BLX has played out well because it happened while the stock was relatively dormant. The bank was poised to increase credit to the post-pandemic Latin American commodities export boom while capturing higher rates because its short-term book was sensitive to those rate changes.

I will not deal a lot in this area because many articles in Seeking Alpha explain what happened. The combination of more loans and higher rates leads to higher net interest income. On top of this, higher banking activity leads to more fees, etc. With operating expenses relatively fixed, the bank was poised to explode in terms of net income, and it did.

Profitability drivers

The question is whether or not the bank's current profitability will continue in the future.

In my opinion, only two aspects will determine that: the global level of interest rates and the growth of the Latin American economy.

The global level of interest rates (basically the FED's rate) determines the global cost of capital. Any institution that lends correctly can earn more on its equity if interest rates are higher. Therefore, higher interest rates lead to higher net interest margins via the interest portion obtained on the bank's equity.

The second aspect is Latin American growth. This factor influences two of BLX's variables: its loan book size and its net interest spread.

The loan book can grow if the economies in the region are growing. For any interest rate level, more loans mean more net interest income. We are not considering the possibility of capital losses caused by a recession because the bank lends primarily to investment grade or top high-yield borrowers at very short maturities, which means that its book should be relatively secure.

Further, the net interest spread determines how much money BLX makes after paying interest to its depositors. Because the job of BLX is to lend correctly (while its clients are only concerned with depositing with BLX), the competitive dynamic that determines the spread, in my opinion, is general competition for credit. That is, the more demand for credit there is, the more BLX gets to charge for its lending services via the net interest spread.

These two relationships with Latin American GDP are graphically evident by comparing the company's loan book with Mexico's, Brazil's, and Chile's GDP. The same dynamic is clear for NIS, compiled until 2010.

Let's zoom in on the case of Mexico and compare the economic reduction, the loan book reduction, and the compression in the NIS, all happening after 2014.

What's being priced in and conclusions

In that case, the question would be, what happens next? And the happy answer is I don't need to know to be compensated for holding BLX.

First, I have no idea what interest rates could be one year from now, nor if the Latin American economy would grow. Second, if I knew that, I would probably not be considering BLX but some form of leveraged futures or more trading-oriented vehicle.

Finally, and most importantly, BLX is priced to yield 10% even in the worst scenario, an economic recession or stagnation in Latin America coupled with low global rates.

The above section shows that the 2018 to 2020 period had two conditions: low loan book and low NIS (both caused by stagnant or falling LatAm economies). The chart below adds the global interest rate level, using the Fed's overnight rate as a proxy. We can see that rates averaged only 1%.

Now, we can compare that to BLX's profitability metrics. We see that BLX's net income during the 2018 and 2020 period was close to $80 million (the fall during 2018 was caused by impairments that were later reversed, showing the company's conservative practices; the issue was studied in more detail in the October 2021 article).

That is, considering a mix of the worst scenarios for the two most important drivers of BLX profitability (low global rates and shrinking Latin American economies), the bank generated close to $80 million in recurrent net income.

That is compared to a market cap of $900 million today. This means that BLX trades today at an 11x multiple of what it generated during an environment where its driving variables were terrible. Further, that is close to, or below, the company's historical average PE ratio (minding the outlier of 2018).

For this reason, I believe BLX continues to be an outstanding opportunity. It is priced to incorporate the worst potential scenario, leaving all future opportunities as a gain. For example, the Fed could take longer than expected to cut rates, allowing BLX to gain a higher NIM on its assets for longer, or the equilibrium rate could be higher than the close to 0% environment of the past decade. Also, the Latin American economy could continue growing because of higher commodity demand or because it can extract better terms for those commodities. The key is that we do not need to be right on that call. We just need to wait and see what happens. That's a heads I win, tails I don't lose opportunity.

For further details see: