CIB - Bladex: Moving To Hold As Bull Thesis Has Played Out

2023-11-30 14:11:02 ET

Summary

• Bladex reported another strong quarter, and profits continue to hit new highs.
• However, I believe growth is about to slow down in 2024.
• Bladex shares have rallied sharply in 2023, and I no longer see much near-term upside.

I've been bullish on Panamanian bank Banco Latinoamericano de Comercio Exterior, S. A. ( BLX ), or Bladex for short, for quite a while. My most recent coverage was in April when I suggested that the bank's unique structure made it safe from the current crisis .

That has worked out well enough; BLX stock is up 50% since then even as the banking industry as a whole has delivered mixed results throughout 2023. With BLX stock up here at $25 now, am I still bullish on the company? Let's check in on the company's developments and outlook going forward.

More Excellent Earnings

Bladex reported its Q3 2023 earnings results on October 20th. The bank delivered another quarter of stellar growth. Top-line revenues soared 55%. Net interest income notched its 10th consecutive quarterly increase. And EPS soared to $1.25, up sharply from the $0.74 reported for the same quarter of 2022. Through the first nine months of the year, Bladex has earned $3.28, compared to just $1.68 for the same nine months of last year.

It's pretty remarkable when a decades-old bank can nearly double earnings in a year and grow top-line revenues at such a stellar rate. How is Bladex pulling it off?

It's not through rapid loan growth; total assets increased from $9.3 billion to $10.1 billion year-over-year which is a reasonable but hardly a dramatic increase. Rather, it's thanks to a huge leap in the profitability of its loans. Year-to-date net interest margin "NIM" for 2023 is 2.44% which has leapt from 1.56% last year.

NIM has jumped due to the bank taking more duration on some of its loans as economic conditions have improved in Latin America and made that type of lending more attractive. In addition, regular trade financing has been increasingly fruitful given the current macroeconomic landscape. The sharp jump in inflation and commodity prices, for example, has catalyzed a lot of new economic activity across the region in areas such as increased agriculture production. As Bladex primarily exists to facilitate trade throughout the region, a boom in commodity prices and local economic activity leads to more lending opportunities for Bladex.

Can The Run Continue?

For a while, Bladex was reporting these tremendous earnings results without the market giving the bank any credit. However, that has finally changed, as we've seen a dramatic move in Bladex's share price over the past six months:

The bull case for the longest time was that Bladex was selling at a massive discount to book value while printing strong (and sequentially rising) return on equity figures. Normally, well-run conservative banks with strong ROEs should trade for at least book value if not a premium.

So where do things stand today? Here's the long-term price-to-book value chart for BLX stock:

Bladex is still selling at less than 0.8x book value, which makes for a decent discount. However, it is up markedly from the less than 0.4x it hit during the initial COVID-19 crash, and the 0.6x or so it was trading for over much of the past two years.

In isolation, I believe Bladex is still cheap and should trade up to book value. However, I must sound a note of caution here. Bladex shares don't trade in isolation. Rather, there are a lot of other publicly traded LatAm banks, and returns have in general been more muted in 2023. Here's a sampling from around the region:

Bladex has delivered a 60% total return year-to-date. Brazilian and Mexican banks have also performed quite strongly, as the chart above shows, but returns have lagged in other markets such as Chile, Colombia, and Peru.

There can be good reasons for this difference. In fact, as my prior thesis on Bladex demonstrated, I believe its reliance on short-term lending and not having a retail bank made it uniquely well-positioned to deal with 2023's complex macroeconomic situation. Over the longer term, however, the whole region needs to prosper for Bladex to have a broader addressable market and expand its loan book. Otherwise, Bladex's growth will slow down as well.

After a year of big gains in Bladex, while at the same time, banks like Peru's Credicorp Ltd. ( BAP ) and Colombia's Bancolombia S.A. ( CIB ) are flat for the year, it's much easier to make the value case for those latter two institutions than Bladex.

Bladex's 2024 Outlook

Bladex is heavily driven by natural resources and manufacturing activity in the region. As such, there is a meaningful correlation to the prices of things such as oil, precious metals, and agriculture prices.

We can see how a more upbeat natural resources sector directly filters through to Bladex's commercial opportunities. See this from the firm's latest conference call , where CEO Jorge Salas notes that:

The [Bladex syndication] team successfully executed two very relevant transactions last quarter, confirming our strong presence in the regional syndication market. One, we served as joint lead arranger and book runner for an $80 million committed facility for GeoPark, an oil and gas company with operations across Colombia, Peru, Chile and Brazil.

Secondly, we acted as joint lead arranger on a $1 billion term loan facility for Ecopetrol, a landmark transaction for Bladex, supporting the largest Colombian company and one of the largest LatAm entities, again, with presses in Colombia, Mexico, Peru, Chile and Brazil. All this resulted in a historical record figure of net income for the quarter was $45.8 million, the biggest bottom line result ever for Bladex. The resulting quarterly return on equity was almost 16%, also the highest in our recent bank history.

Long-time readers will know I'm bullish on energy and Ecopetrol S.A. ( EC ) in particular. However, I must concede that the outlook for oil has weakened over the past quarter. And pricing on a lot of other LatAm commodities such as copper, lithium, and agricultural goods has moderated as well. A global economic slowdown would be a drag on Bladex's near-term loan origination and syndication prospects. As Salas said on the call:

"In Bladex, as a trade bank, we finance both imports and exports. So in general, an increase in commodity prices and particularly, oil, has been historically beneficial for Bladex."

Inverting that, the recent decrease in commodity prices and oil is unlikely to be beneficial for Bladex's 2024 prospects.

The recent reversal in interest rates is also likely to cap Bladex's profit growth. As Bladex has an exceptionally low-duration loan book, it can pass through higher interest rates almost immediately onto its borrowers. That will work in reverse as interest rates start to fall.

I also expect Bladex to slow its growth down. Coming out of the pandemic, the bank aggressively repositioned itself for growth and to take advantage of new opportunities in the region. I believe much of the low-hanging fruit has been picked up there, and we'll see Bladex take a more conservative approach. We might see a dividend increase or additional use of the buyback rather than substantial reinvestment in operations.

Though I think Bladex is nearing the end of this aggressive growth cycle, the company is continuing to innovate and find more ways to put capital to work. For example, earlier in November, Bladex announced that it would be launching a factoring product . Factoring is where a bank will give companies cash upfront in exchange for their accounts receivables while taking a cut that is proportionate to the amount of risk involved in collecting those accounts receivables.

This is a logical line of business for Bladex, as it is another form of short-term funding which should have a reasonably similar performance profile to the firm's long-established trade financing business. Bladex is initially going for the Chilean market with its factoring operations but plans to expand it to other countries around the region as well.

Don't Fear Panama's Politics, But Watch The Canal

I should mention the recent political protests in Panama, as Bladex is based in Panama City. Since October, there have been broad and prolonged protests across Panama in opposition to a mine owned by First Quantum Minerals Ltd. ( FM:CA ). First Quantum shares have lost the majority of their value since the controversy started:

There were long-running highway closures and some parts of Panama were cut off from the capital.

Recently, a Panamanian court invalidated the controversial mine's contract, which will lead to the mine's closure , at least for the time being. While that should stop the protests, it is likely to lead to international arbitration and a nasty legal fight, all of which casts a negative view toward Panama as an investment jurisdiction. Traders might see the headlines and fear an impact through to Bladex, which is technically a Panamanian bank.

However, it's important to note that Bladex has virtually no loan exposure in Panama itself. Bladex doesn't have a retail banking operation and isn't affected by changes in Panamanian consumer credit metrics, property values, or so on.

And Panama uses the U.S. Dollar as its currency, and Bladex holds its reserves primarily in dollars at the New York Federal Reserve as well. Even a significant economic shock in Panama would have minimal impact on Bladex's outlook as it simply doesn't have meaningful day-to-day exposure to Panama's economic conditions.

What is a bigger concern, however, is the state of the Panama Canal. It hasn't been significantly disrupted by the protests. But, it is facing a slowdown in activity due to the worst drought in the region in many years. Authorities have already reduced the number of ships that can traverse the canal on any given day, and a significant logjam may build up if weather conditions don't improve. As Bladex funds a large deal of trade commerce -- a big chunk of which ultimately uses the Canal to deliver goods to end buyers -- any lasting drop in activity there could be a drag on loan book growth going forward.

Bladex Stock Bottom Line

I no longer see a near-term opportunity in Bladex shares, as they have already rallied sharply and my bullish thesis has played out. I have little reason to expect Bladex shares to outperform other LatAm banks in 2024 from current prices, and as such, I am moving to a hold rating now.

That said, Bladex is still trading at less than 0.8x book value and is spitting out mid-teens ROEs. That's cheap. I think long-term investors will do just fine holding BLX stock. Indeed, I continue to own Bladex shares in my buy-and-hold portfolio. However, for 2024, I see better opportunities in more depressed LatAm banks such as Bancolombia or Credicorp.

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