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Banco Latinoamericano de Comercio Exterior (NYSE:BLX), or Bladex for short, reported 2Q24 results today. This article covers the results and earnings call and revisits the company valuation from my previous article in April 2024.
Bladex continues to expand its book, financing it with deposits. It continues to grow its fee-generating letter of credit business and has driven its efficiency ratio to below 25%, positioning it as one of the most efficient banks globally.
The bank’s main risk is the reduction of its loan book in the event of a global recession affecting commodities and the economies of Latin America. When averaging such a negative scenario with today’s, the bank’s stock still sounds attractive, and I maintain my Buy rating.
BLX results are still great
The company’s 2Q24 results continued a more than year-long expansion trend in book size, income, and fees.
Bladex posted that its credit book expanded 13% YoY, which, thanks to flattish NIM, led to net interest income expanding by 15%. The majority of the growth has been on traditional loan products with durations of less than a year.
The company financed this growth with deposits, which grew 40% year over year. This also means that deposits replaced other forms of financing like short-term debt and reverse repos, making the balance sheet a little more efficient and less risky. As mentioned in previous articles, the Yankee CD product continues to grow and now makes up 27% of deposits.
Bladex has also continued expanding its fee-generating business of credit commitments and letters of credit. These commitments are carried off-balance sheet because the bank has committed to lend money if necessary but generally does not need to. This type of off-balance sheet commitment grew 36% YoY but drove a fee increase of more than 90% YoY. Because the bank still carries a liquidity risk from these (and has to maintain liquidity in the form of cash or short-term deposits), these fees actually work as interest in a certain sense.
Bladex is planning to expand this type of product, which is new but generally low(er) risk, and within the bank’s circle of competence (it is called LatAm Bank of Foreign Trade for a reason). Management announced the purchase of a software platform that would allow the bank to double the volume of trade financing transactions in the next two years.
The company’s expenses were flat to 1Q24, but thanks to increasing net interest income, Bladex’s efficiency ratio decreased to 24%, which is considered top-of-the-line for banks. The bank’s management commented during the 2Q24 call that expenses would grow during 2H24, but that they hoped the efficiency ratio to remain below 30% for the year, still very low.
The above meant a net income of $50 million, 35% higher than last year. The same level of growth is registered for the 1H24 period.
Revisiting the valuation
The recession risk: Bladex’s main risk is a global recession affecting Latin American trade patterns via commodity bear markets. Such a situation would probably not lead to loan losses because the bank’s credit is tied to short-term trade and has short maturities. However, a commodities bear market would lead to lower trade volumes in and out of Latin America. This, in turn, would lead to more competition (lower margins) and a smaller book.
I consider the period between 2015 and 2020 representative of low commodity prices, muted growth in Latin America, and low rates. During that period, Bladex was able to shrink its book without generating defaults, decrease its structural OpEx by half, and generate an average net income of $75 million. My April article for Bladex analyzes the scenario in more detail.
This represents the worst-case scenario, in my opinion. Under that scenario, Bladex currently trades at a P/E of 16x, which is pretty high but normal, considering this is the worst potential situation.
Global rates are not a risk: I do not think a decrease in global rates (for example, from the FED) is a problem because Bladex’s funding markets via deposits and loans are very competitive. A reduction in liability yield would compensate for a decrease in asset yield.
Current situation: Bladex can generate between $180 million (current TTM net income) and $200 million in net income today. If the book grows thanks to Latin American trade growth, that number might be higher in FY25. This positive case represents a P/E of 6.5x.
I am no macro forecaster and do not know where global economies and commodity prices are heading. If we consider that Bladex’s current situation is the best scenario and the 2015-2020 the worst, and both have the same probability of occurring, then Bladex trades at a P/E of 9.4x. In my opinion, this seems reasonable for a bank that has demonstrated great management, efficient operations, conservative lending policies and has not suffered from large defaults in most of its history.
For that reason, I continue to believe Bladex is a Buy at these prices.
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