Like everywhere else in the world, Latin America needs sources of financing in order to drive business activity. Panama's Banco Latinoamericano de Comercio Exterior (NYSE: BLX), or Bladex for short, has been a key provider of that financing, but that has left it vulnerable to the ups and downs of the economic prospects of the region. Coming into Friday's fourth-quarter financial report, Bladex shareholders had expected to see relatively solid profits that were consistent with past periods. However, the bank had to report a substantial impairment charge that ate into its profitability and left it with a bottom-line decline for 2016.
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Let's take a closer look at Bladex to see how it did and what it sees ahead in 2017.
Image source: Bladex.
Bladex takes a hit
Bladex's fourth-quarter results showed some of the challenges that the Panamanian bank has faced recently. Operating revenue was down 1% to $43.2 million, continuing its trend of weak performance. Net income plunged by more than 40% to $13.3 million, and that produced earnings of just $0.34 per share. That was less than half the consensus forecast among investors and down by $0.26 per share from the year-ago quarter.
Looking more closely at the report, Bladex again posted weaker internal numbers than it has in the past. Return on average equity dropped by more than 4 percentage points to just 5.3%, and return on average assets was down by about a third to 0.73%. Net interest margin widened slightly, climbing above the 2% mark, and its efficiency ratio improved by a couple percentage points compared to the fourth quarter of 2015. However, the bank had to record $18 million in impairment losses on loans and other commitments, and that was primarily responsible for the bottom-line hit.
The problems with credit quality also appeared elsewhere on Bladex's financials. Nonperforming loans as a percentage of the bank's total portfolio climbed by more than a third to 1.09%, and the total allowance that the bank has for expected credit losses rose by a similar amount.
However, the most striking thing about Bladex's numbers is how much the bank has shrunk its asset base recently. The company commercial portfolio is down almost 10% from year-ago levels, and an even larger percentage drop in Bladex's treasury portfolio helped contribute to a more than $1.1 billion drop in total assets to $7.18 billion. That move has boosted Bladex's creditworthiness considerably, with its Tier 1 capital ratio under Basel III approaching 18%, high levels of liquid assets, and relatively low leverage figures.
What's ahead for Bladex?
Bladex CEO Rubens Amaral was realistic about the past year for the Panamanian bank. "2016 turned out to be a year of unexpected events," Amaral said, "impacting both the global economy in general and the Latin American region in particular." The CEO pointed to strong growth north of the Panama Canal that helped offset recessionary conditions in Brazil, Argentina, and Ecuador and their impact on the entire South American market.
What Bladex sees as having been its strength is its discipline in focusing on boosting interest rate spreads on the asset side while increasing deposits and managing depositor rate expectations on the liability side of the balance sheet. Yet it didn't fully expect the extent of the problems it faced with its non-performing loan portfolio. Going into 2017, however, the bank has established performance-based goals aimed at managing credit risk more effectively, and Bladex is cautiously optimistic that it can keep building on its fundamental competitive advantages.
Interestingly, Bladex also signaled its ability to fight against potential geopolitical issues in 2017. In Amaral's words, "The Latin America region is poised to improve its economic conditions with positive growth prospects across the different countries, but we remain alert for the different challenges arising from a potentially more protectionist environment in the developed world, from the Brexit in Europe and the new government in the United States."
Bladex shareholders weren't pleased with the bank's performance, and the stock fell 5% during the Friday market session following the announcement. Given how strong U.S. banks are looking right now, investors want to see evidence that Bladex can follow suit with improving conditions in Latin America before they'll feel entirely confident about the bank's fundamental prospects going forward.
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