|Shares Out. (in M):||39||P/E||11.6x||10.6x|
|Market Cap (in $M):||997||P/FCF||NA||NA|
|Net Debt (in $M):||0||EBIT||0||0|
|TEV (in $M):||0||TEV/EBIT||0.0x||0.0x|
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What is Bladex?
Bladex was established in 1978 as supranational financial institution to provide dollar denominated trade finance in Latin America. Its original A class shares (16.4% of total shares) are held by central banks and designated state banking institutions of Latin America and the Caribbean with its B class shares (6.5% of total shares) held by private banks in the region. In 1992, Bladex offered its E class shares (77% of total shares) to the public on the NYSE. A new share class (F shares) was created fairly recently for non-Latin American state entities but no shares of this class have thus far been issued. The Board Of Directors is composed of 3 Class A representatives, 5 Class E representatives, and 2 all-class representatives.
The Business of Bladex
The core business of Bladex is trade finance. Trade finance is a collection of financial services which facilitate the cross-border purchase and sale of goods.
It is not a high-margin activity but it is among the safest banking exposures. According the Bank of International Settlements (CGFS Paper No. 50 – Trade finance: developments and issues), the average default rate of trade finance products between 2008-11 was only two basis points (0.02%) with an average loss rate of one basis point (0.01%). Bladex’s own credit performance reflects these global trends. In 1Q14, BLX had a mere five basis points (0.05%) of non-performing assets with a reserve coverage ratio 25 times that amount.
As of 1Q14, 57% of the loan portfolio consists of trade finance loans with the balance in short and medium term commercial loans closely related to foreign trade activities. Trade finance loan exposures are short-term in nature and 71% of the portfolio matures within one year. Both the loan portfolio and Bladex’s funding base are dollar denominated. 38% of loans are to financial institutions involved with trade finance operations, 54% to large corporations, and 8% to middle-market companies. In terms of country exposures, Brazil represents the largest concentration at 30%, followed by Peru and Columbia at 10% each, and Mexico at 9%. Management views the Mexican market as underpenetrated and a future source of growth. Argentina is a small exposure at 3% and the bank does not have any meaningful Venezuelan operations.
It should be noted that even in a market such as Argentina, Bladex has powerful advantages not available to most other companies. For legal purposes, Bladex is a multilateral development institution and enjoys Preferred Creditor status. Preferred Creditors have preferential access to foreign currency in the event of an FX crisis in tandem with other legal protections placing them ahead of other creditors. Thus, in 2002, Bladex was exempted from FX controls imposed by the Central Bank of Argentina on other lenders. I am not aware of any other situation where a private investor can so effectively piggyback on legal protections designed to protect public sector international entities. Another benefit of Bladex’s unique status that investors enjoy is a freedom from taxation in Panama where the bank is headquartered.
Bladex supplements its lending activities with a growing line of fee based businesses. Historically most of this fee business was in trade finance Letters of Credit which for effective purposes are another form of lending. But in recent years, Bladex organically built a growing loan syndication franchise which is an increasingly regular and significant contributor to earnings.
Bladex does have some residual exposure to a Latin American focused macro-hedge fund. The fund was seeded years ago with the idea of raising third-party capital to generate fee income. But, returns at the fund were lackluster and never attracted meaningful third-party participation. Bladex is steadily unwinding its exposure to the fund ($60MM or ~$1.55/shr at 1Q14) and will full exit by 2016 at the latest. In the past, the consolidated volatility of the hedge fund annoyingly obscured core results of the bank but this will end next quarter as BLX’s participation in the fund falls below 50% and they deconsolidate the entity. The bank also maintains a treasury portfolio of regional sovereign bonds amounting to $354MM (5% of earning assets).
Bladex has a conservative balance sheet with a 16.4% Tier 1 Capital Ratio, 17.6% Total Capital Ratio, and 12.3% tangible equity/assets. In part, this is rating agency driven. Although Bladex enjoys many advantages from its supranational status it must be noted that one disadvantage is that it does not have the explicit backing of any national central bank. Thus, the rating agencies demand higher capital buffers. It is, however, also the product of a conservative bank culture. Reserves stand at 1.2% of loans. Liabilities are funded through a combination of deposits (much of which are provided by regional central banks) and debt issuance.
The Next Two Years
Bladex should see a healthy ramp in profitability over the next two years from today’s respectable ROE of 10.8% to nearly 15%. This will be driven by basic blocking and tackling rather than any spectacular new initiatives or external drivers.
First, asset growth should continue to expand in the low double-digit range. I model asset growth of 13% for 2014 and 10% for 2015. Demand for trade finance historically grows at a multiple of several times regional GDP growth. Much of today’s Latin American trade growth is driven by intra-regional trade. Today, intra-regional trade only accounts for roughly a quarter of South and Central American trade flows versus 65% for the EU and 50% for Asia so continued room for growth exists. This intra-regional activity should support aggregate regional trade flows even if Chinese demand weakens.
Second, Bladex should see a continuing recovery of its Net Interest Margin (NIM) which saw compression in recent years due to a combination of factors. The company is targeting a 2% NIM from its current 1.8% level which I believe they should achieve by year-end. This will be accomplished by slightly extending the average tenor to their loan portfolio to match the medium-term liability notes they previously issued.
Third, BLX should continue to enjoy a nice ramp-up in its fee-based income. BLX generated 5.4MM of fee income in 4Q13 and 4.3MM in 1Q14. BLX should generate approximately 20MM in fee income for 2014 rising to 25MM in 2015.
Finally, management believes it can achieve this growth while holding operating expenses flat over the next few years. They expect the current efficiency ratio of 37% to reach at least 30% by holding the line on costs as revenues rise. I expect the company to achieve this goal in early 2015 and reach an efficiency ratio in the 27% range by YE15.
Altogether these factors will increase earnings from a current run-rate of 2.40 to 3.56 in 2015. At that point the bank will still be conservatively levered by global standards with tangible equity/earning assets of 10.7% versus 11.5% today including the impact of a $1.40 annual dividend.
Why Bladex is an attractive value?
Bladex has a low-risk operating model which is underappreciated by the market. Trade finance loans are short-term exposures. When the world gets scary, Bladex has the ability to essentially let its loan book run off and sharply reduce its exposures. For example, from YE07 to YE08, Bladex allowed its loan book to contract by over 20%. As a short-term lender Bladex has tools to protect itself in a worsening environment unavailable to traditional commercial creditors. Moreover, the short-term asset tenor sharply reduces the risk of asset-liability mismatch generated liquidity problems.
The risk-mitigating aspects of Bladex’s business model are supported by a top-tier management team. One of the chief sources of pushback I get from peer investors when I discuss Bladex is whether this is really a shareholder return driven organization or some Frankenstein-like public-private hybrid. I have gotten to know management quite well by following this company for over a decade. Bladex management ranks among the stronger management teams I know both for prudence (appropriate for a financial institution) and shareholder value orientation.
Bladex has a strong track record of returning rather than hoarding excess capital and pays a healthy regular dividend. As another example, in past years Bladex had sought to enter the factoring business via acquisition but backed away when it felt that acquisition prices were too high to generate an adequate return on capital. Finally, management shut down their asset management venture when it became clear that third-party fee income ambitions would not be achieved. Management is laser focused on maximizing risk-adjusted financial returns and supported by the Board in this orientation. They are also quite accessible and appreciative of shareholder interest.
As of 1Q14, BLX trades at 1.13x 1Q14 tangible book, 10.5x my estimate of 2014 earnings (2.43), and 9.4x consensus 2014 earnings (2.76). I suspect that my below consensus 2014 estimates are driven by a more conservative view of what constitutes normal core earnings and higher reserving costs due to a faster asset growth rate. Regardless, if Bladex was to simply trudge along in a fairly stable state it is perhaps unexciting, but far from over-valued given its risk profile, with the added benefit of a juicy dividend yield while you wait. Thus, Bladex has a solid margin of safety.
If I am correct that BLX will earn 3.56 in 2015 (vs. 3.15 consensus) then the stock is extremely inexpensive. At just a 10x forward multiple, BLX would be worth $35.60 at YE14 plus you get to collect a quarterly 0.35 dividend (1.40 annually) along the way for a total return of nearly 45%. With a projected YE14 book value of 23.70, my target equates to 1.5x tangible book on a forward ROE of 14.5%. I believe this is a compelling, asymmetric return profile relative to the stock’s margin of safety.
Why does this value exist? Bladex is a classic case of an orphaned security which falls between the cracks. Although it has a market cap of $1B, Bladex is neither fish nor fowl. It is a Latin American institution but trades solely on the NYSE and doesn’t fall into any specific country bucket. It is a steady, stable value compounder that garners little attention from emerging markets investors more focused on hunting for mega-growth. Street coverage of the stock is limited and lethargic. Anecdotally, I very rarely come across another investor who has heard of the name.
By no means is Bladex (or anything else in the world) risk-free. While credit losses at Bladex are essentially non-existent today, I imagine they would take some damage in the event of a major pan-Latin American systemic banking crisis. But that is a near tautological statement as what company wouldn’t take some damage in the midst of a major systemic crisis. Furthermore, while macro-prognostication is not my strong suit, my sense is that the Latin American financial system is in a historically strong condition and not on the verge of major problems. Yes, China’s economy could utterly detonate and drive trade related asset growth into negative territory. Again, however, there are few companies in the world which are positively exposed to a China detonation scenario, and for Bladex this would be an earnings rather than balance sheet problem. As you are only paying a 13% premium to today’s tangible book value for that balance sheet, there is adequate downside protection in such a world.
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