|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|
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.
|Entry||04/30/2014 09:51 AM|
Wow - I didn't manage to generate a single comment or question on this post. Did I forget to mention that BLX also has some patents on a healthy alternative to sugar being considered my multiple major beverage companies?
|Subject||RE: What's the Catch?|
|Entry||05/02/2014 02:44 PM|
I appreciate the sign of life out there in the universe! In response to your questions:
1. I'm not sure there is a catch per se. What is BLX's competitive advantages/barriers to entry? A few which come to mind are:
a. Pan-latam footprint and expertise quite helpful versus banks only present in a handful of locations. They are a one-stop shop for all your import/export needs. Each bilateral trade route has its own complexities and if you are the CFO of a regional company its helpful to have one relationship versus 50.
b. A total focus on this business and high quality execution makes them a preferred partner.
c. Tax-free status makes you more competitive and/or enhances returns. If you were paying taxes on that business the returns would look much less attractive for an entrant. If you pay a 30-35% tax rate then a 15% ROE business for BLX is 10% for you - not really worth struggling to capture.
d. Multinational banks which do play in the space can be inconsistent partners. For example, trade finance loans (being short term) were one of the first things the big European banks cut off when they were under strain a few years ago.
e. The ownership structure/involvement of the regional central banks opens doors to business
At the end of the day this is a financial company and all financial products are to some degree a commodity. Thats why your downside margin of safety and management alignment are so important. If you buy a 25% ROE financial but pay 3x book, then you are in for a world of pain if/when new entrants compete that ROE down to their marginal cost of capital. If you are paying a little bit above tangible book as you are in BLX today and have a mgmt team/board who has demonstrated they will return excess capital if they are unable to earn a decent return on it, the optionality runs in your favor.
2. As of 1Q you have 2.5B in deposits, 2.4B short term borrowings, and 1.2B LT borrowings supporting an asset book of 6.1B loans, 316MM securities, and 584MM cash. Management is prudent in matching asset and liability duration. Thus, they issued (relatively) expensive medium term debt ahead of ramping up the generation of medium-term loans. Lets say you have 900MM in immediate liquidity. 4.7B of your loans mature in under one year. I can confirm the exact details for you but the short term borrowings mature through the year roughly matched to the intra-year rollover of the loan book (repos are only 274MM of the short term borrowing base). So in a total meltdown scenario where zero percent of your short term debt rolls over you have 2.3x that amount of assets maturing through the year to pay them off with another 40% of the borrowing balance in cash/liquid securities to smooth out any bumps.
What happens if every deposit also gets simultaneously called along with the short term debt? You would have 4.9B liabilities to meet versus that 5.6B in assets maturing in under 12 months so the coverage is a bit tighter but you probably squeak through. But lets take a step back and put this in some context. First, I know that 2008 wasn't really a Latam crisis but the bank didn't see any liquidity outflows in that period. Second, there isn't a bank in the universe which looks good if you assume a total immediate cessation of short term financing and withdrawal of all deposits. But I can't think of any lending institution with a safer asset-liability match than Bladex. As I said in my writeup, nothing in the universe is risk-free and I'm sure I could dream up liquidity scenarios dangerous for Bladex. It would probably involve a total global financial crisis significantly bigger than 2008 which simultaneous forced all Bladex's central bank shareholders to simultaneously need their dollar deposit reserves within one month in tandem with a complete shutdown of global credit markets. But if you can't own Bladex on that basis I would venture to say I don't think there are any financial companies out there you can own. And in a world with the scenario above I dont think Bladex would be suffering alone in your long portfolio!
|Subject||RE: RE: What's the Catch?|
|Entry||05/02/2014 03:25 PM|
Can you speak to the FX risk that Bladex takes on? Notwithstanding the preferential creditor status it enjoys, Bladex did have to recapitalize its balance sheet in 2002-03 with $150m of common (and watch its stock go from $30/sh to $3/sh) after suffering large losses on its Argentinian assets in 2001-02.
I understand the loan book's exposure is de minimis to Argentina (3.1%) and now much more a Brazil story (27.8%), but as you know the problem with being levered 9:1 (A/E) is that it doesn't leave much margin for error if there's a wiff of problem in the LatAm currency markets (an issue exacerbated by the ST funding situation highlighted by Coda).
The more I think about it, the more I wonder if this is just a short vol bet on the Real.
|Subject||RE: RE: RE: What's the Catch?|
|Entry||05/02/2014 04:51 PM|
Thanks for the question. First of all, Argetina (2002) happened two management teams ago when Bladex was a very different institution engaged in practices which would never be tolerated today. But even there, I think history vindicates rather than challenges my view of the bank.
In 2002 the Argentinian Peso devalued by 65% and the government forcibly converted dollar bank deposits to Pesos. Thats a bit more than a "whiff of a problem."
Obviously with Bladex's loans underwritten in dollars this posed a bit of a challenge for their borrowers. So in that year Bladex took a massive 278MM loan reserve charge. But look to the following years... Over the next three years Bladex released an aggregate $230MM even as the total loan book grew by 4% over that period. So Bladex ultimately ended up recovering almost the entire amount of its 2002 reserve hit - no doubt aided by its status as a preferred creditor.
As a result between 2004 and 2006 Bladex ended up repurchasing 50MM of its stock and issuing roughly $150MM in special dividends (~$200MM in total dividends). They raised capital to deal with Argentina but ultimately their Argentina losses were nowhere near the level feared and they gave the money back to shareholders (note that 2004 also coincides with the appointment of Jaime Rivera as CEO which I think marks the beginning of the modern Bladex organization). Thus, rather than sit on excess capital well beyond what they needed, they gave it back. That to me is an important sign of capital allocation discipline.
If you think Brazil is really about to devalue overnight (i.e., not over a period of months or years) by 65% and default on all of their dollar denominated debt then I wouldn't be invested in Bladex. Of course, I wouldn't be invested in anything much in the world beyond T-Bills if I wanted to bet on that scenario.
But even if we woke up tomorrow and the Real was down by 65% its important to see that even in the nightmare scenario of 2002 Argentina, Bladex ultimately came out OK. If you really have a core macro conviction you are willing to bet on that an overnight total collapse of the Real by 65% is a realistic event then I think you can find much much better vehicles to express that view. Find the types of institutions that actually died in 2002 - not the ones that snapped back fairly unscathed a couple of years later.
I don't mean to be disrespectful if an impending Latam financial disaster is your true macro view and I appreciate your question but there isn't an investment in the world I can't dream up a nightmare scenario for. We are all creative people so thats the easy part. The true downside margin of safety in any investment is zero. This isn't a pollyannish plea to ignore black swan fat tail outcomes etc... But you do need to probability weight (no matter how subjective such evaluations are) your adverse events or you will never be able to invest in anything.
The question is what is the probability/severity of a major adverse event versus your normally expected outcome and how does that scenario correlate across your full portfolio. On that basis Im willing to say that I think an overnight 65% Real devaluation is a small probability event, the odds that such an event deeply wounds Bladex is an even smaller probability, and I don't have a lot of other direct bets in my book explicitly tied to that event so I'm OK with the risk given what I see as a high expected value.
|Subject||RE: RE: RE: RE: What's the Catch?|
|Entry||05/02/2014 04:56 PM|
Understood and I appreciate your thoughtful reply
|Entry||07/24/2014 02:27 PM|
BLX 2Q results were inline with my expectations and provided welcome support for my long thesis.
Loan growth resumed at a very strong level which was a lingering concern after 1Q weakness there. NIM is moving up in the right direction. Fee income was strong with indications of a solid deal pipeline into the second half. Operating expenses dropped ahead of my expectations.
Loan growth outlook sounds good. They intend to focus on growth opportunities in Mexico, Columbia, and Peru.
They did have a hit of 2MM on their remaining investment in the investment fund. They are getting out of the fund at a good clip with their position there down from 118MM to 53MM q-q. As a reminder, they are fully withdrawing from the investment fund which will occur at the latest by April 2016 and likely much sooner. You may get a little noise on this line item along the way but as total exposure drops each quarter it should rapidly fade to irrelevance.
Credit outlook remains benign with virtually nonexistent nonperforming assets. The company commented that it has Argentina exposure of around 275MM but doesnt expect a negative impact even in the event of a sovereign issue there due to recent litigation as their loans are all to highly strategic sectors (oil imports and grain exports) and, most importantly, protected by Bladex's preferred creditor status which allows it to jump ahead of other creditors. I don't think anyone is expecting an event like 2002 (markets certainly aren't pricing anything like that) but remember that BLX ultimately came out of that Argentinian crisis without significant damage. Its good to be a supranational bank with privileges above mere private sector mortals!
Overall the quarter tracks my thesis that BLX has a good shot of earning around $3.50 next year in which case the stock still seems like a nice bargain.
|Entry||10/15/2014 09:41 AM|
Because I'm sure its top of mind for the VIC community with everything happening in the markets right now, BLX printed a very good third quarter.
NIM and asset growth all moving up nicely in-line with my projections. Expenses remain flat and credit issues non-existent. Asset growth and NIM expansion more impressive because it was achieved despite shrinking Argentina exposure which is now just 139MM down from 392MM in Q2 (less than 2% of earning assets). The company confirmed that they should be on track for 10-13% asset growth in 2014 which implies a strong finish to the year in Q4.