Bladex BLX
September 02, 2003 - 4:32pm EST by
2003 2004
Price: 11.16 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 439 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Investment Thesis
Bladex is an overcapitalized bank (36% Tier 1 capital ratio) trading at a 79% of reported book value ($11.13 price versus book of $14.07). In 2001 and 2002, the bank lost over 60% of its equity as a result of loan loss provisions taken to cover expected losses on its Argentine loan portfolio. Since then the quality of the Argentine portfolio has greatly improved. In 2Q03, the bank sold some of its worst Argentine loans, carried on the books at 17 cents, for 50 cents. Currently, 80-90% of the gross loans in Argentina are current on interest. Based on my assessment, the bank currently has excess provisions of $2 to$5 dollars per share on the Argentine portfolio. As these provisions come back on the balance sheet over the next 24 months ($2 to 5 per share) and the bank returns to historical leverage (25% tier 1 ratio) and profitability levels (12-14% ROE), book value will expand and so will the multiple of book value. In the next two years, the book value will recover to $18-20 and the stock should follow.

Business Description (From McGraw Hill’s Compustat)
Banco Latinoamericano de Exportaciones, S.A. (BLX),headquartered in Panama City, functions as a specialized multinational bank established to finance trade in Central and South America and the Caribbean (the Region). BLX has two primary subsidiaries: Banco Latinoamericano deExportaciones, Limited (known as BLADEX Cayman) and BLADEX Representacao Ltda. The company is principally engaged in providing short-term financing to selected commercial banks in the Region, which in turn lend to businesses primarily engaged in foreign trade and to state and private export
institutions. As of Dec. 31, 2002, BLX provided financing to apx. 60 of its 170 stockholder banks and to 101 non-stockholder institutions. Until very recently, the
company also made loans directly to non-bank private entities, most of which are engaged in foreign trade in the Region, primarily through co-financing, loan syndications and participations with other banks. The majority of the short-term financing is extended in connection with specific foreign trade transactions that have been identified by BLX. In response to recent developments, management has decided to focus business activities on providing short-term trade financing to banks. In connection therewith, the board of directors amended the company's by-laws to focus its business activities on providing trade related financing. Lending activities are funded by inter-bank deposits, primarily from central banks and financial institutions in the Region, by short-term and
medium-term borrowings and by floating and fixed rate placements made with financial institutions and investors in Japan, Europe and North America. BLX does not provide retail-banking services to the general public such as retail savings accounts or checking accounts and does not take retail deposits. Central banks from 23 countries in the Region, or governmental financial institutions designated by such countries, own all of the company's Class A shares, which at Dec. 31, 2002 comprised 28% of its Common stock. In addition, 147 commercial banks, mostly from the Region, own the company's Class B shares, which at Dec. 31, 2002 comprised 22% of its Common stock. Finally, the Class E shares, which at Dec. 31, 2002 comprised 50% of the Common stock, are listed on the NYSE. Following the bank’s rights offering in June, Class A shares comprised 16% of the shares, Class B comprised 10% of the shares, and Class E (NYSE listed under ticker symbol BLX) comprised 74% of the shares.

Bladex was created in 1977 by the central banks of Latin America with the objective of providing trade finance in the region. Shares were sold to the public in 1992. After going public, the company consistently traded at 2x book. Even during the Latin American debt crises of the 1980’s Bladex was able to maintain a very low loan net charge off ratio in its core trade finance business in part due to its preferred creditor status.

In late 1997 the bank faced an overcapitalized balance sheet and tightening net interest margins due to competition from foreign banks. The bank, in an effort to maintain its profitability, underwrote puts on Mexican government bonds. When the Russian crisis led to a major sell off in emerging market bonds, the bank suffered some significant mark to market losses. Investors, who had traditionally paid a premium valuation for stability in earnings, de rated the stock. Eventually the bank made money on the bonds that were put to it, but the valuation multiples never recovered. Going forward the bank traded around book value.

In order to address its overcapitalized balance sheet, the bank paid a $2.50 dividend in 2000, and $1.88 in 2001. The company had been paying $.96 a year in the previous years.
However, lending spreads remained tight and the bank remained overcapitalized. Despite the 1998 experience with the puts, the bank continued its misguided efforts to expand beyond its core short term trade finance business and began growing its medium term corporate loan portfolio. The bank’s loan portfolio peaked at $4.9 billion in 2000, $1.1 billion of which in Argentina.

When the Argentine crisis hit in 2001, Bladex faced a tough liquidity situation. Depositors (mainly other banks), fearful of the bank’s exposure to Argentina and Brazil, withdrew their money. Management shrank the balance sheet by 50% and provisioned $433 for loan losses and impairment loss on securities between 2001 and 2002, or the equivalent of 62% of equity at December 1999. Following a Fitch ratings downgrade below investment grade and facing potential downgrades from Moody’s and S&P, the bank announced a rights issue. Such issue was completed in June 2003 and increased the number of shares from 17 million to 39 million. The bank had received a backstop commitment from several Class A shareholders and the IMF for up to $150 million of capital, but the capital needs were met by oversubscription of the Class E shareholders. The rating agencies reaffirmed their ratings and disaster was averted, but at the expense of major dilution to existing shareholders.

Meanwhile, conditions in Argentina had begun to improve. In April 2003, Bladex sold loans from its Argentine portfolio and booked a $44 million gain. The loans were being carried at 17 cents and were sold for 50 cents. Currently, about 90% of the Argentine portfolio is current on interest. The bank is carrying these loans at 60 cents. Every 10 cents that are recovered from this portfolio equates to $1.50 per shares of recovery.

The CEO has now stepped down and the COO, Jaime Rivero, has stepped in as CEO. The board has changed the bylaws of the bank, limiting the bank’s business to the core trade finance business. The new CEO is focused on three areas: recovering as much as possible from the Argentine portfolio; growing fee income; and, deploying the excess capital profitably in the core business as opportunities present themselves. Currently lending margins are at an attractive level.


· Recoveries from Argentine loan portfolio over the next 24 months.
· New CEO, Jaime Rivero, focused on avoiding the mistakes of the past and leveraging the bank’s core strengths. Focus on fee revenue.
· Restoration of trust from investors. Change in by laws prevents bank from veering away from traditional trade finance business.
· Reinstatement of dividend policy in 2004.
· Return to historical profitability levels. Basle II will help put a floor on spreads by imposing higher capital requirements for foreign banks lending to Latin America.

· Macroeconomic meltdown in Argentina, although the worst is behind us as far as Bladex’ loan portfolio is concerned.
· Macroeconomic meltdown in Brazil. If Brazil were to get in trouble, given the nature, of BLX current portfolio, I doubt that the bank would suffer severe losses. Aside from the Eletropaulo loan, the banks loan book is primarily short term trade finance.
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