|Shares Out. (in M):||37||P/E||0.0x||0.0x|
|Market Cap (in M):||630||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
Bladex was originally established by the central banks of Latin America in 1979 to promote trade finance in the region. In 1992, the Company became the first Latin American bank to list its shares on the New York Stock Exchange, and today its public shareholders include 23 Latin American central and state-owned banks that own the Class A (17%) and Class B (7%) supermajority shares while the Class E shares (77%) are owned by private investors. As a trade bank, Bladex specializes in short-term loans (avg duration ~1.5 yrs) and letters of credit that finance international trade transactions for Latin American private corporations, commercial banks and financial institutions, state-owned banks and other public entities. Bladex does not have a retail branch network, and instead relies on funding primarily from time deposits and wholesale funds. BLX also houses a Latin American focused, global macro hedge fund with ~$163 million in assets under management, 90+% of which is from the bank itself, and the balance is from external investors that are charged a fee structure of 2% management fees and a 20% promote. The bank is exempt from income tax in Panama under a special exemption granted during the founding of the bank.
As a trade finance bank, Bladex's loan portfolio is considerably less risky than the typical bank asset profile. Total write-off's since inception have been just 0.2% of all loans, net charge-offs over the past five years have been non-existent, and total reserves equate to a very conservative 16% of tangible book value (~$3.00/share). Given the Company's conservative loan portfolio and meaningful discount to tangible book value (0.90x), we believe BLX offers a sizeable margin of safety. Moreover, we see room for significant earnings improvement (and dividend increases) as the Company reaches a more optimal leverage target and resolves issues in its non-core Asset Management segment. While extremely cheap on an absolute basis, BLX also compares favorably to other publicly traded Latin American banks, which on average trade for nearly 3x tangible book value and 15x earnings. As Bladex reestablishes scale and reaches its target leverage ratio of 10x to 13x over the course of the next few years, we expect the bank's return on equity to approach 15% and estimate its true earnings power to be over $2.50/share.
Below are some of the attributes that we believe make Bladex a particularly attractive business:
As for risks, the market's biggest concerns stem from the Company's internal global macro hedge fund. Despite compounding at +8.4% net of fees since its inception in May of 2006, including a particularly impressive 2008 in which it returned +12.2% net, recent underperformance at the hedge fund caused the Company to miss earnings estimates over the past few quarters. While we understand management's desire to diversify away from its core banking business, the synergies between the hedge fund and core banking model are somewhat dubious, and they haven't had much success in raising outside capital, which has declined from a peak of $43 million earlier this year to less than $15 million today. Bladex has already stated that they are going to lower their investment in the fund back to their original $100 million (and take out the $50+ million in profit) by the end of 2011, and longer term we think they are likely to exit this business completely. Additionally, since the second quarter of 2010, management has put much tighter risk controls on the hedge fund, and volatility has come down materially. Should BLX decide to liquidate or spin-off their hedge fund (which equates to ~3% of BLX's total assets), we believe the market would react favorably, and actually consider this to be a meaningful potential catalyst to further appreciation in the stock.
On the positive side, the Company is redirecting its diversification efforts toward an acquisition of a factoring business, a much better complement to its core banking business in our opinion. For those of you that aren't familiar, factoring businesses buy accounts receivables from companies at a slight discount to face value in exchange for immediate liquidity for the seller. While very common in most of the developed world, factoring is a nascent industry in South America, and Bladex is looking to acquire a small factoring business in Brazil and then expand this business into other parts of Latin America. Factoring businesses can have very attractive returns on equity, upwards of 30% in most cases, which would help the Company's long term plan to attain a mid-teens return on equity. Moreover, with more overall scale in their business through this potential acquisition as well as more leverage in the core banking business, Bladex should be able to realize significant cost efficiencies. The Company's efficiency ratio is currently 40%, and in the coming years they are targeting an efficiency ratio that is at least 10 percentage points lower. Over the long term, as Bladex continues to execute on its growth plans and exploits its significantly higher earnings power, we believe the stock will get rerated to a healthy premium to tangible book value.
Other points of interest: