Published 06/25/23

Bladex(BLX): 2022 Review

Bladex has had a good 2022. My cost basis in the shares is $15 and the current share price is $20.5 so I gotta be happy. So far my thesis has been playing out with NIM expansion and the bank lowering their Tier 1 ratio which translated to higher ROE and thus a higher P/B ratio. The share price still has room to run to get to a 1 to 1.2 time P/B ratio. However there are some headwinds on the horizon. The yield curve is heavily negative which usually means rates are gonna go down. Inflation measured by CPI is trending down and inflation based on Truflation is already under 3%. Both those indicators are telling me rates will probably be heading lower short term which will depress NIM. Even with that I still like the bank and its business model lending extremely short term with very low risk. I also like the new CEO’s 5 year plan that will expand Bladex into new products. Overall I think shares are still attractive so I’ll continue to add.

As I’ve been doing for all my investments, below are the top four metrics for Bladex.

Year	Q1 2023	2022	2021	2020
ROE	13.7%	8.95%	6.10%	6.19%
NPL	.5%	.4%	.14%	.22%
NIM	2.41%	1.71%	1.32%	1.41%
Equity(In Millions)	1096	1069	991	1037

In my last article on Bladex I highlighted how their NIM spread was bound to mean revert from its low in 2020 and that Bladex had ample room to add risk by lowering their Tier 1 Ratio thus increasing ROE. This has basically played out.

Highlights

• Bladex is feeling good due to NIM hitting a 1.71% as of 2022. In Q1 2023 NIM has continued higher hitting 2.41% which is the highest I’ve seen this go at least since 2009 which as long as I’ve collected NIM data for Bladex. 
• One negative is NPL’s which have risen from .14% to .5% as of Q1 2023. Considering the higher NIM this higher NPL is manageable. 
• With the Higher NIM, ROE is now over 10% which should justify a 1 times book ratio. Market cap at the time of writing is 747M vs equity if 1.096B which puts the P/B ratio at .68. 
• Bladex has also lowered their Tier 1 ratio from 26% in 2020 to 15% as of Q1 2023. Management has said that a 15-16% Tier 1 ratio is where they want to operate which I consider a conservative level.

One disappointing thing is managements reluctance to increase the dividend as of Q1 2023 the dividend remains unchanged at $.25 a share per quarter. If ROE can maintain itself I do expect the dividend to increase. 

Going Forward

The yield curve being inverted and the inflation rate declining are two signs interest rates may be coming down in the future. The yield curve being inverted is about mean reversion while the inflation rate coming down is pretty self exploratory.

Source: Fred

The above chart shows the yield curve(10 Year minus 1 Year is my preferred yield curve) plotted with the 1 year treasury. You can notice an inverse relationship between the two. Which is partly due to the fact that the short rate is controlled by the Fed vs the long rate being controlled by the market. Anyway the blue line has dipped into negative territory. The last two times on this chart at least preceded a lowering of rates IE red line. 

Source: Fred

Another thing to look at is inflation. Inflation looks like it peaked in early 2022 and has been going down ever since. CPI tends to lag true inflation due to its calculation methodology. Looking at another measure calculated by Truflation, inflation is down below 3%. 

Source: Truflation

With inflation going down its only a matter of time till the Fed starts lowering rates. Lowering rates means a declining NIM for Bladex in the future. Considering Q1 2023 NIM is at an all time high a lowering of this isn’t necessarily that bad. A NIM at 1.8% should allow Bladex to maintain an ROE of 8-10%.

In a recent investor day the new CEO has announced a 5 point plan to sustain Bladex’s future ROE in the mid teens. This would be quite impressive if accomplished but I have my doubts. Though at the current valuation this is hardly built in so this would only be an extra icing on the cake if accomplished. 

The five points are as follows

1. Increasing Bladex customer base and cross-sell penetration. Basically hoping for additional loan growth, fee income and deposits
2. Changing the funding mix to be more heavy on deposits as opposed to other sources. This is cheaper and will lower the cost of liabilities.
3. Operational efficiency
4.  Turn the treasury unit into a client solutions platform to generate additional fee income.
5. Adding structured trade finance solutions. Additional trade finance products.

It’s still too early to tell whether or not Bladex will accomplish these objectives. But like I said it’s only icing on the cake.

Conclusion

Overall I’m still happy with my Bladex investment. Bladex is basically a levered treasury bond with very short term low risk loans. The company has closed the discount to book and is now approaching my base case .8 times book that I layed out in my prior article. I think I’ll probably continue adding till it reaches that point. I do see short term headwinds for Bladex but I see that as only a buying opportunity if share prices go lower.