Bladex, Inc. (Banco Latinoamericano de Comercio Exterior, S.A.) — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. The Panamanian multinational bank finances Latin American trade and reports in U.S. dollars under IFRS. KPMG issued an unqualified audit opinion on the 2018 financial statements and internal controls.
Financial performance and position
| Metric | FY2018 / year-end | FY2017 / prior year-end |
|---|---|---|
| Total revenue | $127.6 million | $138.3 million |
| Net interest income | $109.7 million | $119.8 million |
| Profit | $11.1 million | $82.0 million |
| Basic / diluted EPS | $0.28 / $0.28 | $2.09 / $2.08 |
| Net interest margin / spread | 1.71% / 1.21% | 1.85% / 1.48% |
| Efficiency ratio | 38.3% | 33.9% |
| Total assets | $7.61 billion | $6.27 billion |
| Gross loans | $5.78 billion | $5.51 billion |
| Deposits, excluding interest payable | $2.97 billion | $2.93 billion |
| Borrowings and debt, net | $3.52 billion | $2.21 billion |
| Total equity | $993.6 million | $1.04 billion |
- Earnings and margins: Profit fell 86% year over year. Interest income rose 14% to $258.5 million, but interest expense increased 40% to $148.7 million, reducing net interest income. Higher market rates lifted asset yields, but funding costs rose faster; management also reported narrower lending spreads as the portfolio shifted toward higher-quality borrowers. Return on average equity was 1.08% and return on average assets was 0.17%, versus 8.02% and 1.27% in 2017.
- Credit costs and asset quality: Financial-instrument impairment loss was $57.5 million, versus $9.4 million in 2017. Credit-impaired loans were $64.7 million, or 1.12% of gross loans, compared with $58.8 million, or 1.07%. The allowance for loan losses reached $100.8 million; total credit-loss allowances, including commitments and guarantees, were $104.1 million. FY2018 loan write-offs were approximately $42 million.
- Unusual charges and expenses: The Bank recorded $10.0 million of non-financial-asset impairment, including write-offs of technology projects and assets received in a restructuring. Operating expenses rose 4% to $48.9 million, partly due to personnel restructuring and technology/process changes; management estimated a 2018 run-rate expense base of approximately $46 million.
- Cash flow and liquidity: Cash flow from operating activities was negative $173.6 million, principally reflecting loan growth; investing activities used $21.5 million, while financing activities provided $1.28 billion, largely from increased short-term borrowing and debt. The cash-flow statement reports year-end cash and cash equivalents of $1.706 billion, excluding pledged deposits; the balance sheet reports $1.746 billion before that exclusion. Liquid assets were $1.706 billion, equal to 22% of assets and 57% of deposits, compared with 10% and 21% in 2017. About 97% of liquid assets were deposited at the Federal Reserve Bank of New York.
- Funding, debt and capital: Borrowings and debt increased substantially, with short-term borrowings and debt rising to $2.02 billion from $1.07 billion. The Bank said this funding partly anticipated a possible temporary deposit decline that reversed toward year-end. Deposits remained near $2.97 billion; 71% came from central banks or their designees, and the five largest depositors represented 49% of deposits. Basel III Tier 1 capital was reported at 18.1%; the Bank separately reported a 17.1% total capital-to-risk-weighted-assets ratio under Panamanian banking rules. Total equity to assets was 13.06%, down from 16.64%.
- Portfolio and dividends: The Credit Portfolio grew 5% to $6.40 billion. Gross loans were 73% due within one year, with an average remaining maturity of 323 days. The Bank declared and paid $1.54 per share in regular dividends for 2018, approximately $61 million in total; the stated payout ratio was 546.7%, reflecting the low annual profit.
Material changes versus the prior comparable period
- Profit declined from $82.0 million to $11.1 million, driven mainly by the sharp increase in credit impairment, the $10.0 million non-financial-asset charge, and lower revenue.
- Net interest margin decreased 14 basis points and net interest spread decreased 27 basis points. Average funding cost rose to 2.76% from 1.95% as market rates increased.
- Loan balances and the Commercial Portfolio grew 5%, while the share of Commercial Portfolio maturing within one year declined from 81% to 74%, indicating more mid-term lending. Trade-related financing fell to 45% of the Commercial Portfolio from 60%, as exposure to financial institutions increased.
- Year-end liquidity rose materially, alongside higher short-term borrowing and debt. Total assets increased 21%; total liabilities increased 27%; equity fell 5%.
- Credit-impaired loans rose modestly overall, but a single Brazilian sugar-sector exposure accounted for most Stage 3 impaired loans and drove much of the elevated provision.
Outlook, management commentary and risks
- Management described the 2018 provisions as recognizing the effect of a negative regional credit cycle and said the resulting balance sheet remained well capitalized and liquid. It expects to pursue profitable growth, but the filing provides no quantified earnings, revenue, margin or loan-growth guidance.
- Stated priorities for 2019 and later include streamlining operations through centralized support and technology/process improvements; growing selectively in stable, higher-growth markets; diversifying country, industry and borrower exposure; and expanding products such as leasing, vendor finance, letters of credit and syndications.
- Key risks include concentrated regional and borrower exposure, borrower ability to repay U.S.-dollar loans amid currency weakness and tighter monetary conditions, funding and deposit concentration, competition and spread pressure, interest-rate and benchmark-transition risk, and operational, cyber, compliance and sanctions risks. Brazil represented 20% of the Loan Portfolio; the five largest country exposures together represented 63% of the Credit Portfolio.
- Ratings were investment grade: Fitch BBB+ with stable outlook, Moody’s Baa2 with negative outlook, and S&P BBB with negative outlook. Management cautioned that downgrades could increase funding costs or impair access to funding.
- IFRS 16 was due to take effect in 2019. The Bank estimated initial recognition of $20.8 million in lease liabilities and $17.2 million in right-of-use assets. The filing reports no significant litigation and says the Bank complied with its debt covenants at year-end.
- The filing identifies non-material corrections to the 2017 and 2016 cash-flow statements; it says these did not change reported assets, liabilities, equity or profit. Management and KPMG concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2018.
Important facts for investors to verify
- Review the assumptions, collateral/recovery estimates and restructuring progress for the Brazilian sugar-sector impaired credit, which was approximately $62 million before related allowances and write-offs.
- Reconcile cash measures: the balance-sheet cash line is $1.746 billion, while cash and cash equivalents excluding pledged deposits are $1.706 billion; confirm the composition and availability of the liquidity buffer.
- Assess the durability and cost of the increased borrowing, the concentration and short maturity of deposits, and the Bank’s capacity to refinance short-term funding.
- Check the basis and regulatory definitions behind the reported 18.1% Basel III Tier 1 ratio and 17.1% Panamanian total-capital ratio, as well as the decline in equity and the unusually high dividend payout relative to 2018 earnings.
- Monitor subsequent credit quality, net interest margins and funding costs, regional exposures and credit ratings; the filing gives strategic priorities but no quantified forward earnings guidance.