Banco Latinoamericano Comerc Exterior SA (BLX): Is This the Best Way to Play Latin American Growth?

Incorporated in 1975, Banco Latinoamericano Comerc Exterior SA (NYSE:BLX) became the first Latin American bank to be listed on NYSE in 1992.

Proxy for Latin America’s growth story

According to the International Monetary Fund’s April outlook, Latin America is expected to grow by 3.4% and 3.9% in 2013 and 2014, respectively. There are a few factors driving Latin America’s strong growth prospects.

Firstly, The Panama Canal expansion project, which started in 2007 and is expected to be completed by 2014, will double current canal capacity. With larger ships being able to pass through the Panama Canal, there will likely be a corresponding increase in the export of natural resources available in Latin America to Asia and beyond.

Secondly, Mexico is increasingly viewed as a viable alternative to China as a low- cost manufacturing base for companies in the U.S. and Canada. Lower labor and energy costs coupled with duty-free export into major economies like the U.S., are expected to drive Mexico’s manufacturing exports higher in the next few years. Other Latin American countries are also enhancing their manufacturing capabilities.

Last but not least, free trade agreements have been the key to increased trade activity. For example, Chile, Colombia, Mexico and Peru signed the Pacific Alliance in June 2012 with the common aim of reducing trade barriers and increasing intra-region trade flows.

Banco Latinoamericano Comerc Exterior SA (NYSE:BLX), which provides short-term financing for international trade, is the best proxy for the growth in trade in Latin America.

Conservative risk management

Post-global financial crisis, every investor knows that the buzzword for banks is risk. There are a few indicators to assess the risk of banks.

One of them is the Tier-1 capital ratio, an indicator of risk utilized by regulators. A common rule of thumb is that the ratio should exceed 10%. Banco Latinoamericano Comerc Exterior SA (NYSE:BLX)’s Tier-1 capital ratio of 16.6% is well above 10% and this puts it in safe territory. In addition to complying with relevant banking regulations, Bladex has a lower probability of raising dilutive equity financing to meet Tier-1 ratio requirements.

Another indicator is liquidity. For borrowers, the longer the weighted-average debt maturity the better, since that means they face less refinancing or default risks. On the other hand, for a lender like Banco Latinoamericano Comerc Exterior SA (NYSE:BLX), it is more prudent if it gets its money back as soon as possible. Some 80% of Bladex’s loan portfolio has an average loan maturity of 124 days.

Finally, rating agencies’ ratings serve as a good guide for both Bladex and its customers. Bladex was rated as BBB+ by Fitch in July 2012, while 77% of its loan portfolio is exposed to countries rated as ‘investment grade’ by rating agencies.

Central banks add value as shareholders

Central banks of several Latin American countries hold more than 16% of the share capital in Bladex, as at the end of the first quarter of 2013, and they add value to Bladex.

Firstly, these central banks’ deposits account for more than one-third of Banco Latinoamericano Comerc Exterior SA (NYSE:BLX)’s funding base. This stable source of funding ensures that Bladex will remain well-funded even in volatile market conditions. Secondly, Bladex has been awarded preferred-creditor status and access to product distribution channels as a result of the support from this group of shareholders.

Future outlook

In the fist quarter of fiscal 2013, Banco Latinoamericano Comerc Exterior SA (NYSE:BLX)’s commercial-loan portfolio balance grew 14% year-on-year to $6.2 billion. This came on the back of a 22% increase in its client base of corporations. Going forward, there are two positives worth noting. One is that Bladex sold its asset-management unit in April, allowing it to focus on its core lending business in the future. Another positive is that Bladex maintained its quarterly dividend of $0.30 per share, which works out to an annualized dividend yield above 5%.

Peer comparison

Banco Latinoamericano Comerc Exterior SA (NYSE:BLX)’s peers include Companhia de Bebidas das Americas (ADR) (NYSE:ABV), or AmBev, and Arcos Dorados Holding Inc (NYSE:ARCO).

AmBev is Brazil’s largest brewer and the exclusive Brazilian bottler for PepsiCo, Inc. (NYSE:PEP). It rolled out the 300 ml glass bottle (usual size is 600 ml), which provides consumers with a more attractive price point for consumers in light of weaker consumer sentiment and falling disposable incomes in the country.

Despite this, AmBev should be considered as a mid to long-term investment for patient investors, given the less than favorable outlook for the Brazilian beer industry in the near term. This is validated by recent financial results and management guidance. AmBev saw net revenue on an organic basis and EPS for the first quarter grow by 2.4% and 0.8%, respectively, year-on-year. Management guided for either a flat or low single-digit decline for the Brazilian beer industry in 2013.

Arcos Dorados is McDonald’s Corporation (NYSE:MCD) largest franchisee, with operations in 20 countries across Latin America. It is differentiated from other publicly listed quick-service restaurant peers by its emerging market focus, with all its revenue derived from Latin America, and its competitive advantage of leveraging on its franchiser’s global brand and world-class operating platforms.