Playing Panama Canal's Expansion via Bladex

| About: Banco Latinoamericano (BLX)

Bladex (Banco Latinoamericano de Comercio Exterior S.A.) (NYSE:BLX) is a trade finance bank headquartered in Panama. Being a trade bank means they only operate with short term loans, predominantly financing international transactions (i.e. letters of credit). They have some other commercial lending and asset management businesses, and the latter has been the source of much of their problems in their inability to generate meaningful income the past few quarters. The other problem has been the fact that they have been unable to grow their loan book. As of Q1, they have over $300M cash deposits and about $1.8 billion in debt. Book value stands around $700M. Market Cap is about $450M. Normalized earnings for the year should total about $50M. Therefore the PE ratio stands at about 8.5x and its Market Cap to book value is .55. It looks like book value has declined slightly in Q2, so it's probably closer to .6 as of today. The stock also has a 4.5% dividend yield. Its capital ratios stand above 20%, and writeoffs for losses are paltry.

Regardless, the earnings power of Bladex is probably upwards of $70M, and especially as interest rates rise and trade with Central and South American continues to grow I think it'll get closer to $100M, possibly making them worth in the mid $20's. It wouldn't hurt if the bank can start generating some positive income from the asset management business as well (mostly short-term mark to market losses anyways). The bank currently now depends mostly on Brazil, which covers about 50% of the loan book. However, they are looking to expand their footprint. Peru and Chile accounted for $60M in loans in 2008, in 2008 that number has grown to almost $400M.

The catalyst here in my opinion is the strength of the Panamanian economy (Panama has not had a recession since the fall of Noriega and is a USD-based economy) and the expansion of the Panama Canal. The canal is set to expand its capacity 100% over the next few years, providing steady growth for Panama and opportunity for all trade finance-related operations to grow their businesses. Panama itself is a very interesting country. It's main industries are in banking/finance/trade, whereas a lot of outsiders will probably assume that it would probably be more akin to its neighbors' strengths in tourism/commodities/manufacturing. Regardless, Panama, being the owner of the Panama Canal, gets to play on all these factors as global trade expands.

On face value, Bladex should at minimum be worth book value or about $18.50/share. As the world economy stabilizes and Central/South America expand, along with the expansion of the Panama Canal, it should see steady growth for the next few years. A concentration on short term lending insulates it from many of the problems larger banks have faced, and a USD-based currency takes out currency risks for US investors.

Tell me what US bank has a better risk-adjusted investment case.

Conservative Fair Value: $18.50
Strategy: Buy 1/3 of a position at $12, 55% potential gain + 4.5% dividend yield, 5 year total return expected to be about 100%

Disclosure: Outstanding order to purchase at about $12/share

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