13-AUG-18 – Banco Latinoamericano (BLX:BUY) Net income in Q2:18 disappointed again, attributable to weak interest earning assets, skewed towards lower yielding trade finance loans, and a lower margin driven by rapidly growing funding costs. We forecast the company will eventually recover, and we maintain our BUY rating while lowering our price target to $31.00.

Q2:18 HIGHLIGHTS

  • BLX reported a 5.02% decline in net interest income to $27.9 million in Q2:18 from $29.4 million in Q2:17, attributable to lower average interest earning assets (despite a higher average interest rate on those assets) combined with higher costs of funds. Net interest margin (NIM) increased marginally to 1.81% in Q2:18 versus 1.80% in Q2:17, and up sequentially from the 1.68% earned in Q1:18. Non-interest income declined to $3.6 million vs. $5.1 million, due to a loss on investment properties of $1.1 million and loss on derivatives and F(x) of $0.5 million.
  • Net impairment losses were lower YoY at $3.5 vs. $4.3 million.
  • Operating costs were down 9.8% to $11.4 million vs. $12.6 milllion last year. The driver of expense decline was salaries and other compesation which was $6.1 million this quarter vs. $7.8 million in the prior year quarter.
  • Net profit fell 4.9% to $16.6 million or $0.42 per diluted share in Q2:18 from $17.5 million or $0.44
    per diluted share in Q4:17.
  • Average loans for the quarter were down 3.2% sequentially to $5.40 billion. On the conference call management indicated it is seeing some growth in medium term loans at higher rates, but also referenced the headwinds of the macro-effect of a trucker strike in Brazil, 30% currency devaluation in Argentina, an election of a populist President in Mexico, and the effect of increased tariffs by the United States.
  • The stock last closed at 9% below book value. Given the poor earnings performance so far this year and mid-single digit ROE this is not surprising at first look, but this low valuation sets up the shares for above average appreciation when positive surprises occur.
  • We are maintaining our BUY rating while lowering our price target to $31.00, which represents a 30.00% capital gain potential, plus a 6.5% dividend yield.

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