New York, May 27, 2020 -- Moody's Investors Service, ("Moody's") has
today affirmed all ratings of Banco Latinoamericano de Comercio Exterior
(Bladex), including its Baa2/P-2 long and short-term
foreign currency deposit ratings and the Baa2 foreign currency senior
unsecured debt rating, following the affirmation of the baa2 baseline
and adjusted baseline credit assessments. The Baa1/P-2 long-
and short-term counterparty risk ratings and the Baa1(cr) and P-2(cr)
counterparty risk assessments were also affirmed. The outlook on
the ratings was changed to stable from negative.
The following ratings and assessments were affirmed:
Long-term foreign currency deposit rating of Baa2, outlook
changed to stable, from negative
Long-term foreign currency senior unsecured debt rating of Baa2,
outlook changed to stable, from negative
Baseline credit assessment and adjusted baseline credit assessment of
Long and short-term counterparty risk assessments of Baa1(cr) and
Long and short-term counterparty risk ratings of Baa1 and Prime-2
Short-term foreign currency deposit rating of Prime-2
Long and short-term foreign currency senior unsecured MTN program
ratings: (P)Baa2 and (P)Prime-2
Issuer: Banco Latinoamericano de Comercio Exterior
Outlook, Changed To Stable From Negative
Moody's affirmation of Bladex's ratings reflects the bank's
adequate asset quality and sound capitalization that resulted from de-risking
its balance sheet as it lowered exposures to risky sectors and markets
at a time when operating conditions for banks in Latin America are weakening.
The rating action also incorporates the challenges Bladex will face to
generate earnings amidst declining business volumes, low interest
rates and potentially higher credit costs resulting from the downturn
triggered by the coronavirus outbreak-related disruptions.
In addition, the affirmation considers Bladex´s relatively
stable funding structure, which historically has been supported
by a large share of deposits from shareholders.
The short-term nature of Bladex's loan portfolio, with
nearly 70% of loans maturing in less than one year, has allowed
the bank to react fast to worsening economic conditions in the region,
shifting its portfolio towards countries with better economic prospects
and higher-quality borrowers. Bladex's increased exposures
to Chile, Peru and Colombia, which together accounted for
28.5% of total loans as of March 2020, up from 14.9%
as of December 2018, while exposures to Argentina and Mexico declined
to 12%, from 24%. In addition, the bank's
exposure to riskier oil and gas sector declined to 9% as of March
2020, from 12% as of December 2018. At the same time,
Bladex expanded its loans to financial institutions, which represented
55% of its loan book as of March 2020, from 39% as
of December 2016.
Despite the de-risking strategy, asset quality will likely
deteriorate in the short-term due to the coronavirus outbreak and
economic contraction this year. Stage 2 loans already increased
to 6.4% of gross loans as of March 2020, from 3.9%
as of December 2019. Still, we expect asset quality to be
resilient and recover relatively quickly, in line with the bank's
focus on short-term lending to lower risk borrowers or structured
deals that limit loan losses.
Bladex's high-quality capitalization is a key buffer to absorb
any increase in credit losses. As of March 2020, the bank's
Moody's capitalization ratio, measured as tangible common
equity relative to risk weighted assets (TCE/RWA) was a solid 18.9%,
above the 17% recorded as of year-end 2018, largely
because of the loan book contraction. As business activity remains
soft in the year, capitalization will likely continue to strengthen
the bank's solvency in the short-term. The bank's
board decision to cut its quarterly dividend payout in 35% in 1Q2020
will help it preserve capital in a more challenging operating environment,
a credit positive move. However, it will be difficult for
the bank to maintain this relatively high level of capitalization as the
loan portfolio starts to expand again, and its earnings generation
capacity will then support capital growth.
Bladex's profitability has been strained by declining business volumes
following the bank's de-risking strategy, combined with strong
competition in the region as well as the high levels of liquidity and
low interest rates. Bladex's focus on short-term lending
to financial institutions also explains its relatively narrow net interest
margin of around 1.5%. As of March 2020, Bladex's
net income was 1.1% of its tangible assets, below
the average 1.3% in the period 2015-17, reflecting
lower net interest income and higher operating costs. Bladex's
fee income generated primarily from letters of credit and loan syndications
helps the bottom line, but it has not been enough to offset the
decline in net interest income in the 1Q2020. We expect profitability
will remain subdued in 2020, particularly if credit quality weakens
more than expected and additional provisions are required.
Because of its corporate lending business, Bladex depends significantly
on wholesale funding. However, refinancing and repricing
risks are mitigated by its shareholder-funded deposit base,
access to capital markets and diversified funding sources. Deposits
from the bank's Class A shareholders, which are represented by Latin
American central banks or their designees, accounted for 48%
of total deposits as of March 2020, down from 61% as of December
2019. Despite the challenging operating environment, we do
not expect a change in shareholders' historical commitment to funding
Bladex's stock of liquid assets has been relatively moderate. As
of March 2020; however, liquid assets increased to 21%
of its tangible assets, from 14% reported for March 2019,
largely because of lower loan origination as well as the bank's intention
to build-up liquidity amid adverse market conditions following
the coronavirus outbreak, evidencing prudent liquidity management.
To reflect the growing strain of coronavirus-related disruptions,
in March 2020, we changed our outlook for Latin American banking
systems to negative, reflecting our view that the disruption related
to the coronavirus outbreak will exacerbate an existing slowdown in the
region's economic growth. This will increase the strain on
Latin American banks' operating environment and will erode banks'
asset quality. The authorities' broad supplemental policy
actions will provide support to banks' liquidity, and their
adequate capitalization will help buffer stress losses. However,
the recovery will likely be relatively more muted in the region than in
advanced economies, in which case the credit-negative implications
for banks will intensify. Bladex's increased exposure to
more resilient countries and industries in its commercial portfolio before
the crisis will help mitigate the negative impact on the bank's
Bladex's exposure to environmental and social risks is low and moderate,
respectively, consistent with our general assessment for the global
banking sector. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. Moody's does not have any particular
concerns with the corporate governance at Bladex. The bank shows
an appropriate risk management framework commensurate with its risk appetite.
Nonetheless, corporate governance remains a key credit consideration
and requires ongoing monitoring.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook indicates there is little upward pressure on Bladex's
ratings. Nevertheless, a sustainable improvement in Bladex's
profitability, and low asset risks that could result in permanent
high capitalization would be positive for the ratings, along with
stability in its funding structure.
On the contrary, Bladex's ratings could be downgraded if its assets
quality deteriorates materially. In addition, downward ratings
pressure will arise from a significant deterioration in Bladex's
TCE/RWA ratio, or volatility in the bank's funding structure or
liquid assets that could result in much higher funding costs and narrower
margins. The ratings could also face downward pressure if the bank
expands its lending activity to risky sectors and borrowers amid weaker
operating and economic conditions.
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bladex is a Panama-domiciled bank specialized in trade finance
loans across Latin America. About 16% of the bank's shares
are held by central banks in the region or their designees (class A shareholders),
while 78% of the stake floats in the New York Stock Exchange.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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At least one ESG consideration was material to the credit rating action(s)
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Jose Angel Montano
Vice President - Senior Analyst
Financial Institutions Group
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MD - Banking
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