Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Banco Latinoamericano de Comercio Exterior SA (NYSE:BLX)is a small-cap bank with a market capitalisation of USD $1.17B. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Banco Latinoamericano de Comercio Exterior’s bottom line. Today we will analyse Banco Latinoamericano de Comercio Exterior’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. View our latest analysis for Banco Latinoamericano de Comercio Exterior

Does Banco Latinoamericano de Comercio Exterior Understand Its Own Risks?

Banco Latinoamericano de Comercio Exterior’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 174.25%, the bank has cautiously over-provisioned by 74.25%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

How Much Risk Is Too Much?

By nature, Banco Latinoamericano de Comercio Exterior is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Banco Latinoamericano de Comercio Exterior’s bottom line. Since bad loans make up a relatively small 1.2% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

How Big Is Banco Latinoamericano de Comercio Exterior’s Safety Net?

Banco Latinoamericano de Comercio Exterior operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Banco Latinoamericano de Comercio Exterior’s total deposit level of 58.10% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.

Final words

Banco Latinoamericano de Comercio Exterior exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Banco Latinoamericano de Comercio Exterior a less risky investment. Today, we’ve only explored one aspect of Banco Latinoamericano de Comercio Exterior. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three important aspects you should look at:

• 1. Future Outlook: What are well-informed industry analysts predicting for BLX’s future growth? Take a look at our free research report of analyst consensus for BLX’s outlook.

• 2. Valuation: What is BLX worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether BLX is currently mispriced by the market.

• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.