Overview -- Panama-based Banco Latinoamericano de Comercio Exterior has maintained a steady growth path and strong capitalization levels. -- We are affirming our 'BBB' long- and 'A-2' short-term ratings on the bank. -- The stable outlook reflects our expectations that the bank will maintain strong capital levels and adequate risk position. Rating Action On Sept. 25, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' long- and 'A-2' short-term ratings on Banco Latinoamericano de Comercio Exterior S.A. (BLX). The outlook is stable. Rationale The ratings on BLX reflect its "adequate" business position, "strong" capital and earnings capacity, "adequate" risk position, "above average" funding, and "adequate" and liquidity. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The 'bbb-' anchor of BLX reflects our view of the weighted average economic risk in the countries in which the bank has exposure through its loan book. BLX's largest exposure is in Brazil, where it has loans representing 35% of its total exposures as of June 2012. Exposure to other Latin American countries amounts to 65% (including Mexico, Colombia, Chile, Argentina, Peru, Uruguay, Ecuador and Central America), with no one country accounting for more than 15%. The weighted economic average risk is about '6'. A BICRA is scored on a scale from '1' to '10', ranging from the lowest risk banking systems (group '1') to the highest risk (group '10'). Within the region, a common weakness for economic risk is low income per capita. Industry risk in Panama is '5', which we consider high risk, reflecting our view that supervision practices still lag international standards because the method for calculating capital requirements doesn't account for all risks that banks in Panama face. Also, Panama lacks a lender of last resort. We classify Panama as "support uncertain" because large banks in the country are difficult to support. In our view, the sovereign rating on Panama doesn't constrain the issuer credit rating on BLX, because it has a limited exposure to the country. We don't believe that economic stress conditions in the countries to which BLX has a higher exposure will put its capital and liquidity at risk. The short-term nature of the bank's assets underpins its flexibility to adjust amid significant volatility, as during the Argentine crisis in 2002 or the global financial crisis in 2008-2009. Because central banks of several Latin American countries are BLX's shareholders, we believe that it could count on their support to maintain deposit funding and recover from losses. We believe that BLX has an "adequate" business position based on its operations in the niche trade finance segment, growing customer base, and deep knowledge of the foreign trade business. The bank offers a wide range of products in the trade finance market throughout Latin America. BLX specializes in short-term trade finance, and therefore its performance moves in tandem with Latin American foreign trade. For 2012 and 2013, we expect the bank's loan portfolio to grow 10%-15%, due to high commodities and agricultural products exports and prices. Management has the capacity to overcome difficult conditions and come up with new products to withstand tough market conditions. Over the past few years, BLX has gained geographic diversification in its loan portfolio by reducing its operations in Brazil and expanding into Peru, Mexico, and Colombia. Exposures are congruent with these countries' economic importance. We expect the bank to maintain its competitive advantage because of its market and product knowledge and its status as a renowned trade finance product supplier with a commitment from the region's central banks. Capital and earnings of the bank are "strong" based on the bank's strong capital ratio, the adequate quality of its capital and earnings, and its moderate earnings capacity. We expect the risk-adjusted capital (RAC) ratio to average about 13% for the next 12-18 months. The bank's capital is adequate because it consists of paid-in capital and retained earnings. However, earnings capacity is moderate--with an average earnings buffer forecast of 0.8% for the next two years-in part because of inherent volatility of the asset management unit that has pressured core earnings. During the first half of 2012, core earnings to adjusted assets improved to 1.8% from 1.3% in 2011 and 0.5% in 2010 because of more-profitable lending to midsize companies and better trade income. For 2012, we expect net interest income to increase as a result of the growth in the loan portfolio, and trading income to decline, as the bank reduced its bond position to invest in loans. We consider BLX to have an "adequate" risk position with 51% of its loan portfolio allocated to the corporate segment, 9% to mid capitalization companies, and 40% to financial institutions. About 65% of the loan portfolio is related to foreign trade finance lines and the remainder to general lines. The bank's short-term tenor of its loan portfolio, the good knowledge of the market, and its special creditor status in some countries has allowed it to mitigate client concentration. The 20 largest credits accounted for 37% of BLX's loan portfolio as of June 2012. Despite concentration and volatility in the region, BLX's nonperforming loans to total loans was 0.5% as of June 2012, down from 0.7% for 2011 and 2010. Due to its adequate underwriting standards, we expect the bank to have less than 1% in problematic loans, despite greater exposure to more-risky midsize enterprises. The Panamanian financial system doesn't have requirements for market risk; however, we think that market risk impact on BLX should be low because of its small trading position, absence of foreign exchange open exposures, and hedges' offset of mismatches in interest rates. We believe our RAC model considers the credit and operational risks adequately. We assess BLX's liquidity as "adequate" and funding as "above average". The bank benefits from a solid customer deposit base, especially with central banks and financial institutions in the region. BLX has also been able to diversify its funding and extend maturities through several local-currency issuances in the countries where it operates and through medium-term facilities from global banks. Due to lack of Panamanian government support in a distress scenario, BLX maintains a prudent liquidity cushion. It enjoys, in our opinion, sufficient liquidity to support expansion, especially because 70% of its loan portfolio is short term. We don't expect its liquidity management to change in the future. As of June 2012, cash and unrestricted liquid securities accounted for 12% of BLX's total assets and 31% of total deposits. Outlook Our stable outlook reflects our belief that BLX's performance will remain good, based on its strong capital and earnings and an adequate risk position. We expect that the bank will maintain its business niche as a specialist in trade finance. Our base-case forecast contemplates credit losses of less than 1%, average loan portfolio growth of 12% to 15% for 2012, and its maintenance of strong capitalization. We could lower the ratings if BLX's RAC ratio falls to less than 10%, core earnings to adjusted assets narrows consistently to less than 0.5%, or credit losses grow to more than 3%. An increased exposure to speculative-grade countries could also pressure the ratings downward. We don't foresee an upgrade in the short term as this would depend on a significant consolidation in the anchor score of the bank. Ratings Score Snapshot Lead Bank Rating BBB/Stable/A-2 SACP bbb Anchor bbb- Business Position Adequate (0) Capital and Earnings Strong (1) Risk Position Adequate (0) Funding And Liquidity Above Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology and Assumptions, Nov. 9, 2011 Ratings List Ratings Affirmed Banco Latinoamericano de Comercio Exterior S.A. Counterparty Credit Rating BBB/Stable/A-2 Certificate Of Deposit Foreign Currency BBB/A-2 Senior Unsecured BBB Senior Unsecured mxAAA Commercial Paper mxA-1+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.