Foreign Trade Bank of Latin America Inc (BLX) 2021 Q2 法說會逐字稿

Hello, everyone, and welcome to Bladex's Second Quarter 2021 Conference Call on this 28th day of July 2021. This call is being recorded and is for investors and analysts only. If you are a member of the media, you are invited to listen only. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.bladex.com.

Joining us today are Mr. Jorge Salas, Chief Executive Officer; and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on their earnings release, which was issued earlier today and is available on the corporate website. The following statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934.

In these communications, we may make certain statements that are forward-looking, such as statements regarding Bladex's future results, plans and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are Bladex' expectations on the day of the initial broadcast of this conference call, and Bladex does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in the bank's press releases and filings with the Securities and Exchange Commission.

Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. And with that, I am pleased to turn the call over to Mr. Salas for his presentation.

Thank you, Nick, and good morning, everyone, joining us to discuss our second quarter results. As usual, I'm here with our CFO, Ana de Mendez, and a few members of my executive team. So let's begin with Slide 3, and let's dive right into the main messages that we would like to convey today.

The title of this slide provides a good summary; improved results, consistent growth and pristine asset quality. Growth in Latin America is starting to regain traction as the economies reopen, commodity prices hit record levels and remittances are also at record high. As a matter of fact, just yesterday, the IMF revised for the second time this year, its growth projections for 2021 for Latin America from 4.6% in April to 5.8%. The with the 2 biggest economies in the region, Mexico and Brazil, growing at 6.3% and 5.3%, respectively.

Having said that, daily new infections peaked only a month ago since the vaccine rollout has been, in general, very slow in most countries without the exception of Chile and Uruguay. So we remain cautiously optimistic and well positioned to keep growing and taking advantage of the opportunities that keep arising every day.

In this context, we grew our loan portfolio in our investment portfolio for the fourth quarter in a row, while keeping asset quality sound with only 0.2% of NPLs to total loans. Second quarter results improved. Revenue increased 17%, and also our net profit increased 10% quarter-on-quarter. Ana will share the details of our P&L later on in the presentation.

Also during the second quarter, we created a new executive position, EVP of Strategy and PMO to further align our organizational structure and enhance our execution capabilities. A couple of new value-added structured services that were driven by this unit are now in place. Finally, the share buyback plan announced in May is executed as planned, and the board decided to maintain the quarterly dividend at $0.25 per share.

Now let's move on to the next slide, Slide 4. So after collecting 100% of all scheduled maturities of over $3 billion for the quarter, we managed to disburse over $3.3 billion in the quarter; that's 21% compared to -- 21% more compared to the previous quarter for a net portfolio growth of 5% quarter-on-quarter. It's worth mentioning that new loans for the quarter were disposed, on average, 8 basis points below loans that mature -- that were collected for the quarter as a result of the unprecedented liquidity that we see across the region. As Ana will note later on in the presentation when analyzing the net interest income, the increased volume for the quarter more than compensated the decrease in spread.

Moving on to the following slide, Slide 5. Our portfolio continues to be well diversified by country and has increased 22% or year-on-year. The reduction in exposure to investment-grade countries by 14%, as explained by the recent downgrades for Colombia by 2 of the 3 main credit rating agencies. Our growth for the quarter was focused on the Dominican Republic, Guatemala in Mexico and mainly on resilient sectors like electric power generation, quasi sovereign corporations and top tier financial institutions.

Moving on to Slide 6. Again, this is the same graph as broken down by industry. Just to give some context, world growth, especially in the U.S. and China is fueling trade flows. LatAm trade flows are expected to grow 21% in 2021 and an additional 8% for 2022. As we can see, most of our growth for the quarter was just like in the past quarter, related to the recent commodity boom, which is associated to both prices and volumes. So our oil and gas portfolio was up 71%, and our metals and manufacturing portfolio was up 40%, mostly in investment-grade countries. Also, as the economies we opened, our food and beverage exposure increased by almost $100 million or 32% in companies based in Mexico, Panama, Peru and Chile.

Moving on to Slide 7. The bar graph on the left shows the credit investment portfolio grew $134 million last quarter in addition to a stable, high-quality liquid portfolio designed to enhance liquid yields. Both investment portfolios that add up to 523 million by the end of the quarter are well diversified and predominantly [investing greatly]. As I mentioned in the last call, you can expect further growth of our investment portfolio going forward.

Slide 8 shows our liabilities mix on the left in our asset mix on the right. It is clear that our most efficient funding source, deposits, keep growing in nominal terms and are now at $3.3 billion, while still representing 61% of our funding. Class A shareholders continue to have a meaningful participation and the success of our Yankee CD program has also contributed to the growth of our deposit base.

As you can see in the chart on the right, our credit portfolio, loan plus investments, have finally surpassed pre-pandemic levels of Q1 2020 by almost $340 million. We believe that this is -- that this consistent trend is very relevant. And we are confident that there is considerable room and opportunities to keep growing as the region continues to recover.

In this sense, and moving on to Slide 9, I want to show you just a couple of examples of value-added structured solutions that are now in place. The first one at the top of the graph is the supply chain finance, receivable discounting mechanism through an established Latin American fintech platform that enables [lives] to leverage its vendor finance product and pick and choose to finance short-term receivables from target prospects.

The second one is a tailor made cash and invoice management, proprietary solution interconnected with the Panama Canal Authority, specifically designed for major freight companies which ships go through the Panama Canal. These and other similar projects in the future will be supervised by our new strategic planning unit that contains a PMO office to ensure efficiency and [adequate] time to market.

With that, I will turn the call to Ana, who will walk us through our P&L implications, and then I will take it back. Ana?

Thanks, Jorge, and good morning to everyone. Let me now comment on Bladex's quarterly results of operations on Slide 10. And so profit for the second quarter of 2021 was up by 10% on a sequential quarter basis and stable year-on-year at $14 million. Top-line revenue growth was the most relevant aspects positively impacting profit, having increased by a solid 17% with respect to the prior quarter and 29% compared to a year ago.

Quarter-on-quarter, net interest income or NII was up by 11% driven by higher average loan portfolio and lower funding costs, offsetting the negative impact of a continued downward trend in market rates. The latter mostly responsible for the 3% annual decrease in NII, as I will discuss into more detail in a moment.

Fees continue to perform well with a positive trend in the bank's traditional letters of credit business and a pickup in the loan syndications activity. So the $4.3 million total fee income for the quarter, we noted a sequential quarterly increase of 41% and more than twice the figure from the second quarter of last year. Other non-fee income includes net results from financial instruments, mostly associated with the valuation of currency positions and hedging derivatives.

This line item displayed a gain of $234,000 in the second quarter of 2021, a $4 million improvement with respect to the second quarter of last year, when the bank recorded a $3.9 million loss, mostly related to the fair value adjustment of the debt instrument received as part of a loan restructuring that took place back in 2018.

Quarterly profit also reflects expenses back to historical levels at about $10 million; up 11% from a seasonally low first quarter of the year and up 22% from a year ago when cost-saving measures were implemented at the onset of the pandemic. On a year-to-date basis, expenses remain at a similar level of $19 million, up 2% from a year ago.

As we will see ahead, credit provisions of $1.4 million for the quarter reflect strong credit origination. While the bank reserves it sound asset quality with only 0.2% in NPL's, as Jorge just mentioned, year-to-date, profits reached $27 million, down 17% from last year, mostly impacted by the net effect of lower LIBOR-based market rates on the bank's assets and liabilities, reducing NII by 16% in the same period.

On Slide 11, we present a more detailed information on the quarter-on-quarter net interest income variation, up 11%, as I just indicated. The 12% increase in average loans, along with higher average investments and lower cash position, offsetting higher funding, resulted in a net positive volume effect on NII of $3.7 million. In turn, lower funding costs by 17 basis points were more than offset by lower lending rates, down 23 basis points. As a result of both the continued downward re-pricing of LIBOR-based lending rates and tighter lending spreads returning to pre-COVID levels; the latter reflecting sustained credit quality and ample market liquidity, particularly in the banking sector. Overall, the net rate effect was a negative $1.6 million for a total NII quarter-on-quarter increase of $2.1 million.

On Page 12, we present the same quarterly NII variation analysis this time comparing it to the second quarter of last year. Here again, the bank recorded a strong volume effect, positively impacting NII by $6.7 million, having improved its average interest-earning asset mix with higher loans and investments and lower cash levels. Nonetheless, this positive effect was wiped out by the impact of 105 basis points or 73% decrease in average lending LIBOR base rates, coupled by lending spreads returning to pre-pandemic levels, as I just commented on. The combined volume rate effect resulted in a $0.7 million or 3% decrease in NII year-on-year.

On Slide 13, we present the evolution of allowances for credit losses, which continue to reflect the bank's high-quality credit exposure in its commercial and investment portfolios. NPL's remain unchanged from the previous quarter at $11 million or 0.2% of total loans, while IFRS 9 Stage 2 credits, representing loans with increased risk since origination, mostly related to downgrades in internal country ratings and credits in watch list went down to 4% from 10% a year ago, as the bank has been very successful in decreasing high-risk exposures and sectors most impacted by the pandemic.

Page 1, low-risk credit, representing 96% of the total exposure, increased by $464 million or 8% on robust credit origination and accounted for most of the $1.4 million in credit provision for the second quarter of 2021. Overall, the bank's total allowance for credit losses, which incorporates forward-looking expected losses under IFRS 9 represented 71 basis points of the total credit portfolio at June 30, 2021.

Finally, on Slide 14, you can see how credit growth starts to lower our Basel III Tier 1 capitalization, although still strong at 23.6%, for which credit risk-weighted assets increased by 11% quarter-on-quarter and are calculated under the advanced internal based ratings approach, or IRB, clearly reflecting the low-risk of our exposures and our business focus on short-term trade lending to prime banks and corporations.

In the graph to the left, we also present flat regulatory capital adequacy ratio of 18.2%, as mandated by the superintendence of Banks of Panama. With the main difference from the internal approach consisting of credit risk-weighted assets being calculated under Basel standardized approach. As a reference, the average regulatory capital ratio for the Panamanian International Banking Center is around 16%. Denoting the industry's approach to manage a conservative capital position in a country with no lender of last resort.

With respect to Bladex's stock repurchase program of up to $60 million announced in early May, up to now, the bank has repurchased a total of 728,000 Class E common shares for a total of approximately $11.2 million. In addition, as Jorge mentioned, the board recently declared an unchanged quarterly dividend of $0.25 per share, maintaining an attractive dividend yield of around 6.5% at current stock prices.

Let me now turn the call back to Jorge. Thank you.

Thank you, Ana. So summarizing, the second quarter of the year is, we think, a clear demonstration of that lives continues to trend in the right direction. Keeping sound asset quality on a book of business that continues to grow, serving top-notch corporations, taking advantage of our unique competitive position in a region where we have operated for over 40 years, and that is clearly showing strong tailwinds.

I will now ask the operator to open it up for questions. Thank you.

(Operator Instructions) Our first question comes from Jim Marrone with Singular Research.

I guess maybe the first question that I have is just in regards to going forward with respect to interest rates. So it's widely known that central banks will start raising interest rates to address the current inflationary environment. So I'm just looking at how Bladex is looking to capitalize on the increase in interest rates going forward? And maybe if you can just provide some color, both on the asset side as well as on the liability side of your balance sheet?

Yes, sure, sure. Excellent question. There's clearly inflation pressure in many regions of the world for a couple of reasons. One is the disruption in supply chains because of logistical reasons, sanitary reasons and even climate reasons. The truth is that supply chain disruption is putting pressure on costs. And in order to protect margins, the pressure is being translated through the value [chain] and consumer prices.

Also, there's a demand shock, basically because of the growth in the U.S. and China, which is also being translated into inflationary pressures. Now in Latin America, most countries are facing inflationary pressures for both internal and external, that is to say, commodities prices. Interest rates have been recently adjusted upward in Brazil, in Mexico and in Chile, and we expect the same for the rest of the region in the second half of the year. This is obviously -- but to the extent that we don't have -- we don't assume FX risk, this is obviously positive for Bladex's business model. As long as we see -- as long as we have moderate inflation.

So on the asset side, I think it's very clear that we can potentially increase our margins as rates go up in local currency, and we have already seen that happening in most of the countries in the regions where we have exposure. Just Brazil, we have 20% of our portfolio. Chile, we have 10% of our portfolio. So that's obviously going to be beneficial for our profitability.

Yes. I may add on the fact if you asked for the impact on both assets and liabilities. As you know, we do keep a mostly floating rate book. So as U.S. dollar rates go up, we should be able to benefit, obviously, from re-pricing on both sides of the balance sheet with a net positive effect in net interest income on margin.

Yes. Okay. Great. And just in regards to your credit quality. So you say it's very good. And your NPL's have remained steady. I'm just curious, just as far as that credit quality, is it mainly concentrated on large enterprises? Or is there a significant exposure to small business and just seeing going forward, how is that going to impact as we come out of this recovery with the shakeout of small businesses, the reopening? Just can you provide some color on your credit quality as far as the mix and where you see it going forward?

Yes. That's also a very good question. And I'm going to try to take a step back, so you understand where a bit of a historical context of our risk appetite in our performance. Short answer is, it's basically big corporations and banks. So very little -- actually, no small NIM businesses because we exited that market back in 2018. So -- but after the big loss in 2018, the bank started de-risking. And that meant reducing exposures in countries like Argentina, reducing exposure to smaller corporates and also not engaging in long-term transactions that involve naked commodity risk.

2019 ended with a clean book, an ROE of almost 9%. Then when I came in, in March, the pandemic hit, and we decided for obvious reasons to derisk even further. Shortening the tenor, even more, increasing our liquidity at the expense of the size of the book, and that was huge. That was $1.5 billion in 2 months. So 25% of the book and we shifted to more FI and exited riskier sectors like mining and retail and airlines.

And then as the pandemic has evolved, and the uncertainty has slowly dissipated, we have, as you saw in the presentation, increased the size of our loan portfolio, reduced the excess liquidity to normalized levels and increase the size of the investment portfolio. Now going forward, as the region shows stronger signs of recovery, we are now in a position to take additional controlled risk in 2 main ways. One is returning to our historical mix of FI and corporate and also return to our historical level of corporate as opposed to -- I mean long term versus shorter term.

Now this is all big corporations that normally have sales over $300 million that have access to local and international capital markets. We are not venturing into small and medium businesses. We will continue to complement this strategy with value-added products, like the one I showed before in the presentation. I don't know if that answers your question.

Our next question was submitted by [Tim Dunn from Elm Ridge].

Could you provide some information on what makes up the $4.4 million charge to other comprehensive loss on the balance sheet?

Yes, sure. Thank you for the question. Yes, we do keep some derivatives. This, in particular, for [us to] swap to cover certain liabilities that we have in Mexican pesos. And they are accounted for as cash flow hedges. So the valuation of this derivative is recorded in other comprehensive income in our equity, and that basically explains the change. It's the change in valuation of this derivative, which tend to -- as they are actually economically very well covered. But in the interim during the life of this derivatives and the underlying exposures, they may have certain volatility that is reflected in OCI. I don't know if that answers the question.

(inaudible)

Yes, due to temporary ineffectiveness. But they tend to correct over time. And they are economically matched, at the end, they should go close to 0 at maturity.

(Operator Instructions) It appears that have additional questions at this time.

Okay. If there are no further questions. Thank you for your participation. Stay safe and have a great day. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.