Foreign Trade Bank of Latin America Inc (BLX) 2020 Q4 法說會逐字稿

Ladies and gentlemen, hello, and welcome to Bladex's Fourth Quarter 2020 Conference call on this, the 12th day of February 2021. This call is being recorded and is for investors and analysts only. (Operator Instructions) 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 Méndez, Chief Financial Officer. Their comments will be based on the 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's 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, David, and good morning to everyone joining us today to discuss our fourth quarter results. Today, I'm here once again with our CFO, Ani Méndez; and a few members of the executive team.

This morning, I'll be talking about our balance sheet management during the quarter and an overview for the whole year, and then Ani will discuss the P&L implications of it all.

After Ani's comments, I will make some closing remarks and then as customary, I will open it up for questions.

So there is no doubt that Latin America was one of the most impacted regions in 2020. The world's GDP decreased by 3.5%. Compared to that of Latin America, that decreased more than twice as much, 7.4%. Moreover, as the pandemic evolved, GDP contraction estimates for the last year were constantly revised and varied drastically in most countries.

I would like to highlight, once again, what I have been noting in previous quarters, and that is the importance of our business model in the current context. Having the ability to diversify our portfolio in more than 20 countries, lending exclusively to top-notch customers, including banks, and above all, having primarily a short-term portfolio is, and it will continue to be in 2021, a significant comparative advantage in this continuously changing environment. Why? Simply because it allows us to diligently manage our exposures towards defensive sectors in the different countries as their outlook changes, as it did during the last 3 quarters.

Let me now talk about what happened during the fourth quarter on both sides of the balance sheet. Beginning with the asset side and moving to Slide 3. We grew our commercial portfolio by 9% with respect to the previous quarter, reaching $5.6 billion by the end of the year. Growth was mostly short-term lending and focused on defensive sectors and countries. I will address this topic in more detail further on in the presentation.

In Slide 4, you can see that roughly $2.1 billion loans matured during the quarter and over $2.6 billion, nearly half of the entire portfolio, was disbursed during the fourth quarter. It was 17% more than in the previous quarter. Also the average tenor of new disbursement was, again, short term, approximately 9 months, and the average rate was LIBOR plus 182 basis points, down 33 basis points from the rate of the maturing portfolio for the quarter. As loans closed at the peak of the crisis matured and then were replaced with relatively normalized pricing levels in the context of high market liquidity.

It is worth mentioning that the bank continues to collect virtually 100% of all scheduled maturities quarter after quarter. The quality of our portfolio today is pristine. Our NPLs at year-end are just $11 million, 0.2% of the loan portfolio.

In Slide #5, we note how the portfolio remains focused with almost 60% on lower risk countries. Q4 growth was mainly concentrated in Peru, oil and gas, and then followed by Brazil and Colombia, primarily short-term lending to financial institutions in both countries. On the other hand, we continue to systematically use our exposure in Argentina, down $64 million since the beginning of the crisis and now representing less than 2% of the portfolio.

Similarly, in Slide 6, you can see that origination in Q4 was prudently managed and focused in terms of sectors. Loan growth was mainly concentrated, as I said, in financial institutions, which, as of end of the year, represented 54% of total portfolio. And on the oil and gas downstream sector, representing 7% of the portfolio with a relatively important participation as well in the food and beverage and electric power industries, each at 6% total, against all resilient sectors.

The following slide, Slide 7, shows the quarterly evolution of our asset composition. It portrays how we took prudent measures at the onset of the crisis, favoring higher liquidity levels by taking advantage of the short-term nature of our portfolio that served as an effective liquidity buffer. This defensive strategy, of course, impacted our net interest income, which Ani will explain further later in the call. It is clear in this graph, that the third quarter marked an inflection point in our asset compensation. During the second half of the year, we not only resumed portfolio growth, but also started to build a corporate bond portfolio, allowing us to reduce our cash position and improve the overall yield on assets.

Switching to Slide 8. You may see how the investment portfolio have been built during the second semester, reaching $400 million. By year-end, it was evenly split between a high-quality liquid asset portfolio, aimed at enhancing the return from liquid assets otherwise mostly invested with the Fed and the credit portfolio of Latin American remained steep as a complement to the bank's commercial portfolio.

In sum, we take pride in having improved our asset composition in terms of both mix and quality despite all the challenges faced throughout a very complex year.

Moving on to the other side of the balance sheet in Slide 9. We show now how our funding mix evolved during the year. A few things are worth mentioning. First, deposit growth. Deposits, our lowest cost source of funding, grew 9% year-on-year and substantially increased their share in the bank's total funding base, exceeding 60%. This is in part attributable to the -- our Yankee CD program, which has been consistently gaining traction reaching $452 million by the end of last year. But also thanks to our Class A shareholders, mostly central banks across the region, who continue to support the bank through their investments, which amounts to approximately 50% of total deposits.

Moreover, during 2020, the bank further reinforced the stability of its funding base through new medium-term funding transactions. Bond issuance, both public and private and syndications attracted investors from the U.S., Europe, Asia and Latin America. By year-end, long-term funding represented 31% of total funding, up 6% year-on-year. Finally, we reduced our reliance on funding from correspondent banks, which at the end of 2020 amounted to less than 8% of total funding, down from 30% in March.

Having said this, the bank has access to a wide network of correspondent banks in the U.S., Europe and Asia, in line in excess of $2 billion. I will leave my comments on liabilities there, but as you can see, 2020 was a very dynamic year on both sides of the balance sheet. Funding structure changed, asset mix changed. Country mix changed and industry mix changed as well. Overall, this was a clear indication of the resiliency of the business model and its versatility to adapt to the challenges of the pandemic as well as the bank's ability to take advantage of this flexibility to effectively protect the quality and soundness of its active portfolio.

I will now turn the call to Ani, so she can walk you through the P&L implications to all of this.

Thank you, Jorge, and good morning to all.

So let's continue on to Slide #10, following slide, where you can see the evolution of our P&L, recording a profit for the fourth quarter 2020 of $15.7 million, up 2% from the preceding quarter on relatively stable revenues and lower provisions for credit losses, reflecting high-quality origination during the quarter as well as the ongoing collection rate of loan maturities of close to 100%, as Jorge mentioned, including the continued reduction in high-risk countries and sectors. These were partly offset by a generally seasonal increase in quarterly expenses, up 22% quarter-on-quarter.

Net income for the year 2020 was $63.6 million, a 26% reduction from the previous year, mainly reflecting lower revenues, which were down by 22% on the account of the bank's defensive approach since the onset of COVID-19 to preserve liquidity and lower loan balances, coupled with the negative impact of lower market rates on the overall yield of assets financed by the bank's equity base, as I will explain in further detail further ahead.

As a result, annual net interest income was down 16% or $17.1 million, while fee income was down another $5.2 million or 33%. The latter relating mostly to the absence of new executed structuring transactions during the year, reflecting very low market activity in that line of business throughout the year, although a new pipeline of transactions started to build up towards the last month of the year and is currently ongoing.

Fees from the letter of credit business performed well in the second half of the year, returning to pre-COVID level after the second quarter impacted by decreased activity. Overall, letter of credit fees for the year decreased by 5% when compared to 2019. Annual revenues were also impacted by a $4.8 million loss on financial instruments, mostly related to the fair value adjustments in the second quarter of 2020, of a debt instrument received as part of a loan restructuring back in 2018 and to a lesser extent, attributed to the valuation of hedging derivatives during 2020.

Lower revenues for the year 2020 were partly compensated by a $1.5 million reversal of provisions for credit losses, which I will refer to in more detail ahead. They were also compensated by an 8% year-on-year reduction in operating expenses due to the decreased performance-based employee variable compensation as well as other cost savings derived from operational measures implemented under the current context. Lower profit resulted in decreased quarterly and annual returns for 2020, recording 6% ROE and a 1% ROA for the fourth quarter and full year, down from close to 9% and 1.3% and 1.4%, respectively, in the previous year.

Moving on to Slide 11. We present the drivers for net interest income evolution, which represents the main revenue pool for the bank at approximately 90% of total revenues. Net interest income for the fourth quarter was down 1% from the previous quarter to $22.3 million. Increased average lending balances, up 3% from the previous quarter as well as higher participation from the liquid bond portfolio, replacing cash balances, were able to largely offset lower net interest margin, down 5 basis points to a level of 1.37% on the continued downward repricing of loans from decreased market LIBOR rate.

During the last 3 quarters of 2020, the bank maintained a widened net lending rate differential, denoted by the 193 basis points difference between loan and overall funding rates in 4Q '20, up 43 basis points when compared to 4Q 2019. This is the result of higher lending spreads that the bank was able to charge during the first months of the crisis, together with a favorable liability-sensitive interest rate gap position in a decreasing market rate environment, so that liabilities have been repricing at a faster pace than loans during most parts of the year, an impact that started to level during the fourth quarter.

Net interest income for the year 2020 of $92.5 million was down $17 million or 16% from the year before, mostly due to lower market rates and the change in average asset composition. For the year 2020, the weighted average asset rate, including liquidity, investment securities and loans, was down by 157 basis points from the previous year to 2.72%. In turn, loan portfolio's average base rate alone, which is LIBOR based, was down 151 basis points. So a very high level estimation of the impact in net interest income of base rate repricing at lower market rates, ceteris paribus, amounts to a decrease of about $50 million, considering $1 billion equity invested in productive assets.

The net effect in NII was also negatively impacted by the change in asset mix. Whereas during 2020, average low-yielding cash balances increased from 12% in 2019 to 23% of total assets, while loans decreased from 87% to 75% on average. All of these effects were partly compensated by a positive impact of the increased net lending rate differential that I mentioned before, as weighted average funding rate was also down by 151 basis points to 1.59%.

Now on to Slide 12. We present the evolution of allowances for credit losses, which, under accounting standard, IFRS 9, incorporate forward-looking expected losses. So that Bladex's best estimation of the impact of the current economic environment is already accounted for. In fact, as required by IFRS guidelines, we evaluated our reserve model to ensure that the impact of the new macroeconomic realities in the market we operate were accounted for, and concluded that our reserve methodology adequately incorporates the effects of COVID-19 in our forward-looking estimation of expected losses.

IFRS 9 Stage 1 exposure, categorized as low risk, increased by $625 million to $5.6 billion or 94% of the total during the fourth quarter of 2020 and included the rise in high-quality liquid bond portfolio as well as increased origination in lower-risk countries and sectors, such as Chile and Peru as well as financial institutions in Brazil and Colombia, all of which generally have a relatively lower collective reserve requirement.

In addition, Stage 2 portfolio, including loans in our watch list as well as exposures in countries and sectors assessed by the bank as having increased risk since their origination, remained at 6% of total exposure, amounting to $331 million at December 31, 2020. In addition, during the fourth quarter of 2020, loans amounting to $11 million were classified as Stage 3 or credit impaired, as Jorge commented before, from Stage 2 in [the] previous quarter. So that the NPL to total loan ratio stood at 0.2% at year-end 2020. The net result for the fourth quarter 2020 was a provision reversal of $0.3 million. In the same manner, the overall impact of credit provisions for the year 2020 was a reversal of $1.5 million. Reflecting, again, the successful collection of higher risk exposures throughout the year, coupled with increased origination in higher quality countries, sectors and counterparties.

During the year 2020, a total of $56.5 million in loans were written off against previously individually allocated reserves, of which $52.1 million was related to the sale during the second quarter of 2020 of a credit impaired loan, or NPL, in the sugar sector of Brazil that remained from the previous credit cycle, which ranged from 2009 through 2016. The remaining $4.4 million write-off relates to the sale of a $17.5 million loan to a South American company in the airline sector during the third quarter of 2020, reducing that company's exposure to 0, down from $46.5 million in March of 2020. Overall, the bank's total allowance for credit losses represented 75 basis points of the total credit portfolio at December 31, 2020, all of which remains current.

With this, I would now like to turn the call back to Jorge. Thanks.

Thank you, Ani. I truly believe that, given the circumstances, this has been a very good year for Bladex. I'm very proud of the Bladex team that has managed to disburse over $6 billion since the pandemic started and collected virtually all maturities in time throughout the year. We have acted swiftly, taking advantage of the levers of our business model to protect the quality of our assets and making the best of the current low rate environment on the liability side. We find ourselves well prepared to navigate 2021.

As I mentioned at the beginning, Latin America has been one of the most impacted regions in the world. Several countries applied very stringent lockdown measures from the onset of the pandemic that are still causing severe spread of the virus. COVID policies in most country continue to be erratic in a region that, in general, has limited fiscal room and fragile public health distance.

Having said that, we estimate that the region will grow between 4% and 4.5% in 2021, mostly in the second half of the year, and will reach pre-pandemic levels of GDP by the end of 2023.

We are seeing some positive signs. Consumer confidence indicators are generally improving. And then the increase in commodity prices, external liquidity and the distribution of the vaccine, although it may face some challenges, should also contribute to faster growth. But the different countries, however, have their own set of challenges. So the speed of recovery will vary largely by country.

In any case, we, at Bladex, will continue to work closely with our clients to whom we have offered continued support through the crisis and who have shown financial resilience during these unprecedented circumstances.

(Operator Instructions) And our first question comes from jim Wiggins with Phronesis Partners.

Yes, sir. I was -- I've owned the stock for much long as 12 years or so. And I'm curious if you could -- could you sort of evaluate how you feel the bank has done over that period of time? And what your goals are going forward? I have been very impressed with your ability to minimize loan losses. But I just wondered what you hope to do in a more positive vein.

How do we see growth going forward?

Yes.

Okay. So let me -- so we are seeing increased demand as the economies reopen, especially in the resilient sectors, oil and gas, utilities, food and beverage. We've also started to see some of our clients working on their strategic plans to either expand organically or inorganically or acquire some other companies.

Our clients turn to us to provide financial solutions. So we're seeing some traction there. We're also seeing companies in financial institutions trying to improve their funding structure in this context and their debt maturity profile. So we are exploring those medium-term facilities as well through a combination of the right structure and the right pricing.

I cannot give you specific guidance on size. But I can tell you that our commercial portfolio has -- grew 13% in the second half of the year, and we continue to see moderate growth going forward. I don't know if that answers your question. We'll not sacrifice credit quality for growth in this in uncertain time...

So I -- okay. I understand. So I recall -- I think it was the first or second quarter that you had mentioned that your loan spreads have widened appreciably. And I -- do you see any positive trends in terms of loan spreads now?

Yes. We're seeing -- definitely, and we saw that -- we showed that in the graph, we -- in the last quarter, we started to see a more normalized level of spreads, close to what we used to have before, the COVID. And that also has to do with the fact that we are obviously working with the top notch, the top-tier of the pyramid in terms of credit quality clients, which are particularly very liquid in general and highly offered -- I mean, have highly a target of lending. So -- but in short, we did start to see a reversion of the spreads that we were able to charge at the beginning of the crisis.

(Operator Instructions) And Mr. Wiggins with Phronesis Partners has a follow-up.

Sorry. I didn't mean to take up too much time, I wasn't sure if there were any other questions, but I just wanted -- when you started, you didn't really get -- you came in during a very difficult time. And I don't recall you ever articulating any longer-term goals for your tenure at the bank. Just wondered if you had any sort of longer-term goals? The bank's assets are still about the same as they were 10 years ago. Is there a target with respect to equity to assets that you hope to reach? Or anything of a quantitative nature that you hope to get to over your -- over the next some odd years?

So you're asking about our vision of long-term returns for the bank, right?

Yes. I just -- I mean just -- I mean, you've done a great job of managing through this difficult period. I'm just sort of trying to get a sense of what you're trying to accomplish beyond that.

Well, first, we have to go through the crisis, right? I mean this bank has had -- I mean, we are at the lowest loan portfolio in the last decade. And -- but this portfolio has been close to $8 billion in the past. And back then, it was 2015, returns were double digit. So -- and that was basically doing exactly the same thing that the bank is doing now, just at a bigger scale.

We are now working on several initiatives that I cannot share for obvious reasons. But part of it is just taking advantage of this time to work on internal processes and making sure that our digital capabilities are there, where when we can grow the bank back in a different environment and make sure that we can have the economies of scale to do that operationally. That's what I can share for now. We do have a very solid client base, and we have a lot of space. We have very limited share of wallet with our clients. So just cross-selling more products to our client base will be some important source of new income.

(Operator Instructions) At this time, we have no other questioners in the queue, so I'll turn it back to our speakers for closing comments.

As there are no further questions, I would like to thank everybody, and please stay safe. Thank you.

Thank you, ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines, and thank you for joining us today.