Foreign Trade Bank of Latin America Inc (BLX) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to Bladex's conference call. Just a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Melanie Carpenter with i-advize Corporate Communications. Ms. Carpenter, you may go ahead, ma'am.

Thank you. Hello, everyone. Welcome to Bladex's second-quarter 2005 earnings conference call on this, 11th of August, 2005.

Today's comments are based on the press release that was issued yesterday. If you did not receive a copy, it is available on the website at www.blx.com. But if you need any assistance during today's call please contact us in New York at 212-406-3690.

The purpose of today's call is to allow management to discuss the Company's performance with investors and analysts and remind you that questions from the media will not be taken.

Any comment made today by management may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and reflect the expectations of the bank's management based on information and data that is currently available. However, actual performance may differ due to various factors, including those cited in the Safe Harbor statement on page 11 of yesterday's press release. Please be aware that Bladex has updated the risk factors in this disclaimer, so we ask that you reread it.

And with that, I will now introduce our speakers. Joining us today are Mr. Jaime Rivera, the Chief Executive Officer, and Mr. Carlos Yap, the Chief Financial Officer. It is now my pleasure to turn it over to Mr. Rivera, who will begin the Company's opening remarks. Go ahead, Jaime.

Thank you, Melanie. Good morning, ladies and gentlemen. On behalf of all of us here at Bladex, let me welcome you to our conference and thank you for your attendance. For my part, I am happy to have a chance to once more review the highlights of our business with you.

As usual, we will try to provide you with information so you can place the quarterly figures in the context of both our medium-term strategy and current market conditions. So with this in mind, I will first comment on the qualitative aspects of the business, and then ask Mr. Carlos Yap to expand on the balance sheet and P&L. But please allow me to start by once again summarizing our strategic goals.

We are working towards becoming the preferred provider of services for the entire value chain of trade finance in Latin America. In very practical terms this means working on three fronts -- developing new services for our current clients, developing new clients, and improving efficiency. We are going about this based on the competitive advantages afforded to us by our unique (indiscernible) shareholdings, our sterling prime base (ph), and our ability to underwrite risk in the entire region.

So with this as a background, let me comment on the business in the second-quarter. Now, this was a quarter during which we worked against the backdrop of two factors -- tremendous market liquidity and regional politics.

In terms of market liquidity, I think we all know the dollar remains universally and abundantly available. And in our business, this does not help. Margin strength (ph) and well-run companies use their cash balances to pay down their debts, a reaction quite different from consumers who seem to be leveraging themselves to the hilt all over the world.

Shrinking lending margins is something we can offset through reductions in our own cost of funds, which was part of the reasoning behind the syndication mentioned in our press release. But our ability to implement the demand side without compromising credit quality is more limited. And in today's scenario, contrarian growth, which, as you know, has been and remains one of our strengths, is something that we have to approach very carefully. So during viewed in this light, the quarter's nearly 3% growth in trade finance balances, even after (indiscernible) -- prepayments, sorry, of 70 million, something we had not seen in this segment of the business, was a solid performance.

The second factor driving the quarter's business was politics in the region. Now, politics were expected to come to the forefront in this reelection year in so many countries. And so far, of course, we have not been disappointed. There is rising political uncertainty in a number of our markets, with electoral rhetoric generally raising the stakes even higher. Unfortunately, institutions in the larger countries in particular have so far held. Plus, of course, the economies are generally being helped by strong commodity prices. Please notice, however, that the operating words here are "so far." So in the end our view of these increasing political risk levels impacted the quarter in the form of additional generic provision charges that Mr. Yap will explain in a minute.

Not talking about some specifics, I stated before we are doing more trade business with the corporate sector. During the quarter, fully 29%, or just about 1 out of every $3 we disbursed, represented corporate transactions, which tend to be smaller ticket, but be richer priced than back (ph).

A new client segment that we have decided to focus on is government, where, as you know, we enjoy privileged access on accounts of our shareholders. So you can see, or you can expect to see, more government-related activities in coming months.

Now, regarding new services, we have secured Board approval for our digital identity project, which is something that we are very excited about as the need for this type of service in the region, as it is throughout the world, is increasing. So let's see if we can come to an agreement with our potential partners. And as soon as we do, and if we do, we will let you know.

That the payments business is growing, but only slowly. This is a result of diminished negotiating leveraged in a market just flooded with liquidity. But the structure is set up. We have two people working on the product. And so at this point we wait for the economic cycle to turn.

We have also told you about our plans to expand our bond holding. We will have this business line up and running by year end.

Regarding efficiency, the work to upgrade our technology platform is moving on scheduled to come online sometime next fall. And regarding efficiency as well, and in line with the practice we discussed last quarter, we were able to leverage our solid capitalization into a $235 million syndication on the terms that significantly improved our funding structure. And this, of course, provides us with raw materials with which to fuel our growth.

Next, a couple of comments about Argentina. As we have said before, the very fast reduction in our restructured balances is fantastic news from a medium-term perspective, but it does present a real challenge to our short-term profitability. Replacing these restructured loans, as we said before, which were very richly (ph) priced, will take us some time. All in all, though, I think of this as a good problem to have.

So to try to wrap it all up, it was a tough quarter, one during which we have to swim across against a strong current of growing liquidity and risk levels. But we did very well, disbursing $1.4 billion more than we have done during any quarter in the last two years and advancing on all the front that matter to our medium-term goals. What we are doing is making sure to rebuild our operating profitability as fast as possible, but doing so based on solid ground.

Now, on the subject of additional capital management decisions, we are sticking to our tactics discussed last quarter. We will use our strong capitalization to decrease our cost of funds until we see our operating profit increase, and we will revisit that matter then.

So with this, I will turn it over to Mr. Carlos Yap for him to review the quarter's figures. And then we will then be glad to take up your questions. So Carlos, please.

Thank you, Jaime. Good morning, everyone. Let's start with the balance sheet, Exhibit 1 on page 12 of the press release.

Our net cash position was 164 million at the end of the quarter, in line with historical levels of about 6% of total assets. (indiscernible) strong capitalization, greater ratings and funding base.

Securities available for sale fell 61% to 58 million as a result of our new interest rate outlook. Basically, we sold part of our investment portfolio to start rebuilding it based on our new interest rate view. So we expect to see this portfolio increasing again through year-end, as Jaime mentioned.

Loans declined 68 million on a sequential bases, which reflects loan prepayments during the quarter for 70 million in the trade portfolio and 68 million and the non-trade portfolio. In terms of our credit (ph) portfolio, which includes loans, investments and contingencies, the portfolio did grow 1%, as contingences grew 46% during the quarter.

Our core business continued to grow. Our credit portfolio grew 3% during the quarter and 22% in the last 12 months to a total of 2.3 (ph) billion at June 30, 2005. Credit disbursements for the quarter amounted to 1.4 billion, an increase of 28% on a sequential bases, and represent the highest quarterly highest quarterly level in the last two years. This reflects our ability to originate business in spite of the high market liquidity environment that Jaime mentioned.

Our credit portfolio represented 81% of the total (indiscernible) portfolio, and our target for the year is 70%. So we have room to grow in the non-trade segment.

Our non-trade portfolio fell 4%, or $20 million, during the quarter, mostly due to $60 million in prepayments and the decision to sell part of our investment portfolio.

Let's talk about Brazil. The quality and liquidity of our portfolio in Brazil has always been one of our strengths. Our (indiscernible) portfolio in Brazil amounts to 36 million, and consists basically of two clients -- one with an exposure of 31 million, which was restructured and is currently in interest (ph) and has been paying principle as scheduled; the other client is a financial institution with an exposure of 5 million, which is the only past-due loan we have in the Brazilian portfolio. The remaining of the portfolio is current in principle payments, and we only have $2000 in interest past due.

Regarding the liquidity of the Brazilian portfolio, we have about 300 million in trade maturities every quarter, which represent about 20 to 25% of the Brazilian portfolio. 81% of our portfolio in Brazil is trade and 81% is to banks. Brazilian banks, our main clients in Brazil, are doing very well. They are expanding their consumer portfolio, which is highly profitable because of interest rates.

Our exposure in Argentina at June 30th was 91 million compared to 1.5 billion at the end of March 2001, our highest exposure level during the Argentine crisis.

Regarding our funding activities, deposits increased 10% to $905 million, the first time we reached 900 million level since 2001. We recently closed a 235 million three year (ph) unsecured credit facility which provides stable funding at a very attractive cost.

Now let's talk about our quarterly results. Let's go to Exhibit 2 of the press release.

As we have anticipated and discussed in the previous quarter our near-term profit would be would be lacking the effect of the richly priced Argentine portfolio, which has solidly declined as a result of prepayments. Consequently, net interest income declined 1.2 million compared to the previous quarter, and the net interest margin declined from 1.66 to 1.60.

Lending margins over LIBOR of our loan portfolio remained stable during the quarter. We are pleased by the development of our funding costs. Borrowings bargained (ph) over LIBOR declined 3 basis points during the quarter, which contributed to our net interest income. This is in addition to the effect of lower preferred dividends, which, as you may remember, increased substantially in the first quarter as a result of the special common dividend.

Another positive development was increasing interest rates, which had a positive impact on the return of available cash or equity and our interest income.

The 35% decline in commission income was due to restructured loan fees that weren't recognized in the first quarter when the related loans were prepaid. (indiscernible) credit volumes increased 24% during the quarter. However, lower pricing in this business reduced fee income (indiscernible) during the quarter. On the other hand, we were pleased by a 35% increase in fees from (indiscernible) fees.

Reversal of provision for loan losses was 5.8 million for the quarter compared to 19.8 million for the previous quarter, mostly due to lower payments and no prepayments in this quarter on the nonrecurring portfolio, and also to increased political risk levels. Provisions for off-balance sheet trade risk amounted to 3.3 million, mostly a result of additional volumes and contingencies and also increased country risk levels.

For the quarter, operating expenses were basically flat on a sequential basis. Depending on the timing and implementation of the new projects that Jaime mentioned, expenses will increase in coming quarters. By next quarter, we will have a better idea on the timing and amounts of the added operating costs and revenues.

I will be glad to provide any additional information during the Q&A session. Thank you very much. And with that, I turn it back to Jaime.

Thank you, Carlos. Ladies and gentlemen, we will be glad to take up any questions.

(OPERATOR INSTRUCTIONS) Mario Pierry, Deutsche Bank.

I have two questions. First is on your core earnings. It is running at about $5.4 million according to my numbers, while we have a target of 9 million to be achieved by the second quarter or first quarter next year. Do you still feel like your 9 million target is achievable?

And then the second question is on you mentioned the political risk in the region has been increasing. I was just wondering how do you measure political risk, because my question here is if we look at country risk spreads over the last quarter they had actually improved in the region. So I was just wondering how do you measure political risk in the region?

(multiple speakers) the 9 million figure is indeed achievable. The question is one of timing, of course. We had spoken of a time horizon of 12 months when we spoke last time, 3 months ago. So the time horizon that we have in mind today is nine months.

It depends, of course. It could be three months shorter or three months longer, depending on the way interest rates and demand moved. But no, $9 million is something that is perfectly achievable. We used to be running at that rate not too long ago when we had the benefit of the Argentine interest revenue. The challenge that we have, again, is replacing those richly priced loans in a way without stretching the risk curve.

Again, we are working on that. We are confident that we get there. It is a matter of will it take 9 months, or if things go well 6 months, or if things don't go as well as we hope will it take 9 months. That is still our goal, and it is perfectly achievable.

Regarding country risk, we have an internal country risk review system that is very comprehensive, but it does take into account the market view of other sources. But we reach our own decision. And sometimes our view of risk is contrarian to the market. And sometimes we think that risk is not as high as the market believes it is, and sometimes the opposite holds true. We make our own decisions based on the way we know the governments, our client clients, and the way we think the changing conditions are likely to impact our business. And our business is different to the business that is reflected in many of the ND (ph) Indexes.

Does that address your question in good form?

Yes. So if I can just follow up, then, you had mentioned that you received approval for your digital identity program. And because I think this is one of the key challenges for the bank, is to improve the fee income generation. So I was wondering -- I know this is still a very early part of the process here, but this digital identity program what are the expected revenues that you have in mind from this program? Is this something that we should see -- once the project goes ahead should we see nice improvement in fees right away? Or is a something that will take awhile to develop?

I would rather not comment on that as it applies to Bladex specifically. But I will comment on what is happening to the business in the US. This is a business that has been growing at rates of more than 20% per quarter from a low base, and adoption rate is increasing. It remains to be seen what adoption rates would be in Latin America and how quickly we could generate -- and how quickly we could get traction on revenue.

When and if we come to an agreement, we will give you some more guidance on expectations. Right now we would rather keep it to ourselves until we negotiate final agreements.

(OPERATOR INSTRUCTIONS) Rafael Bello, Citigroup.

If you could just elaborate a bit more on your capital structure, it appears to me -- it seems to me that a Tier 1 ratio way above 40%, I would think that would be more than enough to sustain your low cost of funding. But maybe could you elaborate on what -- if you have a very specific target as to where you want to keep that Tier 1 capital, and how that relates to your dividend policy and over what period of time? In other words, we would expect that you would be paying back dividends fairly quickly considering your high level of capitalization. But maybe you can elaborate a bit more on that?

Yes, we have been all that while consistent on our view that historically we have run the bank at Tier 1 ratios around 20%. So we would expect that, all things being equal -- and they are not likely to be equal, but all things being equal in the future, we will eventually converge the Tier 1 capitalization of the bank to levels around that figure.

And we are going to do it in two ways. We are going to place relative focus or emphasis on using that capital through growth. And over time, that capital that we don't need to fuel growth or new initiatives, we will return. But we will only do so after we have rebuilt our operating profitability.

And what is your target for operating profitability?

The figure that we have mentioned before is a figure of $9 million per quarter, because we think that at around that level we will be able to think in terms of restarting or revisiting the capital management issue without impacting our cost of funds, which, in this environment, where we are fighting over deals involving 1 or 2 basis points, makes a huge difference.

Ben Laidler, UBS.

Just a quick question on the non-trade side. Could you just talk a little bit about what the underlying growth rate there was and what the drivers are, and just on a underlying basis why it was so weak in the quarter?

I think -- and I am sorry, Ben, I couldn't understand -- I think your question did not come through clearly. But I think what you wanted was the details of the decrease in the non-trade exposure -- driven by two factors. Firstly, we got prepayments on the non-trade portfolio as well, just as we did in the trade portfolio, one. And secondly, the non-trade portfolio incorporates our securities, which, as Carlos mentioned, we sold during the quarter as our view of interest rates changed. And we are starting to rebuild that portfolio based on a different structure. Those were the two main drivers of the reduction or the slowing non-trade. I hope I answered your question.

Yes, sorry -- my question was actually just on a normalized basis excluding those two affects what are you seeing on the non-trade side?

Excluding those two affects, we are speaking to our view -- you are likely to see the growth of non-trade at a faster rate than the trade portfolio, simply because we have a lot of room within our trade guidelines, one. And secondly, that is where we realize the most profitability. Again, like Carlos mentioned, by the end of the year we would like to have a 70/30 trade to non-trade distribution in the portfolio. (multiple speakers) and we would have made progress in that regard had it not been for the prepayments and the actions we had to take on the securities portfolio.

Have you seen more prepayments so far this quarter in either portfolio?

No. We have not.

Paolo Relado (ph), Citigroup.

My question is on the reversal of provisions. We saw this quarter that the reversal of provisions for loan losses came as expected, but the reversal for off-balance sheet credit risk actually -- the provision this quarter instead of reversing like you did in the previous. Can you give me some color or what exactly is going on there; what kind of off-balance sheet -- is this still related to Argentina? I had the impression that last quarter you reversed some provision associated with the sale of an Argentine loan that had not been restructured. And if you still have what is the amount of provisions tied up to off-balance sheet credit that might be reversed in the future?

And my second question is about the recoveries of security impairment. You had a higher number last quarter. You had nothing this quarter. I believe maybe you exhausted your -- the portfolio securities related to Argentina in that category. So if you could clarify, that would be great. Thanks.

Let me try to answer your first question first. The increase that we saw in provisions relating to off-balance sheet credit relate mostly to activity outside Argentina. We saw contingencies, particularly letters of credit volumes, vary significantly in several of the countries. And we've passed provisions through accounts for the added volume first and the increased political risk that we saw in some of the countries. So that explains the first question.

The way I understood your second question -- if I understood it right, the answer would be that the reason why you didn't see reversal from an impairment of securities was because nothing of that nature took place in Argentina during the quarter.

But you still have exposure (indiscernible) to Argentina that could be affected in the coming quarters?

I'm sorry, Paolo -- we still have exposure to --?

To Argentina that -- in terms of secureds that we could maybe witness some recoveries going forward?

No. The remaining Argentine portfolio does not include any securities any longer. It is all loans.

And contingencies.

I'm sorry. Carlos is right. We do have some contingencies -- letters of credit, basically.

Mario Pierry, Deutsche Bank.

I just want to follow up. On your share buyback program, according to my estimates you have only used up about $13 (ph) million of the 50 million that you had approval for. So just wanted to get an idea of how you plan to use this buyback program, especially considering that the share price is kind of depressed right now. So I just want to get an idea of how you see the Company buying back shares in the future.

Mario, your translation is right, as usual. As I stated before, we buy back shares on an opportunistic basis. We know that traditionally an historically our stock tends to dip or overshoot on bad news in Latin American, and that is generally when we come in and buy.

That having been said, now that we have had this quarterly conference, and now that, yes, we agree with you our share prices is undervalued, you will probably see us -- or you can expect to us to see us -- back in the market. But again, if the share price increases then we (indiscernible) hold our powder and wait for the next scare and by then.

(OPERATOR INSTRUCTIONS) Nicholas Ogden, Banque Generale du Luxembourg.

I have a question with respect to the revolving credit facilities that you mentioned at the beginning. Could you give us some color about, first of all, the pricing, the number of banks in the syndicate? Could you also give us some color about eventual government language and how that would impact us or how that would impact investors who held bonds issued off your MTN program, and whether they would be at a structural disadvantage compared to lenders via this new revolving credit facility? That is the first question.

The second question concerns the fixed rating, which I believe was withdrawn back in March this year, if you could give us -- perhaps it is something which has been already covered in another call, but if you could give us some color on the reason for that rating?

And the third question, when it comes to MTN issuance, are you actively looking to include downgrade language or termination language in an any eventual bond issuance? Thank you very much.

Yes, I would be happy to take up your three questions. The pricing on the syndication (indiscernible) information to us at 3/8 over LIBOR. The number of banks was 17. There is nothing in the language that should worry our bondholders. The covenants are standard market covenants.

On the issue of dropping Fitch it literally and simply had to do with cost considerations. We have to pay for three rating agencies. We run a bidding process because we told them, look, we only need two. In the end we chose the ones that offered us the best package. So that is what it came down to.

Your third question, if you wouldn't mind repeating it (multiple speakers) take it up?

Yes, sure, no problem. It was just in the event of your issuing bonds under your MTN program. Have you envisaged including early termination events in the event that your credit rating should go below triple B-/Baa3?

No, we have not.

Gregory Merriachi (ph), TRG.

I was wondering if you could elaborate on the investment portfolio that was one of the five or six pillars you mentioned last quarter that would constitute one of the main sources of non-interest income. You have touched on digital ID. I remember that another one was e-education. But I was primarily interested in your investment portfolio activities.

I am going to have to ask you to clarify what you mean by the investment portfolio. Do you mean the securities portfolio?

Yes. You were going to creator or be more active on the trading side with secondary market instruments, I believe.

What we are trying to do, and in fact what we are doing, is building up a business line where not only are we going to hold bonds issued by many of the clients and countries that we know of, but to the extent that it is convenient or it behooves us, we are going to trade on them. We expect that the total securities portfolio will be no larger than 16% of our credit portfolio, and keep it at that -- a sufficiently high level to provide us with added revenue, and sufficiently small so that it will not result in increased volatility in our P&L.

We are working on that. We have the provisions ready. We are right now hiring a couple of people. By year end you should see that operation up and running.

(OPERATOR INSTRUCTIONS) Very well. For closing remarks, I would like to turn the call back over to Mr. Jaime Rivera.

Thank you. Thanks, ladies and gentlemen. And before we go, I would like to leave you with a thought regarding the way we view our stock. I recently had somebody tell me that our stock has a "life of its own." And the fact is that we have indeed added a lot of value to our shareholders in the last three years. But from what I have seen, and I have said this before, those that have benefited the most have been those that have thought of us in a strategic context. And viewed from this perspective, it is our opinion that particularly with Argentina behind us, Bladex comes down to a compelling business case in its early stages, and thus the opportunity -- little downside, if you really think about it -- and significant potential.

So with that, I would like to once again thank you very much for your time. And we hope you, conference useful, and we meet again next quarter. And until then, then, I wish you all the best. Many thanks.

And that concludes today's call. You may now disconnect.