Foreign Trade Bank of Latin America Inc (BLX) 2008 Q4 法說會逐字稿

Welcome to the Bladex Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Peter Majeski. Sir, you may begin.

Thank you, Kylie and good morning to everyone. My name is Peter Majeski of i-advize Corporate Communications. Welcome to Bladex's Fourth Quarter and Full Year 2008 Conference Call on this, the 13th of February, 2009. This is a call for investors and analysts only. And if you are a member of the media, you're invited to listen. But if you have any questions, please follow up with i-advize after the call.

Joining us today from Panama City are Mr. Jaime Rivera, the Chief Executive Officer of Bladex, and Mr. Jaime Celorio, the Chief Financial Officer. Their comments will be based on the earnings release issued this morning. A copy of the long version is available on the Bladex website at www.bladex.com. Otherwise, you can contact i-advize in New York at 212-406-3694.

Any comments that management makes today may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and based on information and data that is currently available. However, the actual performance may differ due to various factors duly cited in the Safe Harbor statement in the press release and we ask that you refer to it for guidance.

And with that, I'll turn the call over to Mr. Jaime Rivera for his presentation. Please go ahead, Jaime.

Thank you, Pete and good morning, ladies and gentlemen. As always, we thank you for your valuable time and for your interest in Bladex. As you might remember, I normally find our year-end call especially rewarding. It gives us a chance to talk about the bank's performance from the perspective of an entire year's worth of work.

But today's year-end call is particularly relevant because of the implications of the environment we're facing and because of the accounting entries related to the fourth quarter. So, it is mostly around these subjects that we have tailored our comments and around which we will be glad to answer any of your questions.

As a simple general opening statement from my point of view, 2008 consisted of two distinct periods, before September 15th and after September 15th. Before September 15th, we carried on with the work that we have been successfully pursuing for the last three years, growing revenues, diversifying our business, improving efficiency, carefully deploying our capital, et cetera.

And then, came Lehman Brothers. The impact and the implications of the Lehman collapse on the international financial markets were apparent to us within 24 hours after the event. And this is what led me to state, if you remember during our conference on October 9th, that given the difficult circumstances in the industry, we would be playing different through year end.

Well, sometime around the second half of October, we reached a conclusion which at that time fell well outside conventional wisdom. We concluded that the deteriorating conditions in the banking industry as well as in the real economy in both the US and in Europe would hit Latin America sooner and harder than originally expected.

Having reached this conclusion, we immediately went about reducing risk levels in the bank through a couple of basic means. First, we preemptively and aggressively collected on what we thought were individual exposures or concentrations that could prove vulnerable in the context of a prolonged economic slowdown.

Now, as you might remember from our comments in October as well, banks and companies in our portfolio were generally carrying relatively little debt. And couple this -- actually, coupled with local liquidity levels then in October and November were still ample allowed us to collect nearly $1.2 billion of exposure in less than three months, a remarkable real-life demonstration of both the quality and the short-term nature of our portfolio.

But in addition to reducing credit risk, we also decided to strengthen our liquidity position. And that's part of our efforts geared around liquidity. And despite what at the time were quite difficult market conditions, we were able to lengthen the tenor of the repo financing in part of our securities portfolio. We think of this as one of the soundest steps taken within the context of our liquidity plan.

Still, accounting being what it is, the increased repo haircuts that were involved implied the need to account for these repos as outright sales, resulting in the non-cash charge to earnings that you see in our press release. This was a charge that, as explained in the text and as Jaime Celorio will review in a few minutes, had no impact on the economic value, cash flow, asset quality, or on any of the fundamentals of the bank. It was a charge that, given the changes that we have instituted in our funding methodology, should not reoccur.

So, accounting results notwithstanding, during the fourth quarter, we were actually quite pleased to achieve each and every one of our goals for the quarter. We strengthened liquidity. We reduced credit risk. We improved reserve coverage. And crucially, we preserved both asset quality and a very solid capitalization.

Now tactically, we believe that this is the combination that will be required of all successful financial institutions as we all confront the economic downturn. And we also believe that these proven principles to which Bladex, as you know, has always adhered and which were at times misinterpreted as I remember and sometimes even criticized as conservative have become the industry standard. It is unfortunate in our view that it should have taken such a major crisis for the argument to be settled.

But because we are in the business of running a prudent degree of risk, let me try to briefly summarize the main elements that I see working for and against us in the current environment. Working for us are diminished competition, widening intermediation margins, [steriling] client base, a proven ability to make credit calls, a solid capitalization, a flexible portfolio, and our asset management division's proven ability to do well under a variety of market conditions.

Working for us as well is our ownership structure. Jaime Celorio recently pointed out to me that large segments of the financial industry are converging towards some version of Bladex's own combination of government and private ownership, a feature that has always been one of our key strengths.

Except that, of course, in our case, the structure was the result of careful design rather than of unfortunate circumstances and that we've had by now more than [15] years to perfect the corporate governance that make the model work so seamlessly. We're also encouraged by what feels like the beginning of a gradual, still fragile, but nevertheless real improvement in funding conditions.

So now, a few words on the elements currently working against us, elements creating risk, that is. First and foremost, there is the uncertainty as to how long and just how deep the economic downturn will be and thus about the ultimate impact, timing, and cost of it all on our portfolio. Until the fog dissipates or the dust settles, we're managing this risk well by being specially selective in our credit disbursement, by keeping tenor short, collecting on selective exposure, and in addition, carrying higher-than-usual reserve and liquidity levels.

These measures have so far proven quite effective. But they have come at a cost. Still, as we said in October, we believe that this is no time to play hero. And quite frankly, we believe that we have probably been proven right in this assessment. So, we will continue to pay this cost until circumstances justify a change. In the meantime, all things being equal, we should be able to gradually begin shifting some cash balances to fund loan growth again.

The second risk element working against us is the impact of the deleveraging process under value of our securities portfolio. Although they have recovered timidly in the last few weeks, it is a fact that security prices have taken a beating since September.

Fortunately and again by design, we were well prepared for this risk. Our capital is so ample that, as you can see from our figures, we are quite comfortably able to carry the mark-to-market impact involved and can just easily afford to wait for as long as it takes for prices to recover. Until then, we will continue realizing intermediation spreads on what are high-quality instruments.

Before passing it onto Jaime Celorio, I'd like to make a few simple -- very simple -- remarks about the strategic implications for Bladex of these interesting times. We're still trying to figure out what the new shape of the financial industry will be once this crisis is all over. And quite frankly, we still don't have an answer.

But we do know this. First, by definition, the new industry will belong to those still standing at the end of the crisis, Bladex crucially among them. Second, we know that we will find ourselves in a privileged position. We will be left as the only regional trade finance franchise in Latin America, well capitalized, liquid, and able to choose among the options made available in the context of the new economy that will eventually emerge once the excesses of the old one has been shed. I know it is hard to think strategically these days. But from this perspective, we are very, very well positioned.

So with this, ladies and gentlemen, I will ask Mr. Jaime Celorio to throw some light on the figures for the year and on the accounting entries for the fourth quarter. After Jaime's finished, we'll be glad to take up your questions. Jaime, please?

Thank you, Jaime. Good morning, everyone. Thank you for taking the time to hear about our annual and quarterly results of 2008. I will explain the results for the fourth quarter in the context of an extreme volatile market environment, where we have seen unprecedented turbulence in the market and for the bank's main priority was to maintain strong liquidity, capitalization, and asset quality.

I will also be describing the 2008 annual results, where the bank was able to deliver three straight quarters of profitability. For the full year, net income was $55 million and where our traditional intermediation business through the commercial division performed well due to a significant increase in lending spreads and effective credit risk management. The treasury division suffered from the market dislocation. And the asset management business had a strong and steady performance during the full-year 2008.

Now, let me touch in detail about the performance and results of each business segment as well as the bank's credit quality and financial performance. Okay, let me start with the commercial division, where net operating income was $58 million, representing $16 million above 2007 or an increase of 37%. The main reason is due to the bank's ability to increase the spreads. The weighted average lending spreads on loan disbursements represented a significant increase. As of the end of 2007, there were 111 basis points versus 353 basis points as of the end of 2008.

There are three simple main reasons of the increase that I just mentioned, which are the following -- number one, less players in the region; number two, less availability of credit; and number three, applicable pricing due to the short-term nature of our portfolio.

During the last quarter and due to the difficult economic environment, the bank decided to collect loans in order to reduce concentration as well as reduce exposures to vulnerable sectors and clients. As a result, during the fourth quarter, the bank reduced by 21% its average loan balances versus the third quarter of 2008. Here, it's very important to mention that the first three quarters were so strong that the bank was still able to finish the year with an average loan balance increase of 10%.

The commercial portfolio continues to be short term and trade related in nature. $2 billion or 65% of the commercial portfolio matures during 2009. The breakdown of the portfolio as of December 2008 was 60% in corporate segments, 38% in banks, and only 2% insolvent. Also, trade finance represents 66%, while non-trade represents 34%.

As a result of the increase of lending spreads, net interest income as of December 2008 was $78 million, representing an increase of 21% from the $64 million as of December 2007. Contingencies during the end of 2008 were $444 million, a decrease of 19% versus the $550 million during the end of 2007 and an increase of $67 million versus the quarter. Nevertheless, fees and commissions were up by almost $2 million in 2008.

Let me take a minute here to discuss quality of our loan portfolio. The bank continues to have zero non-performing loans, as is the case since 2006. As Mr. Rivera just mentioned, because of concerns about the global economic environment affecting the region, the banks continue to be very selective about risk. As a consequence, as of the end of 2008, the allowance for credit losses were stronger at the levels of 2.8% compared to 2% during the previous quarter and 1.9% during the end of 2007.

Okay. So, that's it for the commercial division. Let me now turn to the treasury division, where I will explain the effect of market dislocation and exceptional volatility and movement in due course. Liquidity was the name of the game during the fourth quarter. The bank increased its liquidity balance as of the end of 2008 by $826 million versus $396 million during the end of 2007. This means that the bank more than doubled its liquidity balance.

The division had a net operating loss of $16 million in 2008 compared to a net income of $10 million in 2007. The 2008 results were driven by the application basically of US GAAP FAS 140, which basically considers the accounting for transfer and servicing of financial assets and distinguishments of liabilities.

These have a negative impact on P&L of $25 million. As well also, there was a positive effect in P&L for $12 million regarding the valuation of local funding cross-currency swaps based also in FAS 157, fair market value, especially in a particular volatile fourth quarter.

Okay. Let me start first and explain the repo transactions that were considered as sales for accounting purposes. What happened here is that certain securities based financial transactions, or repos, which is the way we normally call them, were executed with higher-than-usual haircuts. And you will say, well, what's higher than usual? We get this question. And we say, well, as of last year, we used to transact these ones in the (inaudible - technical difficulty). Those were basically the haircuts that we were using. And these ones were about normal level for accounting purposes. And these ones were between the levels of 18%, 20%, and 22%.

As a consequence, the accounting treatment of these repos was considered as a sale. It's important to mention that the bank fully expects to unwind the repos at maturity and repurchase the underlying bonds during the second half of March 2009. That means these are very short term, too.

Given the fact that the bank accounts for changes in the fair value of the securities portfolio and the corresponding interest rate swap hedges and considers unrealized gains and losses in the other comprehensive income account, the charge to P&L had no detrimental impact on the bank's US GAAP capital. And furthermore, non-cash nature of the accounting adjustments means that liquidity was also not affected.

Also, with the underlying securities current as to interest and principal, the bank's asset quality also remains unaffected. It's important to mention that the bank may reverse part of the accounted-related charge in future reporting periods if the bank has sold these securities at a gain or just through the maturity of the bonds. The year-end portfolios of securities available for sale totaled $608 million. And this represents a decrease of 21% from the third quarter of 2008 and an increase of 30% from the end of 2007.

At the end of the fourth quarter of 2008, the securities portfolio represented 17% of the bank's total credit portfolio and mainly consisted of Latin American securities, which by the way 82% of them were sovereign and state-owned risk in nature.

The mark-to-market effect of the available for sale portfolio, as we've been mentioning before, is recognized in the stockholders' equity account, through the OCI account, or the other comprehensive income account. The balance as of the end of 2008 was $72 million versus $10 million during the prior year. And as Mr. Rivera mentioned, the bank has a strong capitalization in order to comfortably carry the mark-to-market effect.

Finally, let me talk about the funding, where our sources continue to be well diversified as of the end of 2008 by having 32% in deposits, 13% in repos, 21% in short-term borrowings. And the rest [32%], it's long long-term and debt borrowings.

The asset management division or BAM, which is the way we call the division, has a talented team of professionals that have been delivering solid results over the past two years, especially consider an unprecedented difficult market environment.

The net asset value of the fund as of the end of 2008 was $151 million and represents an increase of $23 million in comparison with the $128 million balance as of the end of 2007. That means that 2008 return was 12.2%. This fund was the fund of -- BAM was ranked number one by [record] hedge among the hedge funds with over $50 million in assets under management. As of December 31st, 2008, Bladex owned almost 97% of the fund.

One of the main objectives of the fund is capital preservation, while trading is strategy focused in three main aspects -- high liquidity, moderate volatility, and low leverage. And actually, as of December 31st, 2008, 90.8% of the fund's net assets under management were temporarily invested in cash.

Now, let me say a couple of things about operating expenses. Total operating expenses for 2008 were $40 million, representing $3 million above the full year of 2007, mainly due to the investment fund, write-off of an information technology application, as well as some increase in professional services. But on the other hand, offsetting the increase of these expenses that I just mentioned was a decrease of 33% in employee variable compensation. The bank is taking serious measures in order to adapt to the new economic reality. And therefore, last week, the bank reduced its headcount by 12%.

One last comment regarding the net interest margin -- the change by 1.55% as of the end of 2008 versus 1.73% a year ago mainly corresponds to lower interest rates as well as the cost of carrying a higher liquidity particular towards the end of the year.

Before I turn back the word to Mr. Rivera, I would like to emphasize that Bladex fundamentals as of the end of 2008 were solid. Tier 1 capital ratio was 20% versus 21% a year ago. ROE was 9% versus 12% a year ago and in spite of the extraordinary fourth quarter of 2008. Liquid assets in percentage of total assets represented 19% versus 8% a year ago. Non-performing loans continue to be zero. And the bank continues to have the same leverage of only 7.6 times versus 7.7 times a year ago.

With that said, let me turn over the word to Mr. Jaime Rivera for his closing remarks.

Thank you, Jaime. Ladies and gentlemen, we will be glad to take up your questions. Please go ahead. And let's have a conversation.

Okay. At this time, we will open the floor for questions. (Operator Instructions).

Our first question will come from Saul Martinez with J.P. Morgan.

Hi. Good morning, guys. Obviously, funding conditions deteriorated pretty significantly as you mentioned in the fourth quarter. And that played a big role in your drive to preserve liquidity in the quarter. Can you give us a little bit more color as to what liquidity or funding conditions are today?

I think, Jaime, you mentioned briefly that we were beginning to see funding conditions improve a little bit. Can you just give us a sense for what funding conditions are today, how they compare to November, December in terms of funding cost, availability of funding, and what's going on in the inner bank market, with multiple private-sector banks and central banks in the region who are also provide funding for you?

Sure. And thanks for asking the questions, Saul. But it's a timely question because as it turns out, it was only three or four days ago that our treasury team completed a round of both depositors and banks precisely to get a better read for what liquidity conditions we might or we can expect during the coming week. In summary terms, let me see if I can try to summarize it for you. If I don't do so well, I'll be able to take up a follow-up question.

From the perspective of our deposits, as we stated in the press release, they have stabilized. Most the withdrawals that took place took place within a context of interbank funding that suddenly in some cases disappeared, in some other cases dramatically decreased. That process in the case of most of our depositors has now stabilized. We don't see our deposit base continuing to shrink. And in fact, it's been gradually, gradually increasing.

On the interbank market, the change has been most noticeably in that beginning really only in the last three weeks, we have seen correspondents start to increase their facilities to us for the first time really since September. They had been basically stable or had decreased in the aftermath of the Lehman Brothers affair. And our people came back from their trips to New York encouraged because they found more money than we thought possible.

It's coming in slowly and gradually because banks in general are all doing the same thing as we are. We're slowly converting liquidity into loans. And that's what our interbank funding is for them. In general, again, we are starting to see some selective increases in the lines of credit. And we think this is probably what's going to fund our growth over the next two or three months.

Regarding funding costs, they have stabilized. As you can imagine and as stated in the press release, they're quite a bit higher than they were before September 15. It doesn't particularly concern us because we have been more than able to pass on the increased cost to our clients on the asset side. And we're not concerned about the absolute levels of interest rates because the base rate LIBOR is very low. So, the financial impact on our clients of having to pay increased financing costs is not yet a problem.

So, that's what I think I can say in general. If you want more color, go ahead and ask. I'll try to provide it.

No, that's very helpful, Jaime. I guess the one follow-up question I would have is whether you've had any change in the composition of your funding in the quarter and in the first part of this year between central banks and also between private-sector correspondent banks.

Nothing significant. Nothing significant.

Okay. What proportion of your funding can you remind me comes from central banks in the region?

We're not allowed to --

Okay. Got it.

-- disclose what is central bank. But the deposits are, like we outlined in the press release, at about $1.1 billion and slowly increasing.

Got it. Great. Thanks.

And by the way, this is a combination of central banks and some private banks as well.

Got it. Thank you.

Sure.

Okay. Our next question will come from Mario Pierry with Deutsche Bank.

Hi. Good morning. I have two questions actually. The first one -- as you highlighted, you have been reducing your credit exposure quite a bit in the last quarter. But I wanted to get more color on this. What sectors are you more concerned about? What countries? We saw that in Peru there was a big reduction in your loan portfolio to Peru, more so than in other countries that would think would be higher risk at the moment. So, just wanted to know your views on those countries and your views on what sectors concerned you the most.

And also, with the loan portfolio, part of the reduction clearly is the bank's efforts to reduce exposure. But can you give us some color on what kind of demand are you seeing for your products right now, given this uncertain environment? And what kind of growth can we expect out of the bank in '09? Thank you.

Sure, Mario and good morning. I will answer the last question you asked first. As you probably know, one of the problems that Latin America as a whole is facing is the lack of a trade finance facility. So from that perspective, we're in a privileged position. We are one of the few players still active in a market that has as of late or since September diminished in size by more -- by proportionately more -- than the decrease that we have seen in trade flows. And this is why we've seen central banks in Brazil and in other countries having to provide trade finance to try to fill the void left by the many banks that have left the region.

So from that perspective, credit demand for our product is not a problem. What is a problem or is an issue that we have to manage very carefully is the quality of the credit demand. We now have to and we are expending more time doing credit analysis to make sure that companies we disburse to will be able to survive what we believe is still going to be a worsening economic downturn over the next three to six months before it stabilizes. So, that's in general terms the answer to your latter question or to your last question.

Regarding industries, our concern in the last quarter of the year extended principally -- and this should come as no surprise to anybody -- to companies involved in commodities in general. Commodity prices came down in some cases by as much as 50%. And that put pressure on the margins of many of the companies.

The effect was not equal, was not the same on every company. Even if they were in the same industry, because depending on the country where they were and the exchange rate and the leverage that they had on September 15, some of them were able to absorb the decreased prices quite easily. Some others were not. Those that were not were the ones that we were concerned about and we collected on.

In Peru and in other countries, we're also concerned about the mining industry. You know, I'm sure, what has happened to the price of metals in general and what used to be a great, nearly fail-safe business even six months ago is now good business only for those companies that are extremely efficient and know how to run their operations very well. And that explains the reduction in some of the countries like Peru. And by the way, in Brazil, it was also a country where we reduced our exposure -- again, mining sector, commodities, [shell mack].

Regarding countries, it's a difficult statement to make in general terms. But clearly, the region that we see as the most fragile from the perspective of its ability to face the economic downturn, it's in general Central America and the Caribbean. That's the bad news.

The good news is that we have seen in the last two or three weeks that institutions like the IBB and others have been pumping money into the region. And because these economies are relatively slow, the amount of money that they are receiving might very well allow them to weather the storm easier than we thought. If so, we will come back and start working or increase our exposure in those countries as well. But again, it was generally the smaller countries in Latin America and the Caribbean, which from a country perspective we're most concerned about.

Any other -- any part of your question that I left unanswered?

No, no. I think it was very clear. But let me ask you then I guess as a follow-up, when we look at your income statement, we see there was a reversal for provisions of almost $15 million. Then, if you can explain to us how did this arise? And I thought that the reversals of provisions were pretty much done, so just wanted to get more color on that.

Mario, let me -- the question has come up in previous conferences. We manage provisions from an overall credit portfolio point of view. So, when you look at our provisions, you ought to look at what happens in two lines -- in the loan loss reserve, which is in the asset side, and in the provision against contingencies. That is letters of credit and the like, which is on the liability side.

We consider trade finance -- in fact because this is what happens -- trade finance consists both of loans and letters of credit. And in fact, most often, letters of credit become loans. So, if you look at it from that point of view, which is in business terms the way we look at it, provisions actually remain the same. In the face of a lower credit portfolio, coverage increased.

Okay. So basically, they pretty much offset each other here.

That's correct.

Okay.

That's correct. Again, letters of credit that became loans or new loans that refinance letters of credit.

Okay. Thank you very much.

Sure.

Okay. Our next question will come from Jeremy Hellman with Singular Research.

Hi. Good morning, everybody. So, just to make sure I followed up that prior question, that if I go a couple more lines down, that 13.83 is the offsetting amount that you're speaking of, correct, Jaime?

That is correct, yes.

Okay. That's what I thought. And following up on a couple of the prior callers' questions, I thought he was asking -- and it was a question I had in mind, too -- is looking at the 2009, do you expect growth in the portfolio over the course of the year? When we fast forward a year from now, do you expect that credit portfolio to be larger than it is today? Or is it going to decline maybe in the first half and then see some recovery in the second half to get us back to flat? Can you give us any guidance there?

Yes, I would be glad to. And let me open up my statement by saying the amount of uncertainty to whatever I say is quite large because of an environment that is still playing out. But my general feel is that the portfolio should probably have reached its lowest point. We will continue collecting on some exposures that we're still concerned about.

But on the whole, if conditions remain relatively stable where they are -- all we need is for them not to become much worse, liquidity conditions -- we will slowly start shifting some of our cash balances and funding new loans. Again, we do have a lot of demand. Some of that demand is of sufficient quality that we can actually meet it and fuel asset growth again.

How quickly it will happen, I will be able to tell you with much more certainty next time we meet because it depends, firstly, on what the credit environment does in the region. And that will determine how much money we will want to shell out and also what interbank funding and general liquidity conditions are like. To the extent that we feel comfortable with liquidity risk remaining relatively stable, we will be able to press more on the accelerator and fund more loans. So, that's my general answer. I would hope that we have seen the nadir of the portfolio reduction process.

Okay. You also noted earlier that central banks in the region have been active in providing credit. Looking at them as shareholders of Bladex, do you get any increase in push from them saying you guys need to disburse more money into the markets? Or do they just disengage from prodding you at all?

There is a constant contact with central banks. But the way that they support us is through the deposits. So generally, what has happened -- and this has been the case with a couple of countries that reduced their deposit balances significantly during the last part of the year -- they came to us and said, look, Bladex, I would like you to please try to continue supporting my companies and my bank.

And we said, look, we'll be glad to take a look at it under two conditions -- firstly, that we find creditworthy borrowers; and secondly, that you place some or that you replace some of the deposits that you took from us. And they did so.

So traditionally, our central bank shareholders express support, express their requirements verbally, and we ask them to -- in exchange for our support, we ask for additional balances. But they have absolute -- deposit balances -- but they have absolutely no say in our credit process, which it's a long established tradition on the part of the company and one of the reasons we think why we have been able to do such a good job at it.

Okay. Thanks. A couple more, and then I'll jump out. In talking to your portfolio companies, borrowers, are you getting any sense of guarded optimism that the US stimulus is going to provide any sort of catalyst for their businesses?

In general, no. I have to be quite frankly. In general, 50% of the trade of Latin America is directly related to the United States. The United States is the region's main partner. Demand in the United States is down. It's still falling. Most companies believe that that process will continue. So, the volumes for most companies are coming down.

From the perspective of our business, the fact that the financing available to those companies has come down significantly continues to offer a great business opportunity for us because we can come in and fill the void of a smaller business with higher spreads. And in the end, our portfolio benefits.

Okay. One last one from me, and then I'll jump out. The hedge fund, if I'm following correctly, you guys were almost all in cash at the end of the quarter. And that was the case a quarter ago as well. What -- where -- Within the quarter, what was the general composition? Were you heavily in cash all quarter? Or were you well invested at a point and then brought it back down at the end of the quarter?

In general, I would say that it's probably the latter. The guys running the portfolio react very quickly to changes. So, there are some periods when we're heavily invested for a few days. And there might be other periods we've been disinvested for as much as a few weeks. And of course, in the fourth quarter, the situation being what it was, until the fog clears, the guys decided to stay out of the market more than what they usually do.

But in general terms, again, they make use of volatility. And they're quite good at it. They will be all out for a couple of days and then realize the gains come back into cash until they see the next opportunity. They will jump back in and do the same thing. The fund has a limit to make sure that exposures remain relatively or well constrained within our ability to take risks. So, if you see historically when things haven't done well at the fund, it hasn't really impacted our bottom line. And when it does go well, as it generally does, it makes a good difference for us.

Okay. Thanks, guys.

Sure.

Okay. (Operator Instructions) Our next question will come from [Murray Spendvelly] with UBS.

Good morning. A simple question, would you care to make any public comment about your dividend?

Yes, of course. Of course. My statement is the same I always make. We stand on our record. On our record of the last more than half a dozen years clearly shows that Bladex has tended to increase its dividend as soon as or soon after an increase in operating earnings becomes established. The last time we decreased the dividend was 2002, when for very good reasons -- we had a problem in Argentina -- we had to cut it.

We just paid -- and this is also a [close-out] statement from my point of view -- we just paid the dividend corresponding to the fourth quarter. So, that should give you an indication of how confident we feel as to the remainder of the year.

Let's see how this quarter goes. We'll have a better view of what's going on. We had a good January. We'll review our performance, as we do every quarter, and let you know accordingly. If we can keep up -- our preference, of course, would be to keep up and even increase the dividend. But if the environment moves against us as a result of what's going on internationally, it will behoove us to act accordingly.

I know it's not a clear answer. But quite frankly, given the uncertainties that prevail in the market, the level of uncertainty is such that I cannot be more specific than that. We paid a fourth quarter dividend. We did so quite comfortably. We did well in January. Let's see what happens in the rest of what is shaping out to be a quite uncertain year.

Well, I would just say I appreciate that. I know on the last call when the earnings were really high, you elected not to increase it, which I think is the right thing, given the storm we saw coming. And I'm sure the shareholders will be very happy to hear that because obviously you have the alternative of buying stock below book value as well, which has got to be very appealing to you. So, maintaining some income in this environment will make stockholders feel much more comfortable I can assure you. Thank you.

No, thank you. And by the way, I think that over time we have established a base of shareholders that, for lack of a better word, share a common view with management. They know what we do. They know how we do it. And so, your expectations reflect the expectations of most of our shareholders.

We tend to do or we try to do the right thing. And when we move, we like to move based on solid foundations. We don't like or we don't view volatility in our dividend as something that's variable. If we increase it, we like to keep it there. And therefore, before increasing, we think about it carefully.

Just pass on another thought from the shareholder perspective up here in Boston, it is very refreshing to talk or listen to some bankers that just paid attention to their old-fashioned knitting and seem to be in a very good position, given what has gone on around the world. So, we appreciate your conservatism and common-sense approach to this. Thank you.

And we appreciate your comment, yes. We actually feel, for lack of a better word, that it's not something that we like to boast about. But to an extent, we do feel vindicated in what has been our approach and we have reaffirmed it and --

Absolutely, no question about it. Absolutely. Thank you.

Thank you.

Okay. Our next question will come from Arthur Burns with Deltec Asset Management.

Jaime, two questions, which I hope will be brief -- but what percentage of your loan portfolio is trade finance?

66%. That was brief.

Okay. What is the rest of it?

The rest of it corresponds mostly to loans that are -- to companies that are involved in trade. They're mostly companies involved in trade but transactions that are not documented as trade finance. Our definition of trade finance is that there has to be a dollar of trade backing up every single dollar that we consider trade and report as such.

Okay. But this non-trade portion, which is a third roughly, is this something new? Or is this something you've always done?

It's always. We have always done. If you -- the difference is that starting six years ago, we have done so only or mostly with companies involved in trade. If you take a look at our guidance over the last -- certainly the last two years -- we have stated quite clearly that our intention is to keep the proportion between the trade and the non-trade exposure in the portfolio at somewhere between 60% and 70%.

Okay. But even the non-trade is trade?

Even the non-trade -- most of it is to companies involved in trade.

Okay. Second question, the $25 million non-cash write-off that you had to take because of the extended repo period, when you repurchased those assets, does that $25 million get reversed? Or does it get reversed only to the extent that the price when you repo it is relative to what your original cost was?

It's a variation of the latter. When the repos mature and we repurchase the securities, we will realize gains to the extent that we decide to sell those securities at above the price that we will be buying them back at. So, it depends on -- we might be able to recover some of it immediately. We might choose to keep it in portfolio. But it's not an automatic thing. It doesn't get reversed when the repos mature. It only gets reversed if we can sell it at a gain or eventually when these things mature.

If you marked it to market now, are you worse than the $25 million or better than the $25 million?

Slightly better.

Okay. Thank you very much, sir.

Sure.

Right.

Okay. Our next question will come from [Barry Linhoff] with Ironworks Capital.

Thanks. You answered my questions. Thank you very much.

Okay. (Operator Instructions).

Our next question will come from [Anham Branworg] with Porter.

Hi, Jaime. How are you?

Hi, Anham. How are you?

Good, good, good. Jaime, I had a question on the splits. And we discussed this briefly on the last call also. So I mean, your spreads were 2.07 last quarter. Now, they've gone up 3.53. That's wonderful. And it's good to know that you are one of the few people standing. But how long can the businesses who are taking loans with you at these prices afford to continue taking those loans?

It's a good question. And I referred to it during my opening comments in very general terms. I will now try to go into it in a bit more detail. As long as interest rates remain low -- and by that I mean LIBOR and fed funds -- we can afford to place a very large spread on top of that very low base. And the nominal rate will still be relatively affordable by our clients.

If a couple of years from now interest rates should start to rise and LIBOR and/or the fed funds rate starts going 4%, 5%, 6%, 7%, then the result will be that you add 3% or 4% to a 6% base, now you have a client having to pay 9% rather than 3% or 4% as they do today. And that might represent a problem.

But right now, the financing cost is not a driving element in any company's health, not in Latin America. The driving element to their financial health is in general the degree of leverage and the prices for the products that they're selling, international commodity price.

Okay. Thank you. That's very helpful.

Sure.

Okay. Our next question will come from [Jose Restropo] with [Interposte]. Mr. Restropo?

Okay. Gentlemen, there are no further questions in the queue at this time. So, I'll turn things over back to you for closing remarks.

Well, ladies and gentlemen, it's mid-February already. And as I hope we have been able to convey, we face an uncertain environment. But we do so from a position of real strength. In very practical terms, we are confident of our ability to make the most out of opportunities that we know we haven't yet identified and we know will arise. And we're equally confident of our ability to manage the obstacles and problems that might and probably will arise along the way. Most importantly -- and I'd like to make this point again -- the current environment is highlighting and enhancing Bladex's strategic value.

So in closing, let me thank you again for your time, wish you the best. And we'll see each other or we'll talk to each other in April when we discuss the results of what we hope will be a good first quarter. Thank you very much and until then.

This concludes our teleconference. You may now disconnect your lines.