Foreign Trade Bank of Latin America Inc (BLX) 2011 Q2 法說會逐字稿

Good day, everyone. Welcome to the Bladex conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Ms. Melanie Carpenter. Ma'am, you may begin the conference.

Thank you, Operator. Hello everyone, and thank you for joining us for the Bladex Second Quarter 2011 Conference Call. Today is July 2nd2 of 2011. This call is for investors and analysts only. And, if you're a member of the media, we ask that you please listen only. If you need an interview or have any questions, please follow up with us after the call.

Joining us today are Mr. Mr. Jaime Rivera, Chief Executive Officer, and Mr. Christopher Schech, Chief Financial Officer. Their comments will be based on the earnings release issued yesterday. A copy of the long version is available on the website at Bladex.com.

Any comments that they make may include forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Their comments are based on information and data that is currently available. However, the actual performance may differ due to various factors and these are cited in the Safe Harbor in the press release. And, with that, it's my pleasure to turn the call over to Mr. Jaime Rivera for his presentation. Please go ahead, Jaime.

Thank you, Melanie. And, good morning ladies and gentleman. And, thank you for your interest in Bladex and for joining us once more in our quarterly conference call. In order to make the most efficient use of your time, once I finish a few introductory comments, Mr. Schech will dwell into the financial details of the second quarter. And, after that, we will additionally be happy to take up your questions.

So, let me start, if I may, by saying a few general words about the second quarter. For reasons that Christopher will explain, the financial results were solid. But, beyond that, and as I said in our press release, I'm happy because it is, I believe, compelling proof of the soundness of our strategy first. And, just as importantly, of our ability to execute on it.

So, let me stop for a second and rephrase our strategic case, as we have described it before. Let's see, Latin America is growing at a rate predicted to exceed 4.6% or so this year. Most importantly, for our purposes, however, the sound macroeconomics of the region, alone with its generally expanding internal market, and the increasing strategic importance of its export, means that this economic growth is likely to be sustainable and the key word is just that, sustainable.

The region's trade flows therefore, are likely to also continue growing, as they have historically at a rate of three to four times the underlying expansion of the region as a whole. And, what does this scenario mean for Bladex and its business proposition?

Well, for one, Bladex is the most Latin American of banks. We know this growing region very well, and we are supported by 23 governments in Latin America. But, we're also the most international of Latin American banks. Which means, that we have units and clients from Monterrey in the north to Santiago in the south and, from Rio in the Atlantic to Guayaquil on the Pacific.

So, we are, quite objectively, very well positioned to take advantage of the region's growth. But, the clinking element in our business proposition is, I think, our focus on trade, who's rapid expansion provides the fire that fuels our revenue growth. And, that, in a nutshell, and beyond the details beyond the numbers is why we're doing so well.

A solid marketing, a solid market, strong positioning, strong expertise, all backed by our solid financial. Admittedly, we still have some work to do in order to fully exploit the benefit of the business model. More specifically, we think we need to continue to do four things well during the next couple of years.

First, we need to continue to leverage the balance sheet and deploy our capital efficiently. In this, I will let the numbers speak for themselves. I think that the 47% year-on-year growth in our commercial portfolio should leave no doubt as to our ability to leverage the bank. Secondly, we need to grow while maintaining -- or, rather, making sure to retain our solid credit quality indicators.

In this, it's important to remember that we're helped by our concentration on trade finance. A business that is inherently less risky than others, and one that we know very well. The numbers and the tendencies in zero accrual and past due loans that you see in the press release, support our proposition that growing with quality is also something that we know how to do very well.

And, the third thing that we need to do well is to maintain or hopefully improve our operating efficiency levels. And, here, even in spite of the two year investment program that we have been engaged in to expand our footprint, efficiency ratios have, generally, remained in the 30's, and we'll improve as business volumes continues to pick up based on the new infrastructure that we have put on the ground.

And, finally, the fourth thing that we need to do well is to increase fee revenue, a point which has, admittedly, been a weakness in the last couple of quarters. But, we have identified and recognized that thought, and are taking measures to correct. Fee generation is, as you know, and as our track records indicates, something that we know how to do.

So, these are the four steps, which are the drivers of what we need to do to increase the scale of a bank, reach out to more clients, increase revenues, and, ultimately, reach our goal of a strengthened, stable, ROE. And, thus, significantly increased, or, rather, achieved, significantly increasing higher and higher valuations for the bank.

So, next, let me say a word or two about the performance of the fund this quarter, because from past experience, I, kind of, suspect that this might be of some importance to some of you. Clearly, the fund had an excellent quarter, and that's great. But, for us, it's great not only because of the results themselves, but also because they contribute to rebuilding the funds' track record to, again, track the third party investors and generate management fees.

Christopher, in a few minutes, will provide you with more color on the funds' quarterly performance. But, in summary, the success came down to making the right calls on Latin American currencies, interest rates, and sovereign debt yields. Along these lines, please keep in mind that Bladex and the fund,are experts in Latin America and it's not surprising at all that whenever all of our market calls turn out right, the fund should have a very good quarter.

I bring to mind however, that our corporate objective regarding the fund remains to continue growing the rest of the business and gradually reducing our exposure to the fund. So, that it's contribution, the funds' contribution, that is, to our overall income statement remains fairly attractive, but less significant and more fee based.

And, finally, as far as our work during the rest of the year is concerned, I think it will come down to, in the very good sense of the word, to more of the same. Quality growth, credit quality control, a focus on efficiency, and more fee generation.

Now, I know that, in fact, we all know that, because of a number of reasons extraneous to Latin America, some experts are speaking of the possibility of some sort of slow down internationally. Now, I can tell you that we haven't felt any such slow down in our business. And, that we are, in fact, expecting a reasonably strong second half in the year in the region.

This, in turn, makes us feel confident and relatively at ease in our ability to grow at rates sufficiently robust to support our strategy and regional goals that I've just described. And, with these very general comments, ladies and gentleman, I will turn things over to Christopher, for him to take us to the details of the quarter. And, we can then take up your specific questions as to either the quarter's performance or our way going forward. Christopher, please.

Thank you, Jaime. Hello, and good morning, everyone. Thank you for joining us on the call today. In discussing our second quarter results, I will focus on the main aspects that have impacted our results, and I will put them in context with the previous quarter, as well as the same quarter of 2010.

A year ago, our core business was in the process of taking the initial steps to benefit from the growth in trade anticipated for the region. Now, a year later, we have a commercial division that has grown significantly, and which is in full expansion mode across all client segments, driving scale and stable revenue growth. To compliment that, the asset management unit had a remarkable performance this quarter, as the investment fund had one of its best quarters since inception.

The treasury division saw more movement in its securities portfolios this quarter, with beneficial impact on results. And, continued successfully with its key objectives of maintaining safe liquidity levels, and obtaining competitive funding to support our asset growth.

Our margins and spreads strengthen even as Interbank base rates weakened in the quarter. Our portfolio continues to benefit from the favorable growth and credit quality trends in the region, as reflected in our stable non-performing loan trends and reserved requirement levels.

And, our expenses, while showing quarterly and annual increases on the basis of the investments in the front end activities that we have made so far, they still remain well under control, as revenue growth rates exceed the rate of expense growth, as a result of a highly scalable infrastructure of systems and processes.

After 18 months of investment, we're close to reaching the regional footprint and workforce bench strength we have deemed necessary to achieve our mid-term growth and return targets. So, the second quarter of 2011 closed with net income of $25.7 million, up 58% compared to $16.3 million in the previous quarter, and up $24 million versus the second quarter of 2010.

So, let's go into more details regarding the performance and results of each business segment before discussing other aspects of the bank's financial performance. Let's start as is usual with the commercial division, where net income was $13.3 million in the second quarter, compared to a $13.6 million in the first quarter of 2011 and compared to $30.9 million in the second quarter of 2010.

The quarterly variance in the net result was impacted mainly by interest income growth from higher average portfolio balances, partially offset by the effects on expenses of what we view as the final stages of our investment program, as we have now achieved most of the infrastructure needed to support origination and asset growth over the next couple of years.

The change in the provision for loan lost line also had an impact this quarter, as portfolio balances grew. Compared to a year ago, the drivers of the variance in net income were similar. However, with the stronger impact on provisions as the commercial portfolio experienced year-on-year growth of 47%, as Jaime already mentioned.

Net operating income, and by that we mean net income before provisions for loan losses, was stable quarter-on-quarter, as higher net interest income derived from a growing commercial portfolio base were offset by lower commission income and higher expenses.

The commission income derives mainly from letters of credit transactions, showed a small decrease compared to the previous quarter, along with the underlying average contingency portfolio balances that drive these commissions.

As Jaime already mentioned, we have directed more efforts and resources into growing our commission income base and we believe that the letters of credit business, while not necessarily matching the scale of growth of our loan book, we'll resume growth over the next few quarters with commensurate impact on the commission income line. And, that is together with other fee-based revenues that we are pursuing.

Compared to the second quarter of 2010, net operating income improved by 7% mainly from net interest income growth. Average commercial portfolio balances, including acceptances and contingencies, grew 6% in the second quarter of 2011, while period end portfolio balances reached $5.2 billion, which, is a 10% increase over the previous quarter. And, a 47% increase above the levels at the end of the second quarter of 2010. We see this as evidence of the traction of our regional expansion and client segment penetration plans.

Credit disbursements reached $3.2 billion in the second quarter, up 41% versus the previous quarter, and up twice the level of the second quarter of 2010. This is a level of origination that we have not seen in many years in this company.

Demand from large corporations and financial institutions continues to be strong, and origination growth in our new and middle market segment, in terms of loan balances and number of clients, accelerated as we have consolidated the local teams in our new representative offices, and which are now fully positioned to ramp up activities there.

Average lending spreads improved slightly this quarter as the portfolio mix remained biased towards large banks and corporations in the region. We talked about already about the average US dollar Interbank market rates, our base rates, which continue to soften this quarter. In our loan book, this effect was partially compensated by achieving higher average margins, as we made progress in winning clients from the middle market segment, which commands higher margins.

The commercial portfolio remains short term and trade related in nature. 71% of the portfolio will material within one year, and 62% of the portfolio is trade finance, while the remainder represents lending to banks and exporters. He continued to maintain a diversified mix of country exposures that enhances the risk profile of our portfolio and, on the scores, the relevance of our ability to support companies and banks nearly anywhere in the region.

57% of the commercial portfolio is in favor of corporations and sovereigns, 43% is lending to financial institutions. Outside the financial services sector, our exposure to industry sectors in the region is well diversified, with strategic focus on those sectors, while Latin America has distinct competitive advances, which is what we discussed amply before.

The portfolio risk profile remains very solid, as the totality non-performing loans remains stable at $29 million, continuing their downward trend in relative terms compared to the size of the loan portfolio. The amount of loans in non-accrual status amounted to 0.6% of our loan portfolio at the end of the second quarter of 2011, down from 0.7% the previous quarter, and down from 1.5% a year ago.

At the end of the second quarter, one million in loans were actually passed through more than 90 days, which is the same level as in the previous quarter, while the rest of the non-accruing loans showed payment behavior, which was in-line with the workout term.

As mentioned before, the reduced reserved requirements on the basis of improvements in both country and client risk levels are mitigating the credit costs of our portfolio growth. We also said that we should nevertheless expect to see provision increases going forward, as reserves start to keep pace with portfolio growth. And, that is what has been happening here to date, even though the P&L effect has been relatively modest so far.

Now, let me move on to the treasury division, which posted the quarterly gain of $1.1 million in the second quarter. As we had increased turnover now in our securities portfolio, and proceeded to realize gains of sale in the process, the market to market effects on the available for sale portfolio and related hedging instruments were the main factors driving a quarterly improvement of unrealized losses recorded in the other comprehensive income account which, stood at $3 million at the end of the second quarter, down from $4 million last quarter, and down from $11 million a year ago, at a time when markets were more severely affected by sovereign debt fears.

The securities portfolios continue to consist of very high quality in liquid Latin American securities. 75% of the securities portfolios represent the sovereign or state-owned risk. We continued to manage liquidity levels conservatively, to ensure that they remained comfortable, given the current market condition.

On the funding side, the division continues to manage an effective mix in our diversified funding portfolio, as average weighted funding costs were down 1 basis point versus the first quarter of this year and, down 18 basis points versus the same quarter of a year ago. Net interest spreads widened 4 basis points versus the previous quarter, and by 18 basis points year-on-year.

Deposits are an important factors in our funding mix, helping reduce overall funding costs and offsetting the cost of increased amount of medium term funding. At the end of the second quarter, there were $2.1 billion in deposits, another record level of 9% versus the previous quarter, and up 38% compared to a year ago.

The deposit increases primarily came from our central bank shareholders and other regional banks. We also continued to diversify our tenure structure this quarter, expanding our medium term liability portfolio with another global loans indication.

Now, let's talk about our asset management unit, which had a very good quarter, as mentioned by Jaime, contributing a net gain of $11.3 million in the second quarter, compared to a gain of $3.6 million in the previous quarter. And, a $9.4 million loss a year ago.

This quarter's result benefited from a very strong trading result in the investment fund, where investment strategy adjustments implemented early in the year continues to bear fruit. As a general capital and debt markets environment has not changed significantly from a year ago. And, by that, I mean in terms of market volatility and risk on, risk off patterns.

The lessons learned from last year's performance are still very relevant in today's environment. These lessons have mainly been applied in the following areas. One, the ability to reduce the impacts of market volatility from outside the region using market hedges. Secondly, the position of the funds' trading approach to benefit from short term, so liquidating transactions that have proved less susceptible to price fluctuations and, thirdly, the implementation of option strategies to limit the downside of the positions.

This quarter's profits were mainly derived from the following elements. The first element was a long position in a basket of Latin American currencies against G3 currencies. Secondly, correctly predicting, as Jaime mentioned, the central bank policies in some of the leading countries in the region, with respect to interest rates. And, thirdly, maintaining short term credit positions in select sovereign paper.

The fund remains focused on Pan LatAm regions. In no positions, except the hedges that we alluded to already, pertained to other regions. The rebuilding of its track record is a very important basis for the fund to win back the third party investors who have left over the course of the last few quarters, and to attract new investors. This remains our main strategic goal for this business.

Great progress has been made so far in that regard, as evidenced by the numbers, which contrast favorably with the rest of the industry. And, as these efforts gain traction, we will ramp up our marketing activities. Meanwhile, the bank has redeemed $50 million in this quarter in line with the decision, announced a couple of quarters ago, in order to reduce our relative exposure to the fund.

Moving on from our segment review, let me give you a brief summary of other financial highlights of the bank's performance in the second quarter of 2011.

Net interest margin rose 3 basis points to 175 basis points in the second quarter, up 8 basis points versus a year ago. Despite the fact that average Interbank interest rates were, again, lower this quarter. I already mentioned the mitigating effects of increased average margins in our loan book. But, this was complemented, also, by higher average yields in our investment portfolios and lower average margins paid on interest bearing liabilities on a funding side.

Net overall had a beneficial impact on both net interest spread and net interest margins. Operating expenses in the second quarter were up 22% compared to the previous quarter, mainly as the result of performance related expenses in the investment fund, and the effects of the final stages of our investment in the banks workforce and regional footprint.

Our investment in front end resources, adding primarily sales executives and risk resources has lasted for a good 18 months so far. In this period, we have added four new representative offices that are up and running as we speak. We feel we now have mostly reached the plant workforce scale that should carry us through the next several quarters of sustained growth without the need for significant additions.

And, we will now place increasing emphasis on sales force effectiveness, as the new sales force ramp up their pipelines. Our investment has already paid off in significant portfolio growth, and the payback will, surely, increase going forward.

Before I hand it back to Jaime, just to comment on the bank's book value which increased to $19.73 a share. Leverage at the end of the second quarter, 2011, is 7.9 times up from 7.5 times in the previous quarter. And, up from 6.6 times in the second quarter of 2010. Tier 1 capital stands at a comfortable 18.1%. And, with that, I hand it back to Jaime for the Q&A session. Thank you very much.

Thank you, Christopher. Ladies and gentleman, we would be delighted to take up your questions, please.

Thank you. At this time, we will open the floor for questions. (Operator Instructions). Our first question comes from Tito Labarta from Deutsche Bank.

Hi, good morning, Jaime and Christopher. Thanks for the call. Just a couple of questions. I think, maybe, focus on the risks that you're taking. You know, in the investment fund, I know you spoke a little bit about, you know, how you're mitigating some of the risk.

But, I just want to, maybe, get a little bit more color, given the huge gain we saw this quarter, you know, what's to prevent another quarter from the one we saw last year, where you lose, like, $10 million in a quarter? Just, kind of, get a sense of the limits that you have and, maybe, if you can give more color on what's to prevent another quarter from happening like that again.

And, then, also, in terms of the risks that you're taking in the loan portfolio, particularly as you grow more in the middle market segment. Just, maybe, give some more color on how you're controlling that risk, and, you know, where NPLs can go as this segment becomes a larger portion of the portfolio? Thank you.

Tito, thanks for joining the call. Yes, I'll be glad to take up your questions and try to answer them. I'll take the latter question first, because it's been asked by a number of people. You know, what's going to happen to your risk as you grow the middle market section?

We are watching it very carefully. We are not more concerned about the risk in our middle market sector than we are concerned about the risk in our traditional banking or our corporate sector. We're just managing it differently.

Engaging in the middle market sector means, for instance, running much smaller tickets, means particularly making use of a specialized work force. We have hired people with long experiences in each of the countries where we're working with the sectors. It also means things like working with guarantees, to a much larger degree, than we do either in the corporate or in the financial sector.

It also means much closer follow-up of each individual transaction. It's a less efficient way of running a business that is intrinsically higher margin in nature. And, of course, lastly, of course, we run, in our reserve models, we allocate a higher reserve, reserve percentage, to the business of the middle market.

We've been at it, by the way, for a good year, and we were at it even before the 2008 crisis, although admittedly at a much smaller level. So far, our -- we have the same questions that you had, as we went into the market, but so far we have been pleasantly surprised as to how well it has progressed risk-wise.

You might have noticed that it has taken us longer to ramp it up and one of the reasons why it took us longer is because we wanted to make absolutely sure that we had all our ducks in line before pressing on the accelerator.

The last point to keep in mind is that more so, more so, than the rest of the portfolio, the middle market exposure is concentrated on trade finance, which as I said during our calls, the earlier part of the call, rather, it's inherently less risky. And that holds true not only for banks and corporations, but also for the middle market. So again, I would not worry about that segment any more than I would worry about the other two.

Regarding the fund, the business is what it is. It's a volatile business, one. Secondly, however, and this is hugely important, Christopher just alluded to the lessons of last year. You might remember that one of the problems that we had last year is that the impact of non -- of extraneous effects to Latin America were much larger than we had anticipated. The Greek crisis, et cetera, brought about or was reflected in the prices of Latin American currencies and securities, to a much larger degree than we had expected.

We learned the lesson and one of the things that we have done is made use of, like Christopher, again, said, much more in the way of hedging instruments, to make sure that the correlation between Latin America and non-Latin American risks is reduced and we have put on a number of options that limited the downside. So I will make two comments.

Firstly, the possibility, we have closed a number of the doors that would make a repetition of last year's performance likely. But secondly, let's just be clear, this is, by nature, a volatile business. We cannot guarantee that it will not -- something like that could not happen again. It is just a lot less likely than it was a year ago and not something that is worrying us unduly.

Thirdly, remember we continue -- we agreed and we announced a couple of quarters ago, that we would be reducing our exposure to the funds, by taking out our gains of $60 million to make the exposure to the fund, in relative and absolute terms, a smaller percentage of our balance sheet.

We are about one-third of the way into that reduction. By the end of the year, we will have completed it, so that simply by having less exposure to the funds, its impact on the overall book should be less. The overall book, by the way, by the end of the year, should be much larger. So the relationships between the potential impact of the fund and the revenue of the rest of the portfolio will have improved in our favor, making the overall volatility of the fund less of an issue on the P&L. Do I -- was that more or less what you wanted to hear? Do you want any more information?

No, no, that was very helpful. Thank you, Jaime.

Sure Tito.

Thank you. Our next question comes from Jeremy Hellman from Divine Capital Markets.

Hi. Good morning, gentlemen.

Jeremy, good morning.

I wanted to ask about the commercial portfolio distribution by country. And a couple of threads within that. Peru, for example, was down about 22% versus the prior quarter. Uruguay, you had -- you have some money on the table in the portfolio there, where you really haven't had anything in the past. So I wanted to ask, just country-by-country, if there's anything specific that you don't like in Peru and do like in Uruguay or if it's just opportunity-by-opportunity? And then a second question regarding Venezuela, obviously, with President Chavez being sick, what are your kind of thoughts around Venezuela, long term?

Jeremy, the ups and downs in the overwhelming majority of our country are simply related to opportunity-by-opportunity deals that were closed before the end of the quarter, in some countries, deals that you will materialize this quarter.

We are very much in favor of growing in Uruguay. That's one of our -- Uruguay is doing well, the macroeconomy is improving, our penetration is improving. For a long time, we were absent from Uruguay. The country is now starting to export more and we have rekindled some of our older relationships. You will see balances continue to increase in Uruguay.

The exact same thing will happen in Peru. This quarter, it just so happens, that a couple of -- some of the larger loans that we had to financial institutions matured and we haven't yet replaced them with some of the very attractive deals that we have in the market.

I'll give you a very clear example. We inaugurated, as the press release makes clear, we inaugurated a -- our representative office at the beginning of July and we used the opportunity to announce a very significant deal to one of the best corporates in Peru. The size is significant. Along with that, we have a rep office with a very good and strong pipeline.

You will see us grow in most of the countries in Latin America. Brazil included, although what we expect to see is that Brazil -- Brazil's participation in the portfolio will slowly decrease. Not because Brazil will not grow, but that other countries will continue to grow. So that's the question, that's the answer on countries as a whole.

And just one more comment that I would like to make, we are underweight in Mexico and we don't like that. For historical reasons, we took a bit longer and I think we have admitted to this, we took a bit longer than we should have in switching over our emphasis in Mexico from the banking to the corporate sector. We were about a year and a half too late in making the switch.

So we are bit behind in Mexico, in where we would like to be. Mexico is one of the countries where we're placing particular emphasis on that spend, and particularly relatively larger amounts of money in setting up a very strong sales force in there. You will see the relative importance of Mexico grow faster than other countries.

And lastly, on Venezuela, Venezuela is our shareholder. Venezuela has always treated us well, has always met its obligations. We know that President Chavez is having health problems and, like everybody, we wish him well. On the other hand, we recognize that the risk of the country is now at very uncertain.

So what we -- we will continue doing, until uncertainty diminishes, is helping the country import very strategic materials for them. The exposure that we have in Venezuela relates to letters of credit to import things like medicines, food and the like, which of course Venezuela is very careful about servicing.

Until the situation of the uncertainty diminishes, that is what we will continue doing in Venezuela. Does that more or less answer or did I provide you with sufficient color on the question?

Yes. Thank you very much. And it all -- as a general just response to that, when -- back to the first part of the question, would you characterize what's going on in the region, and if you kind of look at it against the backdrop of what's going on in Europe, where the European peripheral economies are essentially falling behind, it seems like quite the opposite's happening in Latin America, where some of the smaller economies are -- given Brazil, for example, as an anchor of the smaller economies, are getting brought forth. Is that a fair characterization?

That is a fair characterization, particularly in South America. The situation is somewhat different in Central America, the structure of the economy in Central America is somewhat different. They are not benefiting to the extent that countries in South America are, from the boom in commodity demand.

But even in Central America, as you will see and have seen, we're gaining traction and doing very good business. I expect, over the next year, however, the growth in South American and in Mexico -- South American countries and in Mexico, to probably outpace the growth in Central America and the Caribbean.

Okay. Thanks.

Thank you.

No, no, sure, Jeremy.

Thank you. (Operator Instructions). Our next question comes from Patrick Brennan from RBO Asset Management.

So, I have a couple. The first one, just in terms of the asset management business, when it gets down to sort of your $100 million target, as you go forward, over the next couple of years, are you going to -- what return do -- are you thinking about internally for the -- that asset management division? And specifically, when you think about things like the tail ratio and your dividend, are you going to be assuming a positive contribution going forward from the asset management division as you think about the appropriate pay-out ratio? Or are you only going to think about the earnings from your commercial -- essentially your commercial division, as you think about the dividend pay-out ratio?

Patrick, if you'll allow me, this is Christopher, I'd like to take your question. The answer to your first question is that in terms of internally expectations regarding the performance of the fund, we look at the historical track record of the fund, on a -- since inception. And we expect to be -- to -- we expect levels commensurate with the average annual return that this fund has achieved so far.

With the losses of last year, and certainly also including, going forward, the great performance year-to-date. So all in all this translates to a return expectation that hovers around 10%, could be, a year, 9%. It could be another year could be 11%. But that's really the internal target. And given the design of this fund, you should not expect outsized returns all the time. Nor should you expect outsized losses either. So this very in line with the design that went into the structure of the fund in the first place, we believe.

And secondly, in regards to the fund's performance over the Bladex asset management performance impact on dividends and the discussion of to what extent this would impact dividend payments, we do really look at our core business and our core business, per our definition, does include the commission, the fee income that we derive from our Bladex Asset Management unit.

So we would exclude the trade performance of the fund from what we'd consider core, but we do definitely look at the fee income derived from managing third-party monies. And so to the extent that the unit becomes increasingly successful, in that regard, there is certainly a beneficial impact in our consideration as to how to calculate our dividend proposal. I don't if this answers your question?

Pretty much. Or to say it differently, if you do not sell -- the outside parties do not take up more of the fund, once you reduce it to $100 million, when you model out the earnings going forward, shareholders should not assume that just any type of -- the 10% expected gain year in -- year-over-year, that you expect to return, none of that would likely be available for dividends per se? Or you can't count on that?

I would -- I don't think you should count on it, but we will certainly include -- the Board -- I don't want to speak for the Board, but the Board does consider all elements in determining the appropriate dividend levels. Not just how well we do in the core business, which is the -- certainly the most significant portion of their considerations, but in general, if there's no -- certainly it's not out of the question to consider incremental dividends if we have a spectacular performance in the fund. That is not to say that this may not happen. And so -- but it -- there is no mechanism, no formula, that would impose such a decision and actually it would be on a case-by-case basis.

Okay. And let me just -- I'll just squeeze in a couple of questions back-to-back here. And if you can answer some of these, just real quick. It's just in terms of the tier one common capital ratio's around 18%. Assuming that you -- the growth in the region continues and you have the trade finance grows as well, but sort of target how much lower can that number go? And is it -- it's tier one common to risk-weighted assets, but the measure you're going to look at most carefully? Or is it just straight tangible equity to assets and any comments with regard to any updates on Basel III?

And then just real quick, I think these others, fairly quick questions. If you can just comment a little bit on the competition you're seeing for trade finance, if you see any step-up from outside players, especially -- or it may be especially from anybody within Latin America, it's sort of the larger -- any change in the larger banks in Latin America or making more of a targeted effort in this area?

You mentioned that non-fee income outside -- that you were looking to grow fee income -- I'm sorry, you're looking to grow fee income. Could you just comment a little more about where you're seeing opportunities outside of the asset management business and then any update on that factoring business in Brazil? So it's about four squeezed in there, real quick. Thanks.

Let's see. Let me see if I can take them in order. Capital. It's -- I'm not at all dodging the question, but the fact is that how much capital do you have has a very direct relationship to how much risk are you taking.

If risk in the region continues going down, the way it has been over the last couple of years, and the world behaves in a somewhat predictable manner, it would be logical for us to assume that at a very minimum, we will be going back to our historical tier one ratios of something like 15% and straight leverage levels of around 10 times.

If, however, our business becomes more diversified and, as we hope, more profitable and risk in the region becomes even better than we thought it is going to be and the world doesn't go to hell in a hand basket, we will operate with lower capital levels because that's what it will make sense.

What we can say is that 18% today, we probably have more than we need, given the risks that we're taking. From every point -- from every point of view that we care to analyze our risk, whether it's past due loans, whether it's non-performing loans, whether it's restructured loans. We are running extremely -- whether it's charge-offs, we -- the fact is that at very few points in our history have we been taking as little risk as we have today. So we will continue to leverage the balance sheet.

Basel III is an important consideration, but the way we're structured, the type of assets that we have, all of the exercises that we've done to simulate Basel III lead us to the conclusion that under just about any scenario we contemplate, Basel III will not constitute a limiting factor of what we can or cannot do.

Competition in the region, you alluded it - to what is probably the most important emerging competitive element in the region and that is Latin American banks that are slowly becoming international. It is not yet much of a concern to us, because it does take time for any organization that has been traditionally focused on its own domestic market to become comfortable and established relations, and especially be able to measure risk outside its traditional markets.

So while Latin American banks are expanding, and we welcome that, by the way, because we think that for the region, that will mean a more stable funding and finance through the economic cycle. While Latin American banks are expanding and becoming more of a competitive force, it is something -- it is not something that worries us yet. We do think that we have two or three years to strengthen our franchise to the point where it would be difficult for them to take market away from us.

And lastly, non-fee, non-fee activities, there are a number of them that we're working on, but probably the most -- the one that is closest to becoming a reality is our distribution business, as we have developed new clients, particularly in the middle market and some in the corporate markets. Distribution is becoming much more and more attractive. The deal that I just mentioned in Peru, it's a distribution type deal where we're going to be charging a very significant fee. And that is one of the initiatives that we are putting resources and pressing the accelerator on from here to year-end.

So it's basic blocking and tackling, including new things like distribution where we think we're going to be able to grow revenues significantly. In addition, and more down the road, we continue looking at the factoring business. We haven't been able to find the perfect bride yet. We have come tantalizingly close, a couple of times.

In the meantime, it's becoming more obvious to us that factoring as a -- is becoming more important as a structuring of -- as a structuring element in the international trade finance business, as open account business becomes more important. We continue looking and we're fairly certain that in one way or another, this business is something that we're going to -- becoming more and more active in.

We're already doing some. We're already doing vendor financing. It's a relatively small part of our business yet. Still, rather. But it's growing extremely quickly. Within a couple of quarters, we'll probably start providing separate information as to vendor financing, fee and intermediation activity.

We're already discounting paper and receivables out of a unit that we have in Miami that is literally doubling in size every three months. We've discounted $900 million worth of paper so far this year. That is going to become an important source of fee revenue, probably within the next six months or so.

That's my general answer. In very concrete terms, distribution, vendor financing, less concrete, but something we keep looking at because it's becoming increasingly important all over the world. International factoring.

Great. Thanks a lot.

Sure.

Thank you. Our next question comes from Bill Jones from Singular Research.

Hi, guys. Great quarter.

Thank you, [Bill].

I think, actually, most of my questions have been answered. I would just like to ask if there's any other opportunities such as factoring that you may be looking at.

The answer is yes. We're continuously looking at other opportunities. We think there are -- I'll give you another example. Most of the open account business that is taking place international -- internationally is making use of insurance, particularly export agency insurance. In the last month, we brought a -- resources into our offices in Miami to start structuring export agency insured deals. It will take some time, however, for that business to acquire significant size.

Other than that, we're keeping our options limited by choice. We want to focus on -- we're a relatively small team. We need to compete or focus on our main objectives, as I just mentioned them. Leverage the balance sheet, credit quality, efficiency, etcetera, without -- and be careful not to -- being careful not to dilute our efforts.

But, no, there are certainly a large number of opportunities to -- for us to dwell into, but we will start working on them in 2012. Our plan is to look -- let's strengthen and complete the work that we have set for ourselves this year, and after we've completed and those initiatives are running and doing well, let's look at something else.

We have to be very careful in this company about keeping focused because we are a relatively small team, which is an advantage, by the way, because that's part of the reason that we're so efficient.

Right. Great. And keep the focus and keep up the good work. Thanks, guys.

No, Bill, thank you.

Thank you. Our next question comes from Regina Chi from DRZ.

Yes. Hi, it's DRZ in Florida. Just a question on leverage. Given your mid-teens ROE target, should we assume that the leverage will go back up to 10, 10 times, versus the 7.9 times that we saw recently?

That's certainly what we're assuming in our model. Something like 9.8 is what we were with. It'll come to something like that. Again, assuming that risk levels continue improving. If they don't, we could probably operate with a smaller -- at smaller leverage ratios, but with higher margins.

Okay.

On a steady state basis, I'll call it 9.8 times and we'll be fairly close to where we will be sometime in 2014.

Okay. Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from Chris Delgado from JPMorgan.

Hi, good morning. Just two quick questions. Kind of since the crisis, you guys have really seen a lot of loan growth and NIM expansion. Could you kind of just give a quick view on like where you guys see that going forward, since you guys are pretty much back to where you were from '08, '09 levels?

Yes, Chris. I would -- I tried to allude to that in my open statement. The fact -- we grew 10% this quarter and I said -- you might remember, last quarter, when we spoke, we were expecting something in the order of 7%. We were pleasantly surprised to see demand pick up. And we're sort of torn. Because on the one hand, the market, the sages, the gurus, keep telling us to expect a slowdown. And on the other hand, our business -- the business that we continue to originate -- originating and demand on the part of our customers, remains strong.

For purposes of what our own projections, we would be happy with a growth level of anywhere from 4% to 6% per quarter during the remaining of the year. But I wouldn't be surprised if we are surprised on the upside. Again, I can state openly that we have not felt, as of today, mid-July, in fact end of July, any particular slowdown in the business in any country in Latin America. A couple of particular exceptions, as you can imagine, Venezuela, Peru slowed down for a month. But other than that, it seems to be fairly much business as usual. And that helps us.

Okay. Great. Thanks.

Sure, Chris.

Thank you. (Operator Instructions). There are no further questions at this time.

Well, ladies and gentlemen, thank you very much for your attention and your continued support of Bladex. Again, we are privileged in operating in a region that, as we just discussed, is growing, is growing steadily, in a business, trade finance, that is growing just as steady, except it's growing faster in a business that we know very well, where we have a great reputation, expertise, where competition is not much of a factor and where we have all the resources in place to bring about the increased ROE and significantly increased share price increase that we are all looking for within the strategic plan that we have announced and that we are, in a very disciplined fashion, following.

Thank you very much for your support. All we can offer is to continue focusing on those plans, doing the right calls and meeting problems head on, letting you about things -- letting you know about things that are going well and what we're -- how we're taking advantage of those things that are going well and letting you know of things that aren't going so well and what we're doing about it.

This is a medium-term project with great prospects in a region that we believe, more than ever, is going to be strategically very important for the world. So, again, thank you very much. Thanks for your support. And we look forward to seeing you next quarter.

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