Foreign Trade Bank of Latin America Inc (BLX) 2014 Q2 法說會逐字稿

Hello, everyone and welcome to Bladex's second quarter 2014 conference call on today, the 24th of July 2014. This call is being recorded and is for investors and analysts only. If you are a member of the media, you are invited to listen only. Bladex has prepared a PowerPoint presentation to accompany this discussion. It is available through the webcast and on the Bank's corporate website at www.bladex.com.

Joining us today are Mr. Rubens Amaral, Chief Executive Officer of Bladex, and Mr. Christopher Schech, Chief Financial Officer. These comments will be based on the earnings release, which was issued yesterday. A copy of the long version is available on the corporate website.

Any comments made by the executive officers today may include forward looking statements. These are defined by the Private Securities Litigation Reform Act of 1995. They are based on information and data that is currently available; however, the actual performance may differ due to various factors, which are cited in the Safe Harbor Statement in the press release.

And with that, I am pleased to turn the call over to Mr. Rubens Amaral for his presentation.

Thank you, Katie.

Good morning everyone and thanks for joining us today. Yesterday, we reported another quarter of good results and positive trends in our business. I will comment on the highlights of our results for the first six months of 2014 and Christopher will provide you with the details of our quarterly performance.

For your information, when I refer to net income, I'm using the concept of business net income, as defined in the appendix of our presentation. In terms of fee income, I'm referring to our traditional contingency business, syndications platform, and other income from our debt intermediation activity.

Let me start with total disbursements. During the first semester, we reached a total of $6.7 billion, being $1 billion in legal term transactions with an average life of 3.2 years. This important level of disbursements, as discussed in previous calls, is a consequence of our business strategy of first achieving healthy growth; second, diversifying the mix of our portfolio; and thirdly, improving the margins.

Our growth for the first half of the year was 4%, consistent with our expectation for 2014 between 10% to 13%. The average life of our portfolio increased from 9.4 months at the end of 2013 to 10.8 months by the end of the second quarter 2014.

Our net interest margin, NIM had a pick-up of 15 basis points for the same period. Therefore, the net income reached $47 million, which represents an increase of 33% for the first six months of 2014, when compared to similar period last year.

Our net interest margin of 184 basis points reflects improved asset margins and lower cost of funds. I realize the NIM is still shy of our 2% target, but I'm satisfied this showed positive trend in the first six months of this year.

Our fee income continues to increase steadily as we consolidate and expand our syndications activity, both primary and secondary, and not less important, our contingency business. Total fee income reached $9.3 million for the first semester, representing an increase of 58% over similar period last year.

Operating expenses remain under control and we are determined to keep it that way. Our business efficiency ratio for the first semester was 33.5%.

We continued to diversify our funding structure, having issued recently bonds in the Mexican market in a transaction that was oversubscribed 5 times at a very attractive price.

Our loan syndication business continues to expand. We have participated in nine different transactions during the first half of the year, which is already higher than the six transactions we did during the full year in 2013.

The total amount of the transactions reached $1.3 billion, and we have in our books an average of 20% to 25% of each transaction. Our pipeline for the third quarter remains very attractive and we expect to continue to deliver accordingly.

I'm also particularly pleased to have announced, this week, the signing of an important agreement with the IFC that will allow Bladex to expand its client relationships and portfolio without increasing its balance sheet at the same pace. It is the first time the IFC enters into an agreement like this in Latin America.

In terms of our investment in the fund, the performance again for our disappointment was weaker than we had expected, with a loss of $2.2 million, but as mentioned in previous calls, we remain committed to our exit strategy. The Board of Directors approved recently the quarterly dividend of $0.35 per share, consistent with the performance of our business results.

In terms of the market environment looking forward and how it might affect our business moving forward, our view hasn't changed since the last time we met. We are keeping our forecast of portfolio growth for 2014 between 10% to 13%, as alluded to before in my comments.

We understand that some of you might be concerned with the current situation in Argentina. Our portfolio is healthy and we do not anticipate any negative impact stemming from the current discussions about the holdouts. By the end of the second quarter, our total exposure to that country was $392 million. Today, it's down to $317 million, and by the end of the month will drop to $274 million.

All of our transactions are related to what we call strategic for the country, meaning oil, imports and exports of grains. Last but not least, we have a preferred credit status in Argentina, which provides access to hard currency in times of crisis, as it was the case in 2002, although this crisis is entirely different from the one we experienced in 2002.

You might also ask me about Brazil, not exactly about the World Cup, but because of the slowdown in the economy and how it might affect our activities and portfolio. Our portfolio is healthy with focus on trade, which represents 82% of the total portfolio. 59% of the portfolio is short term with maturities lower than 1 year. The total exposure to the country is now down to 28%.

Nevertheless, we continue to monitor constantly the quality of our portfolio, and we do not expect any meaningful change in our provisions requirements, except as alluded before, the natural movements stemming from the growth of the credit portfolio as it was the case in this quarter.

Thanks again for your time today. I will now turn it over to Christopher to guide you through our presentation. Christopher, please.

Thank you, Rubens.

Hello and good morning, everyone. Thank you for joining us on the call today. And contrary to Rubens, you may always ask and enquire about the World Cup results with me personally.

In discussing our second quarter results, I will focus on the main aspects that have impacted our results, and I will base myself on the earnings call presentation that we have uploaded to our website, together with the earnings release, and which is being webcast as we speak.

So, before we go into more detail, let's start on page five of the presentation with a quick rundown of the key financial highlights and drivers that shaped this quarter. Rubens already gave a recap of our six months results. I will focus my comments more on the quarterly variation.

The second quarter of 2014 closed with net income to Bladex shareholders of $20.7 million, compared to $23.5 million in the previous quarter and compared to $21.7 million in the second quarter of 2013. In order to accurately present performance in our recurring business activities, we focus on business net income, as already mentioned by Rubens, and which is recurring net income derived from our principal business activities of financial intermediation, which generate net interest, commission and fee income. We also refer to it as core income or income from core activities.

In this business, net income reached $22.9 million in the second quarter of this year, down from $24 million in the first quarter of this year, mainly due to the provisions for credit losses brought about by the strong growth of our commercial portfolio. Business net income grew 17% compared to the second quarter of 2013. Net interest margin continues to increase, rising 5 basis points during the quarter versus the previous quarter, and that is 12 basis points ahead of the levels in the second quarter of a year ago.

The net interest spread, which represents the difference between average interest rates earned versus average rates paid, also improved in a similar manner. Business return on assets and return on average equity metrics dropped quarter on quarter because of the volume driven reserve increases, but nevertheless improved significantly compared to prior year levels.

The business efficiency ratio improved 3 points quarter on quarter and remained 4 points below prior year levels. Our Q1 Basel I capitalization continues to be comfortable, reaching 15.2% at the end of the second quarter.

So, let's look at the quarterly results in a bit more detail, moving to the next slide, page six, which shows the evolution of net income compared to the previous quarter and compared to the second quarter of 2013. Net interest income rose compared to the first quarter 2014, benefiting from higher average loan portfolio balances, with marginally increased lending spreads and stable cost of funds. As mentioned already, there was movement in the provision line this quarter, on account of portfolio growth, compared to minimal reversals of provisions recorded in the first quarter.

Noncore income, which mainly represents the participation in investment funds, fell back to a larger loss, compared to the previous quarter. Fee income remained largely stable as stronger activity in the letters of credit business offset lower income from fewer closed transactions in our structured finance and syndication business. That said, activities in the syndication business are trending well ahead of prior year's levels.

Year on year, quarterly net interest income was also substantially ahead on greater average portfolio balances and lower funding costs. Noncore results have been a letdown so far, as already mentioned by Rubens, as prior year cumulative gains stemming from our participation in investment funds swung to a current year loss. We [see] the further validation of our decision to exit this business, and this exit is progressing as scheduled.

The evolution of operating expenses highlights our determination to boost efficiency in our organization, as we exercise tight cost control while portfolio balances and revenues continue to grow.

The next page, page seven provides a closer look at net interest income and net interest margins. The positive evolution quarter on quarter and year on year of both metrics benefited from higher average loan balances and lower to stable cost of funds, as evidenced by rising spreads. Average lending rates had a slight improvement of 1 basis point this quarter, which underscores our aim to generate substantial asset growth, but not by sacrificing risk/return expectations.

Average portfolio balances grew strongly this quarter, as we saw demand pick up from prior quarter levels. Average funding costs remained stable this quarter, as deposit balances grew to new heights, nearly topping $3 billion in balances by the end of the quarter and offsetting the effects of expanding balances and tenors in our medium and long term borrowings, as $250 million of a 3.5-year syndication closed early in the second quarter.

As already mentioned by Rubens, we also just announced the very successful completion of our second bond issuance in the Mexican market, which solidifies our overall medium term funding base at very attractive cost, and also provides us with appropriate funding capacity to support our lending growth in medium tenors in that country.

On page eight, we show our efficiency levels, which continue to improve, compared to the previous quarter and the second quarter of a year ago. The business efficiency ratio looks at our recurring base of expenses and revenues, excluding noncore revenues and expenses, and it showed a meaningful quarterly and year on year improvement. We see this as an early indication that our lean six sigma process improvement initiative is putting us on the right track and is starting to make an impact.

On page nine, we show the evolution of average portfolio balances. Demand from financial institutions remained robust, while our corporate segments showed very good growth momentum, driven by strong demand.

On page 10, we highlight our fee income business. A number of our growth initiatives are centered on increasing and diversifying our fee income base with significant focus on the distribution of loans originated by our sales force. A good example is our structured finance and syndication platform, which targets distribution in primary markets, and which again made a significant contribution to income as we closed three transactions this quarter, maintaining Bladex in the top 10 of the relevant league tables.

Growth prospects remain very good for this segment as we look at a healthy pipeline of deals in the second half of the year. But we are also focused on distribution in so called secondary markets, as a tool to optimize risk exposures, improve profitability and to free up capacity to do more business with valued clients.

Rubens just mentioned that we announced a risk-sharing facility with the International Finance Corporation, which focuses on commodity finance. This type of facility will not only allow us to achieve the strategic targets I just mentioned, being risk dispersion, client profitability and freed up capacity, but will also generate distribution income, which is accounted for in the other income line, together with income from secondary market transactions.

So, on this page, we show the distribution income combined with the fee and commission income as a summary of our total fee based income that we derived from our contingency or letters of credit business and from intermediation and distribution activities. So, year on year, combined fee income growth was 50% as a result of the increased scale of our structured transaction platform, growth in the contingency side of our business, as well as the main season of commodity shipments is underway in South America and other income generated from secondary market operations.

Moving on to page 11, we discuss our noncore income, essentially resulting from the remaining passive investment in the investment fund, formerly owned by Bladex. As mentioned before, performance in the fund deterioriated this quarter. Effective April 1st, we made a partial redemption from the fund, bringing our participation in the Feeder Fund below the 50% threshold. And as a result, we deconsolidated the Feeder Fund during the second quarter and continued the target of final redemption on April 1st of 2016 at the very latest.

On page 12, we highlight return on average equity trends, which remain ahead of prior year levels. We expect the business return on average equity expansion to continue in the second half of the year, based on underlying core trends, while we continue to maintain conservative capitalization and leverage levels.

And finally, on page 13, we highlight our focus on total shareholder return. Just recently, the Board of Directors authorized a quarterly dividend payment of $0.35 a share, as we continue to maintain an attractive dividend yield for our shareholders.

And with that, I will hand it over now to Rubens. Thank you very much.

Thanks, Christopher. Ladies and gentlemen, we are now ready for your questions.

Thank you, sir. (Operator Instructions) Our first question comes from Yuri Fernandes from JPMorgan.

Hello, guys. Good morning. Just a quick overview on Tier 1. It fell 120 bips this quarter, so I would like to just know how do you see this evolving and at what level of Tier 1 capital are you comfortable with. Thank you.

Yes, thank you very much for your question Yuri, this is Christopher. So, yes, we have seen a reduction of our Tier 1 capital, which is calculated on Basel I criteria, and with using Basel I criteria it was 15.2% at the end of the quarter.

This is actually in line with what we said all along, in terms of trying to get closer to a 15% Tier 1 level. And the fact that it has dropped over the last quarter is just a -- you know, the reason for that is our strong portfolio growth this quarter, which we have grown our risk-weighted assets nearly $500 million in one single quarter.

And clearly, that had an impact on our Tier 1 capitalization. And we aren't necessarily saying that this rate of portfolio growth will continue unabated in the following quarter, especially having the agreement with the IFC in place, which will allow us to share some of our origination with them. But we do believe that our -- the portfolio growth will continue in the same vein as already alluded to by Rubens, and that we will of course compensate the additional use of capital with the generation of incremental revenues and income, which is part of what we are planning to do this year.

And in terms -- if I just may add, Christopher, we are looking at also changing the way we are measuring capital to Basel III. We are doing internal calculations, and although the regulator in Panama does not require us to do so, we are looking carefully at that; and then eventually in the future, we might come up with minimum levels according to Basel III. But we'll keep you posted.

So far, as Christopher said, we are around this 15%, give or take a little bit, but this is our target so far.

Thank you. Thank you, guys. Do you -- may I ask another question? Very quickly on the loan growth, this quarter was very good, as you said. Do you -- can you share any trend for the rest of 2014 and maybe just point which country in Latin America may drive this growth? Thank you.

Yuri, no problem at all.

Christopher mentioned and I as well about the transaction we just did in Mexico in the capital markets, and one of the reasons we do that is because we are anticipating growth in Mexico. So, one of the countries we're going to be growing in an important way and also in terms of our medium term portfolio, is Mexico.

The other two countries where we are looking to grow, it's Colombia and Peru, two other countries that are priorities for us. In terms of Brazil, our exposure, as I mentioned in my comments, is down to 28%. We don't expect any meaningful increase in there, but we might grow slightly in Brazil as well, as we diversify into different countries.

Central America continues to be an important region for us. Total Central America plus Carib represents 25% of our portfolio, and we are comfortable with those levels.

So, you might see growth coming primarily from Mexico, that today is already a number two country in our country exposure, which is very important. And Peru, Colombia, eventually something more in Central America and very small growth, I would say, in Brazil.

Thank you. Thank you, guys.

Thank you.

No problem, Yuri.

Thank you. (Operator Instructions) At this time, we have no further questions.

Okay, Katie, thank you very much. I hope we didn't bore you too much today, so you didn't ask any questions, I was provoking you guys to ask me about the World Cup and the results, and but I think, our investors and shareholders are fortunate to have a CFO that's German.

And so, having said that, I would like to thank you very much for attending our call today. And I just want to tell you that we're looking forward to an always challenging, but very promising second half, and we continue committed to achieving improved results on your investment in our company.

Thank you very much. Have everyone a good day. Bye, bye.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect your line.