Foreign Trade Bank of Latin America Inc (BLX) 2014 Q3 法說會逐字稿

Hello, everyone, and welcome to Bladex's third quarter 2014 conference call on today, the [15th] of October, 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 their 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. Their 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. Sir, please begin.

Thank you, Kate. Good morning, everyone, and thanks for joining us today.

Yesterday, we reported strong results, confirming the positive trends of our business as we had informed you in our previous calls. I'm especially pleased with the improvement in the quality of our earnings, as our traditional trade finance business posted solid growth. Our fee income is steadily increasing as a result of our syndication business. And not less important, we continue to increase efficiency throughout the organization.

As already highlighted in our press release, I would like to use this opportunity to comment briefly on the business environment and our view for 2015. Christopher, as always, will provide you with the details of our business performance.

So, let's start. The economic growth in Latin America this year will be a modest 1.4% due to weaker exports, low commodity prices, and poor internal demand in the different countries. As we know, the story is not the same in every country, but all the projections have been revised down for the reasons mentioned before.

The foreign trade will grow only marginally, with the value of exports increasing a timid 0.8% and the value of imports decreasing by 0.6% for the year. Nevertheless, as you have appreciated in our press release, our portfolio [presented] 9% growth for the first nine of the months -- of the year, I mean -- which is in line with our expectation for 2014 to grow between 10% and 13%.

We have been able to achieve this growth by increasing our client base, with 48 new clients, and catering to markets such as Colombia, Mexico, Peru, and some countries in Central America where a more dynamic economic activity opened up new business opportunities.

Let me now give you a quick overview about some of the countries in our region. Let's start with Argentina. Our exposure is down to $162 million, from $392 million which was the total outstanding when we last met. Our focus remains on the transactions related to the strategic sectors for the country; mainly, the import of oil and export of grains. We expect no surprises in that front.

We are also monitoring closely what happens in Brazil, as the economy has slowed down almost to a halt. Although we do not anticipate any macroeconomic challenge to the country in the near future, we are reviewing certain individual exposures in our portfolio to determine whether there might be any possible credit impact, mainly because of the drop in commodity prices. The majority of our portfolio is trade finance and, as you know, exposures short term, up to one year. The total exposure to the country is now at 28%.

In Mexico, the economic activity is gaining momentum as the US economy continues to show gradual improvement and the reforms gain more traction, signaling new investments in the country. Our total exposure to the country is now over $1 billion, making Mexico our second largest country exposure in the region after Brazil.

I'm also glad to inform that we have established a new subsidiary in Mexico, BLX Solutions, with the objective of increasing our local leasing activity. We have already booked our first transaction and expect more to come in the fourth quarter.

We continue to diversify our portfolio in Colombia and Peru by doing more medium-term transactions. In those countries, we are focusing on selective corporate names associated with either trade or regional expansion. The total exposure to Colombia and Peru amounts to $1.4 billion, which represents 19.6% of the portfolio of the Bank.

In Central American/Caribbean, we work with financial institutions and large corporations. As this area [will post] an average GDP growth this year of 3.8%, we were able to identify good business opportunities, thus increasing our portfolio in both sectors. The total exposure stands now at $1.6 billion, which represents 22% of our total portfolio.

I would like once again to highlight that we continue to monitor constantly the quality of our credits and we do not expect any meaningful change in our provisions requirements, except the natural movement stemming from the growth of the credit portfolio, as it was the case in the previous two quarters.

Thinking about 2015, GDP growth in the region is forecasted by the IMF to increase by 2.2%, and the trade flows according to the WTO, World Trade Organization, to increase by 3.2% for exports and 4.8% for imports. Although we recognize these projections are on the moderate side, they represent an important improvement in comparison to this year, where GDP and trade flows growth were very modest.

Again, there will be countries where activity will be more than in others, and as you can appreciate from this year's performance so far, Bladex will continue to be well-positioned to benefit from these pockets of more prosperity across the region.

We are cognizant of the risks of a prolonged cycle of [slow, disappointing] economic growth, but as the forecast for the region is positive for 2015 and we expect the countries to keep their focus on investing in the so much-needed infrastructure, we are cautiously optimistic about another year of good performance for Bladex. Nevertheless, we are well aware of the outside risks that can impact Latin America's prospects for 2015.

With that, I thank you for your time today, and I will now turn it over to Christopher to guide you through our presentation. Thank you. Christopher, please.

Thank you very much, Rubens. Hello and good morning, everyone, and thank you again for joining us on the call today.

In discussing our third quarter results, I will focus as usual on the main and key 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 a little bit more detail, let's just start with a rundown of our financial performance this quarter, on pages 4 and page 5, and those are the key financial highlights and drivers that shaped this quarter.

So, the third quarter 2014 closed with net income to Bladex shareholders of $26.6 million, compared to $20.7 million in the previous quarter and $22.8 million in the third quarter of 2013. In order to more accurately present performance in our recurring business activities, we like to focus on business net income, 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.

And this business net income reached $26 million, up 14% from $22.9 million in the second quarter 2014, mainly due to net interest income growth brought about by the [growth] of our commercial portfolio and higher margins. Business net income was down actually 3% compared to (technical difficulty) 2013, but that quarter (technical difficulty) as the release of credit (technical difficulty) we posted increased provisions that were in line with portfolio balances growth Rubens already mentioned.

Net interest margin continues to increase, rising 9 basis points during the quarter versus the previous quarter, and that is 3 basis points below the level seen in the third quarter of a year ago, due to the fact that market rates have been declining year on year.

The net interest spread, which represents the difference between average interest rates earned versus average interest rates paid, also improved, rising 10 basis points quarter on quarter and dropping just 1 basis point year on year.

Business return on assets and return on equity [reduced metrics] increased quarter on quarter and year on year because of the volume margin and spread drivers I mentioned before.

The business efficiency ratio improved 2 points quarter on quarter and remained nearly 4 points below prior-year levels.

Our Tier 1 Basel I capitalization continues to be comfortable, reaching 14.7% at the end of the quarter.

So, let's look into quarterly results in a bit more detail, moving to the next slide, page 6, which shows the evolution of net income compared to the previous quarter and compared to the third quarter of 2013. Net interest income rose compared to the second quarter 2014, benefiting from higher average loan portfolio balances and increased average lending rates, also lower average costs of funds.

There was movement in the provision line again this quarter, owing to portfolio growth.

Non-core income, which mainly represents the participation in investment funds that we formerly owned, was positive compared to losses in the previous quarters.

Fee income remained stable, with stronger activity in the letters of credit business and stable income from our structured financing syndication business.

Overall [fee income] is trending well ahead of prior-year levels.

Year on year, quarterly net interest income was also substantially ahead, on greater average portfolio balances and lower funding costs.

As mentioned earlier, these non-core results have turned around a bit this quarter but still remain negative on a year-to-date basis.

Operating expenses remained stable at prior-quarter and even prior-year results.

Next page, page 7, provides a closer look at net interest income and net interest margins. The positive evolution (technical difficulty) the quarter of both metrics benefited from higher average loan balances and lower cost of funds, as evidenced by rising spreads.

Average lending rates had an improvement of 5 basis points quarter on quarter, as we continued to emphasize margins over sheer volume. Nevertheless, origination continued on a strong pace, backed by solid demand across the region. And with that, [ending in an] average portfolio balances grew again this quarter, carrying momentum into the fourth quarter.

Average funding costs are up again this quarter, as deposit balances grew to new heights, comfortably topping the $3 billion mark by the end of the quarter.

At the same time, we continued strengthening our [tenant] structure and geographical diversification in our medium- and long-term borrowings, as we successfully completed the bond issuance in the Mexican market early in the quarter and as we executed a series of small (technical difficulty) private placements throughout the third quarter. Even with these activities, average funding cost in our medium- and long-term borrowings came actually down, reflecting declining market rates and strong appetite for our name.

Year on year, quarterly average rates have come down on both sides of the balance sheet. However, net margins and spreads have held up fairly well in this environment of year-on-year declines in base rates.

On page 8, highlights the portfolio growth and segmentation. Demand from (technical difficulty) corporations were the main driver behind growth, as we sharpened our focus on mostly Latino companies (technical difficulty) quarter on quarter (technical difficulty) pricing levels on the corporate side.

On page 9, we highlight our fee income business, which continued to show good progress. In this slide, we also include the fee income that we derive from intermediation activities, by which we mean secondary market transactions and [where] fee income is actually recorded in the other (technical difficulty) in the fee and commission income (technical difficulty). So, we combine that here on this page.

Our structured finance and syndication platform targets distribution in primary markets and (technical difficulty) managed to make a significant contribution to fee income (technical difficulty). One of the transactions closed this quarter was actually the case (technical difficulty), meaning another transaction on behalf of the same corporate client that built on the original transaction we structured a couple of years ago. This points to the scalability of our syndication platform, on top of the healthy pipeline of transactions with new syndication clients.

The risk-sharing facility with the International Finance Corporation, which we announced earlier in the quarter, has already seen significant activity levels and looks to be fully utilized before the end of the year.

Our contingency letters of credit business also (technical difficulty) well with increased levels of activity in a geographically more diversified portfolio.

Overall, fee and other intermediation income is tracking well ahead of prior-year levels.

On page 10, we show our efficiency levels, which again were improved over the previous quarter and the third quarter of a year ago. The business efficiency ratio looks at our recurring base of expenses and revenues, excluding non-core revenues and expenses. And both business and the overall efficiency ratio showed good trends that go in the right direction in our opinion.

Operating expenses were well under control this quarter, as revenues continued to rise.

We have reached our interim target of 30% efficiency ratio, or at least we have on a quarterly run-rate basis, and we think we are on track to be able to sustain that trend and be consistently at, around, or even below that level in the quarters to come.

On page 11, we make reference to our non-core income, which is essentially resulting from the remaining passive investment in the investment funds formerly owned by Bladex. This third quarter, [the participation generated a] small profit which we hope and expect to be a turning point after several quarters of losses. At any rate, we do not expect any significant impact on our earnings either way, and we continue to target our final redemption in April of 2016, at the very latest.

On page 12, we highlight the return on average equity and capitalization trends. Here, return on average equity continues to be on track in our opinion. The capitalization levels remain strong, and this quarter will very likely be the last time we speak about capitalization based on Basel I criteria, as we move to coverage our Tier 1 levels based on Basel III criteria starting in the fourth quarter of this year.

There is no regulatory requirement that [has asked us] to do this; it is just the fact that we have completed our internal evaluation and implementation process that allows us to be ready for this step. In case you were wondering, I can tell you that we have determined the Tier 1 Basel III capitalization as of the third quarter to be actually higher than the Basel I figure, at 15.2%, and that is on account of the favorable risk profile inherent in our current portfolio mix.

And finally, on page 13, we highlight our focus on total shareholder return. We are very pleased to see the stock price and liquidity of BLX evolving favorably. Just recently, the Board of Directors authorized a quarterly dividend payment of $0.35 a share, and the Board remains committed to maintaining an attractive dividend yield for our shareholders going forward, based on the performance of our business.

And with that, I would like to hand it back to Rubens for his closing remarks. Thank you so much.

Thank you, Christopher. Now, ladies and gentlemen, we are ready for your questions.

Thank you, sir. (Operator Instructions) Chris Delgado, JP Morgan.

Good morning, and congrats on a good quarter. I just had two quick questions. First, loan growth has been quite good the past two quarters, and I wanted to get a sense of do you see that continuing into the fourth quarter? And then, what are your thoughts on loan growth for 2015?

My second question relates to your overall portfolio mix. When you look at the industries you're exposed to, about 25%, 26% is to oil and gas. And given the recent declines in oil prices, I wanted to get a sense if you had any concerns about that exposure?

In terms of the overall growth of the portfolio, I can tell you that we remain within the confines of our target for this year, between 10% and 13%. We are seeing a strong demand still, but the different countries can vary. In Mexico, for instance, it's gaining momentum, as I alluded to in my initial remarks, and we might see possibilities there to continue our growth.

Brazil, because of elections and the slowing down economy, much less so.

Peru and Colombia continues to be very (technical difficulty).

So, we expect to have (technical difficulty) growth for the fourth quarter. And for 2015, so far, our guidance is going to be around 10% for the whole year.

In terms of the oil and gas industry, honestly, we are not that concerned with the reduction in prices, because the majority of our clients are importers of oil. So, they will benefit from reduction in oil prices. We are not so much involved with the production of oil, the upstream, but much more with the importers of oil. So, at the end of the day, our clients will benefit.

We will need to do more work to get to the same levels of exposure that we have to the sector.

Okay. Great. Thank you.

(Operator Instructions) Sir, at this time, we have no further questions. Do you have any closing remarks before we wrap up?

Thank you, Kate. Thank you, everyone, to attend our call today. We are very pleased again to present solid results. And I think at the end of the day the results speak for themselves.

We are looking forward to a strong fourth quarter. We are well aware of the challenges ahead of us. We have seen what's happening to the markets as we speak, yesterday and today, and we understand the downside risks that can come from Europe and what's going on with the regional tensions across the globe. But, again, Bladex is well-positioned to benefit [in Latin America] for the prospects in 2015.

I'm looking forward to talking to you in our next call, in February 2015, and I would like to wish all of you a (technical difficulty) holiday season. Thank you very much.

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