Foreign Trade Bank of Latin America Inc (BLX) 2014 Q4 法說會逐字稿

Hello, everyone, and welcome to Bladex's fourth quarter and full-year 2014 conference call on today, the 12th of February, 2015. 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.

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

I am very pleased to share with you the results we have achieved in the fourth quarter and the full year of 2014. As I have already mentioned in my comments in our press release yesterday, we continue to strengthen our core business: by posting solid growth in our credit portfolio, 10% year over year; by continuing to diversify our revenues streams, [executing] sustainable and increased fee income, [38%] increase in the year; by keeping our commitment to improve efficiency, which reached 28.1% for the fourth quarter, then 31.8% for the whole year; and last but not least, by keeping our focus on sound risk and liquidity management.

These results were achieved in a very challenging year, as 2014 was marked by an important slowdown of the economic growth across the region, lower trade, and more volatility in capital markets caused by uncertainties in the more mature markets and largest emerging economies. Christopher will provide you with the detailed information about our performance.

Let me now share the main factors impacting the scenario for Latin America in 2015. As most of the challenges we faced last year still remain, we need to consider carefully the following. First, we will experience still sluggish GDP growth, which is projected to reach only 1.3% for the whole year.

Second, modest trade flows increase; projections indicate an increase of 3.7%.

Third, investments in infrastructure present uncertainty as to the capacity of the countries to keep up with their investment plans.

Fourth, a stronger dollar that could impact the availability of liquidity for the region and increase in prices of imports.

Fifth, interest rates; possibility of increase in the interest rate in the second half of the year.

And sixth, the oil prices, with a possible prolonged cycle of low oil price levels.

Although the combination of these factors may produce a discouraging scenario, in our analysis we look at how these variables will impact individual countries and areas within Latin America, as we are in a new cycle of moderate economic growth [but divergent] consequences on the countries across the region.

Let's look at Mexico, for instance. The forecasted GDP growth for 2015 is 3.2%, well above the average for the region, and trade flows should increase by 7.8%, again above the average for the region. These figures points to a better year for Mexico in 2015 than it was last year, in which we already increased our portfolio by 63%.

Let's also not forget that Mexico has managed well their exposure to oil prices volatility. The country is less dependent on exports of commodities and the US economy continues to show signs of improvement.

Therefore, we are optimistic about our prospects to increase our portfolio in that country this year, as well. Our sales team in Mexico is working already on a solid pipeline of new deals. We also expect to ramp up the business of a newly created [lending] subsidiary in Mexico.

Let me move on to another area in our region where we expect positive trends in 2015, which is Central America and the Caribbean. The forecasted GDP growth for the area is 3.9%, well, again, above the average for the region, and trade flows should increase by 4.1%, also higher than the average for the entire region. Some of the countries are also exporters to the US and, similarly to Mexico, should benefit from improvement in the US economy.

Our total exposure in this area rose from $1.5 billion in 2013 to $1.6 billion in 2014. I can also say that our pipeline of deals looks very solid for this area.

Moving on to South America, we are all aware of the challenge of the Brazilian economy and the prospects of almost zero growth in 2015. Our exposure continues to be mainly in trade finance, 82%, with 72% of the total portfolio maturing within one year. We will continue a selective approach to [business] in Brazil, focusing on trade finance.

In terms of Colombia, Chile, and Peru, the prospects of growth are positive, with GDP growth [improving] in each country around 3-plus-%, well, again, above the average for the region. In these countries, we are focusing on selective corporate names associated either with trade or regional expansion, as well as being very active in our syndication business.

So, summing up, as you can appreciate, as we break down the analysis on individual countries and areas, we are cautiously optimistic about our growth prospects for 2015. Our expectation for the year is to post portfolio growth between 8% to 10%. We will continue to diversify selectively the mix of the portfolio towards more near-term transactions and keep the momentum we have achieved in our syndication business, further increasing our fee income.

And speaking of the syndication platform, let me share with you that we have a solid pipeline of possible transactions in diverse countries such as Chile, Mexico, Guatemala, Peru, and the Dominican Republic, among others.

As you will see in our presentation today, we have also prepared a special slide about our exposure to the oil and gas sector, explaining reasons why we feel comfortable with the credits we have and why we do not anticipate any negative effect in our portfolio. Christopher will go through it in a few moments.

Last, but not least, I'm particularly pleased with the fact we have achieved a sustainable [ROE] of 12%, which was one of our important targets.

And we continue [to share] the positive results with our shareholders, by increasing dividends. Our Board, as you know, approved another increase of our quarterly dividend in December last year, making this the fifth year in a row that dividends have been increased.

So, 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?

Alright. Thank you, Rubens. Hello and good morning, everyone. Thank you for joining us on the call today.

In discussing our fourth quarter and full-year results, I will focus on the main aspects that have impacted our results, and I will make reference to the earnings call presentation that we have uploaded to our website, together with the earnings release, and which is being webcast as we speak.

Before we go into more detail, let's start on pages 4 to 6 with a quick run-down of the key financial highlights and drivers that shaped this quarter and the year 2014.

The fourth quarter 2014 closed with net income for Bladex shareholders of $36.1 million, compared to $26.6 million in the previous quarter and compared to $23.9 million in the fourth quarter of 2013. For the full year 2014, we reached net income of $106.9 million, compared to $84.8 million in 2013, which represents an increase of 26% year on year.

In order to accurately present performance in our recurring business activities, we 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 $30.5 million in the fourth quarter, up 17% from $26 million in the third quarter, mainly due to net interest income growth brought about by the growth of our average commercial portfolio balances and due to higher fee income from our structuring and syndication activities. Business net income was up 12% compared to the fourth quarter of 2013. For the full year 2014, business income reached $103.5 million, an increase of $14 million, or 16%, over the previous year.

Net interest margin remained relatively stable, one basis point below the previous-quarter level, but it is 23 basis points above the level seen in the fourth quarter of a year ago. For the full year 2014, net interest margin reached 187 basis points; that is, up 12 basis points versus the previous year.

In similar fashion, the net interest spread, which [represents the difference] between average interest rates earned versus average rates paid, dropped again one basis point quarter on quarter, but rose 25 basis points year on year. Full-year interest spread was at 171 basis points, up 16 basis points from the prior year.

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

The business efficiency ratio was 32% in the fourth quarter 2014, two points above the previous quarter, but nearly three points below prior-year levels. For the full year 2014, the business efficiency ratio was 32%, again some five points below the level reached in 2013.

Our Tier 1 Basel I capitalization continues to be comfortable, reaching 15.3% at the end of the fourth quarter, slightly higher compared to the previous quarter and slightly below the level of the fourth quarter of a year ago.

This quarter, we made the move to report Tier 1 Basel III numbers, going forward, and the Basel III ratio stood at 15.6% at the end of the year 2014, slightly above the Basel I level.

So, let's look into quarterly and full-year results in a bit more detail, moving to the next slide, page 7, which shows the evolution of net income compared to the previous quarter and compared to the fourth quarter of 2013.

Net interest income rose [4%] compared to the third quarter 2014, benefiting from higher average loan portfolio balances and stable net margins. There was a lesser net change in the provision line this quarter, owing to relatively stable end-of-period portfolio balances.

Non-core income, which mainly represents the participation in the investment funds, was positive, as the turnaround performance which started in the third quarter picked up considerable pace in the fourth quarter.

Fee income also picked up, on the back of (inaudible) transactions in our structuring implementation business and increased activity in secondary markets where we [posted] gain from the sale of corporate loans. These fee income drivers are partly offset by lower fee contribution from the letters of credit business which saw higher average balances but lower average margins, as we continued to shy away from overly risky markets.

[Operating] expenses were up a bit this quarter, as is oftentimes the case for us in fourth quarters, mainly to investments made for accruals in variable compensation and [due to] professional (inaudible).

Year on year, quarterly net income was even more [substantially ahead], up 51% compared to the fourth quarter of 2013. Net interest income was a significant driver for that, as we grew average portfolio balances, net interest spreads, and net interest margin.

Fee income increased year on year based on the same drivers I mentioned just a minute ago.

The change in provision for loan losses is mainly driven by the reserve requirements from higher portfolio balances and the absence of recoveries this quarter.

As mentioned earlier, non-core results performed nicely this quarter, compared to losses in the fourth quarter of a year ago.

And operating expenses were slightly higher compared to a year ago, again, mainly from higher variable compensation and professional [fees].

On page 8, we look at the full-year net income evolution, and we basically have the same story here -- a rise in net interest income from higher average portfolio balances; higher net interest margin; improved fee income from syndication and loan intermediation activities; higher provisions for loan losses, mainly due to portfolio growth; and a swing in non-core results, as the funds turned around their performance. And all of this with basically stable expense levels.

On page 9, we take another look at net interest income and margins, which are still our key income drivers even if non-interest income is getting more and more share in our net revenues, which is of course what we want.

Net margins were up 12 basis points year on year, which is a meaningful improvement for us. The source of this net improvement [came outperformance] from the funding side, where we managed to reduce costs in all tenor ranges at roughly twice the rate compared to the drop in average yield on the other side of the balance sheet.

The relevant market-based rates -- in our case, LIBOR -- were the most significant drivers of these downward movements. But in addition to that, we exercised restraint on the asset side, where we favored margin stability over sheer volume growth. And on the liability side, we made careful use of diversified funding sources and fine-tuned the tenor mix to further squeeze average funding costs. And we did that leveraging the strong appetite that markets have to our name.

Moving on to page 10, we highlight the portfolio growth and segmentation. Demand from medium-sized corporations remains the main driver behind this quarter's growth and the growth that we have experienced in the full year of 2014, as we continue our focus on companies that have already outgrown the size thresholds we use to categorize the middle market companies.

Lending to financial institutions increased [a bit] quarter on quarter, as it oftentimes does towards year-end when banks tend to shore up liquidity to bridge both holidays and generally low market activity during that time of year.

On page 11, we present breakdowns of our commercial portfolio balances by country on the left and by industry sector on the right. Many things are being said and written about Brazil these days. So, we figured it would make sense to highlight some facts around our business in Latin America's largest economy, where over 40% of the region's GDP is generated.

Compared to that number, if you look at our exposure levels in that country, [currently] 28%, you could think that we are underweight that country. But this really has more to do with our desire to limit and reduce concentrations in our book, rather than lack of business opportunities. We have moved in this direction for quite some time now, since right around the global financial crisis of 2008 and 2009 when we had more than 45% of our business in Brazil.

The business we have in Brazil now is the business we like -- a strong trade finance bias, stronger than our overall book, and our usual short-term focus. Both elements make this portfolio solid in terms of credit [policies], and our tenor mix allows us to react very quickly to changes in market conditions, which is really also true for our entire book of business across the region.

So, in the industry sector graph on the right, (inaudible). One was to include the financial sector and show the entire commercial book, not just the corporate, or non-bank, book that we have been showing in our previous earnings releases.

And secondly, given the ongoing discussions around low crude prices, we broke out the oil and gas sector into three distinct segments, which have very different risk exposure profiles, as we explain in page 12, where we offer a deeper dive into our exposure profile in the oil and gas sector. We show our entire oil and gas credit portfolio, which includes loans, [contingent fees], and securities (i.e., bonds).

But first off, our segmentation of our client base into three segments -- starting with upstream, or production-oriented, companies focused on exploration, drilling, and production; then, the vertically integrated clients who really cover the value chain end to end, from exploration all the way to retailing; and finally, the more downstream and distribution-oriented client base. We should highlight the fact that the majority of market players in these segments are often government or quasi-government entities, many of which are of systemic and strategic importance in their respective economies.

Our views on these segments in the current market context range from the negative, in the case of the upstream activities where we have 14% of our total oil and gas exposures, equivalent to about 2% of our overall credit exposures; to the positive, in the case of the downstream segment where we have 43% of our total oil and gas exposures and 6% of our total credit exposures. The rest is concentrated in the integrated segment, where both negative and positive influences largely offset each other, providing for a relatively stable outlook.

The reasons for our negative outlook in upstream are fairly obvious, given the low level of margin these clients are able to achieve in the current market environment net of their production costs, which impacts cash flows and limits their ability to continue their normally very intense investment activities.

Perhaps mitigating that (inaudible) is the size and financial solidity of the companies themselves, their relative importance in the oil production chain that makes them strategically relevant in their respective countries, and the fact that local currency devaluation is helping them reduce cost pressures.

Our stress test [analysis] points to resilient payment capacity, should current market conditions prevail for some time. We are closely watching this segment and, to date, we have not detected a change in payment behavior or credit quality deterioration.

On the downstream side, which is relevant in the majority of countries of the region, as they are net importers of crude and refined fuels, we see a largely positive impact on most of the economies, in general, as internal demand is stimulated, and on our client base, in particular, as this internal demand is satisfied at lower procurement costs.

The fact that our business in both integrated and downstream segments has a short-term trade focus actually help us capitalize fairly rapidly on favorable market conditions in these segments.

Moving on to page 13, a quick glance at operating expenses and efficiency levels which continued their positive trends, as expenses remain stable while revenues rise. The business efficiency ratio looks at our recurring base of expenses and revenues, excluding non-core revenues and expenses. Business expenses increased quarter on quarter [as the flows to] variable compensation and professional fees were adjusted based on latest estimates.

Year on year, the growth in the business expenses was fairly marginal, thanks to increased efficiency in both our business [strategies] and headcount management.

Normalizing variable compensation elements, we have obtained a run rate very close to our stated [interim] target of 30% efficiency ratio. However, we won't stop there, as we think we can and need to do more to get to even better levels of efficiency that will help us to further differentiate our franchise in the market.

Moving on to page 14, we focus on our fee income business, which we have talked about quite a bit in recent earnings releases. The reason for that is of course the strategic, relevant importance that we've seen in these business activities, and we are encouraged to see some real progress not only in our structuring and communications platform, which over the course of [three] years has developed into a [general] business, but also an increased activities in secondary markets where we place business originated by us in order to free up capacity to do more business with our clients.

We will look to develop more of these [distribution] channels in both primary and secondary markets, as we actively manage concentrations, exposures, and margins to generate the consistent returns that our shareholders expect.

On page 15, we make reference to our non-core income, essentially resulting from the remaining passive investments, including investment funds formerly owned by Bladex. Needless to say, we are very pleased with the turn-around performance of our investments, but this does not change our commitment to devoting ourselves entirely to further developing our core business activities.

On page 16, we highlight return on average equity and capitalization trends. Return on average equity continues to be on track. Capitalization levels remain strong and, as mentioned last time, we'll now make the switch to measuring our capitalization based on Basel III criteria, going forward.

As of year-end, the Tier 1 Basel III ratio stood at 15.6%, and as we've said before, there is no regulatory requirement that would ask us to implement Basel III at this point; we just do it because we can and because we think it is helpful information for our stakeholders. The only reason we are still showing Basel I on these slides and in our earnings release is to allow you to make period comparisons.

And finally, on page 17, we highlight our focus on total shareholder return. We are very pleased to see the stock price and liquidity of Bladex shares heading in the right direction.

Recently, and as mentioned by Rubens, the Board of Directors authorized an increased quarterly dividend payment of $0.385 a share, further proof of its commitment to maintaining an attractive dividend yield based on the performance in our core business.

My apologies for taking a bit longer this time, as we expanded a bit on some current hot topics. But now, with that, I'd like to hand it back to Rubens for his closing remarks and Q&A. Thank you very much.

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

(Operator Instructions) Chris Delgado, J.P. Morgan.

I have two quick questions. My first question relates to fees. That's been a good business for you guys. It's been a focal point for you. And I just wanted to get a sense of what are your thoughts on fee growth for 2015 and the long term?

And then, my other question [really shows] to growth opportunities, in general. Loan growth, 8% to 10% is pretty good, especially given regional GDP. But any thoughts on maybe risks to that number? What are potential upsides for that number?

Those are my two questions.

First of all, fee income growth. You saw that we have a solid year 2014, with 38% growth in our fee income business. As I mentioned, the syndications business has a solid pipeline of new deals, which points towards that we [can] experience another year of growth in our fee income.

It is difficult to say to you how much we would expect of fee income growth in this sense, because you know that this is going to be a challenging year. The pipeline looks solid, but we have the process of continuing to develop this business activity and eventually have the deals done. And this is the beginning of the year. This is the slowest quarter of the year, as you know.

So, we are optimistic that the demand is there; there will be possibilities of continuing to develop [this growth]. But I would wait until next quarter to give you a more solid guideline in terms of the fee growth for this particular business.

What I can tell you is that, as Christopher alluded in his comments, letters of credit business, which has been important for us, it is a little more volatile now these days, as we are managing the risks as we have in the region. So, we don't see a lot of upside in terms of growing our traditional letters of credit fee business.

But we do see the potential to grow on the syndications, and also as we continue to generate more activity in the secondary market -- which leads me to your question of growth opportunities -- we'll be able to rotate our portfolio more quickly.

So, in that sense, as I told you in my initial remarks, growth will be diverse in different countries, and we are very optimistic in Mexico, in fact. A big chunk of our growth can come from Mexico.

We have given you a very conservative guidance, 8% to 10%, but as we move forward during the year and as these trends confirm in Mexico and Central America and the Andean countries that I mentioned -- Chile, Colombia, and Peru -- eventually we might get some upside in that growth projections and increase a little bit -- up to 12%, I would say. But I wouldn't see more than 12% for the whole year in 2015.

Okay. Great. That's really helpful. I just have one more question relating to fees. Is there any particular country concentration where you guys see most of your business being done, in terms of diversification?

Diversification of fee income?

Yes. Is it coming from a particular -- is it all Central America? Mexico? Is it scattered across the whole region? I just want to get --.

It is well spread. Of course, because of the value added we have for financial institutions and the smaller financial institutions, that tends to be a concentration in terms of this industry. We have seen more deals in terms of financial institutions. And basically, what we expect is that increase this year will come from Central America and Peru.

Okay. Great.

(Operator Instructions) Jeremy Hellman, Singular Research.

Just one question, going back to slide 11 where you go through the exposure by industry. Just wondering what sort of read through you have with the financial institution bucket in terms of their exposure breakdowns?

We don't --. Sorry, I didn't --.

The breakdown of the financial industry.

Okay. As you know, Jeremy, Bladex started off as a lender to banks. For the first 20, 25 years of our existence, our only client base were financial institutions. And so, we can basically say that we know each and every single institution of relevance across the entire region.

So, that makes our bank book, our lending to financial institutions, very diversified. It goes from Mexico all the way down to Argentina and Chile. Of course, the larger the country is and the better banked it is by international institutions -- maybe the case of Mexico -- our penetration level in financial institutions may be less. It would certainly be greater in the smaller countries, all through Central American countries and the Caribbean. But we have an important presence in places like Peru, Colombia, and Brazil.

So, I would say it's a very well diversified book of business.

Okay.

(Operator Instructions) At this time, we have no other questions. I will turn it over back to Mr. Amaral for closing remarks.

Thank you very much, David.

Thanks for your attention today, ladies and gentlemen. As I have stated in my last call in 2014, we are looking with enthusiasm to a challenging but successful 2015, as the culmination of our original footprint plus our trade finance expertise positions Bladex to make the best out of a challenging economic environment. I am looking forward to sharing with you our first quarter results in April. Have, all, a good day. Thank you very much.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines. And thank you for joining us this morning.