Foreign Trade Bank of Latin America Inc (BLX) 2015 Q1 法說會逐字稿

Hello, everyone, and welcome to Bladex first quarter 2015 conference call on today, April 17, 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 and 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, Josh. Good morning, everyone, and thanks for joining us today for the first quarter of 2015 earnings call. Yesterday we reported results of our financial performance in the first quarter of 2015. We now feel the results confirm the solidity of our core business in spite of a more challenging economic environment as already highlighted in our previous call. The economic growth in the region has started more subdued this year as already expected. On top of that, the reduction in oil prices and the low level of commodity prices has limited the growth of our loan book albeit we had acceptable and sustainable demand levels from our clients. In my remarks in the press release, I commented that it's not uncommon for us to experience such a slower first quarter.

We had also informed in previous calls that reduction in oil prices and commodity prices could potentially have a negative impact in our origination capacity. Therefore the scenario of a slight reduction in our loan book had already been considered in our planning process. And so even with that scenario turning out to be the actual case in this quarter, we reaffirm our base case view of expected portfolio growth of around 8% to 10% in 2015. On the other hand, let me highlight that we constantly monitor the economic and business environment for the purpose of identifying any potential negative impact in our credit portfolio. I'm sure you all understand that from time to time it is inevitable that we are confronted with more challenging credits.

In the first quarter, two transactions were transferred to the non-accrued status requiring a slight, I repeat a slight, increase in our specific reserves. These transactions are well secured and the negotiations so far indicate a viable solution for the companies in the medium term. Thus based on what we know, we are not anticipating any further deterioration in our credit portfolio. On the other origination side, our pipeline of new business transactions looks solid, both in traditional trade finance and lending as well as the more structured transactions in our syndications platform. This should bode well for accelerated fee income generation. The current list of potential transactions has never been greater in this business line.

To provide you with an idea, we currently have five new transactions in the final stages of securing a mandate and we are well advanced in the negotiations with clients to move forward with six more transactions. Christopher will guide you through our presentation providing more details about the quarterly results. But before that, I'd like to make a few comments about the recent Summit of the Americas that was held in Panama last week. I attended the CEO Summit of the Americas, which took place two days before the meeting of the Presidents of the Americas. The format of the event allowed for an important interaction between the business community and the Presidents of several countries. Allow me to briefly summarize the key takeaways. First, the United States reaffirmed their commitment to Latin America.

Second, the regional integration and investments in infrastructure are the hot topics in the chambers of the different Presidents. Third, a consensus about the need for greater transparency in the public finances. And lastly, a commitment towards syndication and a renewed effort in terms of looking for ways to force innovation throughout the region. Although there was not a final document emerging from the Summit, there was a clear understanding about what the objectives are. So, let me highlight that from the standpoint of Latin America and particularly from the Bladex business perspective, all this is good news as our focus on supporting the regional expansion of the [new] Latino companies and banks along with the growth of inter-regional trade flows fits right it.

Nevertheless I don't want to sound too optimistic as we are well aware of the challenges ahead of us in 2015, which I would cite for instance; the divergent asset growth in the region, the more difficult environment for certain clients in commodity sectors, the global economic scenario with the possibility of increasing interest rates, among others. Bladex will continue to focus on opportunities across the region while being very selective about the types of transactions and deals we engage in doing. We remain committed as expressed before to increase steadily our net interest margin as well as our fee income. As you know also, our Board has approved a dividend of $0.385 for the first quarter of 2015 confirming two things. First, the solidity of our results and the commitment of the Board of sharing with our shareholders the positive results of the bank.

Lastly, let me comment that yesterday as you also know well, we had our Annual Shareholders Assembly. I'd like to thank all of you for your continued support of Bladex and particularly express, in the name of our Chairman and my personal name, our gratitude for your confidence in us to continue to manage the organization for another term of three years. Thank you very much. I will now turn it over to Christopher to guide you through our presentation. Thank you again. Christopher, please.

Thank you, Rubens. Hello and good morning, everyone. Thank you for joining us on this call today. So as usual in discussing our first quarter 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 that is being webcast as we speak. So before we go into more detail, let's start on page 4 and 5 with a quick rundown of the key financial highlights and drivers that shaped this quarter. The first quarter of 2015 closed with net income to Bladex shareholders of $28.8 million compared to $36.1 million in the previous quarter and compared to $23.5 million in the first quarter of 2014.

In order to accurately present performance in our recurring business activities, we focus on what we label business net income, which is recurring net income derived from our principal business activity of financial intermediation; which generate net interest, commission and fee income. We also will refer to it as core income or income from core activities. And this business income reached $26.4 million in the first quarter, up 10% compared to the first quarter of 2014 on the rise of net interest income and higher average portfolio balances. Business net income was down 14% from $30.5 million in the fourth quarter of 2014 mainly due to lower net interest income brought about by slightly lower average commercial balances and lower fee income from our structuring and syndication activity (inaudible) transaction this quarter despite the (inaudible) and transactions pipeline.

Quarterly net interest margin was 5 basis points above the level seen in the first quarter of a year ago, but shrunk 8 basis points below the previous quarter level. And in a similar fashion the quarterly net interest spread, which we present difference in average interest rate earned versus average interest rate paid, rose 6 basis points year-on-year and dropped 8 basis points quarter-on-quarter. This quarter we continued to closely monitor the asset quality of our exposures in a couple of industry sectors as mentioned already by Rubens. Bladex Bank has reserves to the extent needed without any significant impact in the provision line. Business return on assets and return on equity metrics dropped quarter-on-quarter, but increased year-on-year because of the volume margin and spread drivers I just mentioned.

Business efficiency ratio was 33% in the first quarter of 2015, 1 point above the previous quarter, but improved year-on-year at 2 points below prior year levels. Last quarter we made the move to reporting Tier 1 Basel III numbers and that Basel III ratio of capitalization stood at 16.4% at the end of the first quarter of 2015, that is up from 15.6% in the previous quarter and still slightly above the Basel I levels, which we continue to report temporarily for the sake of period comparison purposes. Last, but not least, in the announcement that came out early yesterday, the Board of Directors declared a dividend payment for the first quarter of $0.385 a share, which adds an attractive dividend yield component to our total shareholder value proposition.

So now, let's look into the quarterly numbers in 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 first quarter of 2014. Year-on-year quarterly net income was up [some 20%] compared to the first quarter of 2014. Net interest income was a significant driver for that on higher average portfolio balances and higher net interest spread and net interest margin. Other income mainly from the participation in the investment funds were also a driver of net income growth. On the other hand, fee income dropped year-on-year based on the very limited structure in fee income this quarter. The minor change in provision for loan losses was offset by a small year-on-year decrease in operating expenses mainly from lower professional fees.

Moving to the quarter-on-quarter comparison, you see net interest income dropping compared to the fourth quarter of 2014 on account of lower average loan portfolio balances and lower net margin. Fees and commission income dropped as well compared to the fourth quarter where we saw a record number of deal closings compared to [very low] activity this quarter. Non-core income, which mainly represents the participation in investment funds, was down a bit compared to the fourth quarter performance. But operating expenses were also down mainly due to seasonal effects recorded in the fourth quarter of 2014. On page 7, we take another look at net interest income and margin. Both were down quarter-on-quarter, but were up year-over-year, which in our view provides a reasonable base for gradual improvement of the remainder of the year subject as always of course to economic developments in the region and in global capital markets.

Year-on-year interest income and margin levels were up on a greater business scale, stable lending rates, and improved funding costs. Of course the variance in net interest margin was a combination of lower lending rates from seeking credit quality and stability over volume and a mix shift in the funding structure as (inaudible) which were lower during the quarter picking up however towards the end of the quarter. On page 8 we highlight the average portfolio balances growth and segmentation. Year-on-year the corporate client segment has grown significantly underlying the secular trend we have seen in the bank's [diversification] profile over the last several years. Quarter-on-quarter, lending to financial institutions (inaudible) of momentum towards higher quality deposits we saw in the last quarter. Peer lending decreased.

On page 9, we present breakdowns of our commercial portfolio balances by country on the left and by industry sector on the right. Changes versus the previous quarter have been minor as we gradually trim exposures in certain countries and industry segments while we grow in others. We continue being a short-term lender focused on trade finance. These core elements combined with our broad diversification profile allow us to be very agile and effective reacting to any changes in the operating environment. This leads me to page 10 to show the evolution of credit quality and reserve parameters. We monitor our exposures in countries, sectors, and clients and this quarter we had only minor adjustments to our reserve levels with minimal net impact on the provision line.

As a consequence of these small specific reserves, the non-accruing portfolio increased disproportionately to still very modest levels at 0.3% of total portfolio balances. Moving on to page 11, a quick glance at op expenses and efficiency levels. Operating expenses saw a decline versus prior quarter levels returning to a more normalized run rate. The efficiency ratio was nevertheless a bit higher this quarter on account of lower revenues. These comments apply also to the business efficiency ratio, which looks at our return base of expenses and revenues and excludes non-core revenues and expenses. Moving on to page 12, we show our fee income evolution. We came from the fourth quarter of 2014 that saw record activity and intermediation and syndications business.

And despite the fact that this quarter we had no closed transactions and very limited secondary margin activity, we still feel good about our prospects for the remainder of the year. Our pipeline, as Rubens mentioned, looks promising indeed and some of the transactions are well advanced in progress as he stated. On the letters of credit side, we are seeing increased diversification of the sources for that business, which we believe is necessary in order to provide a sustainable flow of business in the current environment of elevated market volatility. On page 13, we made reference to our non-core income essentially stemming from the remaining passive investment and the investment funds formally owned by Bladex.

Fund performance is up year-on-year, which is a good thing of course, and quarter-on-quarter again we came out of a great fourth quarter and so our first quarter results were slightly below that. We are pleased to see them continue generating positive returns. But in line with our strategy to focus our efforts on strengthening our core competencies, we continue to work towards our exit from this participation and therefore made another redemption this quarter. On page 14, we highlight return on average equity and capitalization trends. In terms of year-on-year trend, the return on average equity considered to be on track. Capitalization levels remained strong as mentioned before as the quarter-end Tier 1 Basel III ratio stood at 16.4%.

And finally on page 15, we highlight our focus on total shareholder return. We of course continue to see the stock price and liquidity of Bladex shares heading in the right direction. We see more of that trend, which we think is a function of a gradual but consistent improvement in core performance. The Board of Directors again authorized a quarterly dividend payment of $0.385 a share. And with that, I'd like to hand it back to Rubens for Q&A. Thank you.

Thank you, Chris. Ladies and gentlemen, we are ready for your questions.

(Operator Instructions) Tito Labarta, Deutsche Bank.

My question is in terms of asset quality since we did see some deterioration though it's still a small percentage of the portfolio, but just want to get a sense how you see this evolving with the credits that became non-performing. Could you also mention whether these related all to the oil and gas sector or do you see any concerns there just given the lower oil prices? And then on the back of that, we did see provisions were pretty low because you had some provision reversals, but given that looks like some deterioration in asset quality, do you think that would be sustainable going forward? Do you think provisions will need to increase going forward? So, if you can give some more color on that would be helpful. Thank you.

And let me address first that we didn't have any deterioration in our portfolio when it relates to the oil and gas industry. The portfolio in this segment as we disclosed in the last call is comprised of exposure to different segments in downstream, upstream, and integrated; and the only one that has little more challenge is the upstream, but we have very solid credits in that type of portfolio. In terms of the deterioration that we had in our portfolio this year, it's more related to commodities and specifically to the sugar industry where we have been more challenged environment for the sugar mills with high inventories and very low prices of sugar. Some companies that were little more leveraged in terms of investments in coal generation for energy had to confront some more challenged situations.

So as I mentioned in my initial remarks, we are well advanced in the negotiations of the companies, we have good guarantees so we don't see a major problem there. Although as you know very well this takes time to resolve, but the medium-term prospects are very positive. In terms of provisions, what you have seen overall was a slight increase in our provisions by $300,000. There was movement between the loans and off-balance sheet provisions because we increased our activity with letters of credit. So, that's why you see an increase here and a reduction in the loss because the loan book has reduced. Overall, the levels of provision that we see in our books we are very comfortable with according to the types of credits we have and the tenured credits that we have as well. So, you see the movement of provisions moving forward according to the eventual growth of our loan book.

Okay. So, is it safe to assume that you feel comfortable with the asset quality when some of these issues you said and the medium-term prospects are pretty positive. So, do you think you can see some improvement there or could there be some more deterioration in the short term?

In the short term we don't see more deterioration. We are comfortable as I told you and it is something that we do constantly, we have credit reviews and we review the different sectors and how we are faring in terms of the exposures we have in these different sectors and what we see gives us the credit quality to tell you that we don't see any major problems. And just another comment I like to make, we had also in the first quarter a recovery of $600,000 of an old credit that we had in Argentina stemming from the crisis in 2001, $600,000. So, that's one of the reasons also you saw an impact on provisions on top of the reduction of the portfolio.

Maybe just one more question if I may because we did see the loan portfolio I guess in Brazil and also in Peru decline in the quarter. I guess Brazil is kind of understandable, I know growth in Peru has also been probably lower than expected. But is this just in terms of really being cautious I guess particularly in Brazil and not lending much there and maybe you can give some more color why we saw the decline in Peru.

As you know, Tito, we have short-term exposure in the different countries, 74% of our portfolio continues to be short term. And the first quarter is by our definition the slower quarter we have every year. So when we see, it's basically the seasonality that happened in Peru. Brazil, we'll be much more careful as you alluded to, but there are still interesting opportunities in Brazil that eventually will create benefit in this market environment. But as I told as well, we will be very selective. So don't see any major problem in Peru, it's just the seasonality and Brazil, we'll continue to monitor closely and see how we can benefit the business opportunities will not have there.

Great. Thanks. That's very helpful.

(Operator Instructions) Chris Delgado, JP Morgan.

I just have one quick question with regards to your net interest margin. You saw some compression there and you mentioned in the release that it related somewhat to competition. Can you talk a little a bit about the regions that you're seeing increased competition and the types of companies that have basically increased their expectations for pricing?

I'll try to respond. I again respond to consider that the question was the communication on (inaudible). I understand that your question's about competition and increasing competition in our portfolio. What I can tell you basically is that one thing that we see when we have downturns and more challenging economic environment, naturally companies and banks tend to focus on more individual credits. So as Bladex has always been a bank that focuses on good quality credits, in situations like this competition by definition increases and that leads to an impact in our net interest margin as you alluded to. On top of that because the first quarter was a quarter that we had more short-term transactions, then naturally you had another impact on our net interest margin and net interest spread. So, it is a combination of focusing on quality if you will in terms of good credits by the banks and increasing competition.

And second, a focus on the short-term of the curve where we have more demand because in this first quarter, that's why we say our pipeline looks solid, because several of our clients told us that they are postponing their investments for the second quarter to have a better understanding how the economy in the different countries will behave. So, that's why you've seen impact on the net interest margin. And definitely in terms of the funding books that you asked too, we continue to diversify funding. We are looking to eventually go back and do some more (inaudible) in markets as we did in last year. I think it's a very good moment for us to consider improving our funding. We are not losing any type of funding, it's the opposite. Banks are very eager to fund the bank, but we are focusing much more on the more structural type of funding in terms of doing private placements, we have increased quite a bit our private placements recently, and extending the tenure of the funding and take advantage of course of this availability of liquidity to manage funding clients (inaudible) of funds the banks.

Okay, great. Thank you.

(Operator Instructions) Jeremy Hellman, Singular Research.

Just wanted to ask about something I haven't asked about in a long time. But wanted to go back to what your kind of delta is to rising interest rates across your loan book. I guess the larger question is how much of the book is of a variable nature and so maybe a way to quantify it if US based rates went up by 1%, what's kind of the delta to your earnings?

Jeremy, if you allow me, I'd like to take that question. The vast majority, [98%]; don't quote me on that exact percentage, but a very, very large portion of bulk of business is of course variable and so any increases in base rates would be passed on almost automatically as we quote our lending rates on a LIBOR basis and we fund ourself on a LIBOR basis as well. Even in those instances where we have funding through issuance of bonds which are fixed rate, we swap that back immediately into floating. So, we don't really have much of an impact in terms of a reprising risk.

And at the end of the day if you consider that there's always an equity portion underlying our lending towards our clients, which does not carry an interest expense element, a gradual rise in the interest rates would actually benefit our bank as it would be the case for any other bank as well. So from that perspective, what's critical to us is the reprising cycle which in our case is extremely short, less than two months based on our internal GAAP analysis. And so we've been hoping for a slight rise in interest rates for the last several years, it's not happened so far and we don't bet on it happening this year either. But as and when it happens, we will stand to benefit.

Okay. Thanks for that color, Chris.

(Operator Instructions) And at this time we have no further questions waiting to be answered. I now like to turn the call back over to Mr. Rubens Amaral for closing remarks.

Thank you again, Josh. Thank you'll, everyone, for your attention today. It is a very challenging environment as we discussed, but we are very confident that we are well positioned to benefit from the marketing balances we might see forward. So, I'm looking forward to talking to you on our next earnings call for the second quarter 2015. Have a great day, everyone. Thank you.

Thank you. Ladies and gentleman, this concludes today's teleconference. You may now disconnect.