Foreign Trade Bank of Latin America Inc (BLX) 2015 Q3 法說會逐字稿

Hello, everyone, and welcome to the Bladex Third Quarter 2015 Conference Call on today the 15th of October, 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, it is my pleasure to turn the call over to Mr. Rubens Amaral for his presentation. Sir, please begin.

Thank you, Katty. Good morning everyone and thanks for joining us today for our third quarter 2015 earnings call. Our performance this quarter demonstrates the quality of our earnings and our commitment to position the Bank to do well in a more challenging economic environment without compromising the credit quality of our portfolio.

In my comments today I will touch on a number of important elements to explain how we achieved these results. I'll start with the highlights of the third-quarter results and then I will share our views on credit demand, fee income, how we are in terms of credit quality, the objectives we have set for the fourth quarter, outlook for Latin America, and how it impacts our business, review on Brazil, and a final comment on liquidity management.

So let me start with the highlights of our financial results in Q3. Average balances increased by almost $100 million. Margin on loans increased by 9 basis points as a result of pricing discipline and more medium-term transactions. Total fee income increased by 121% as both our contingency and syndication businesses performed very well this quarter.

The return on equity reached 13.9%. The efficiency ratio improved to 26%. We have added 22 new clients to our client base which led us to have an increase in net income of 66% quarter on quarter, 26% year on year, a quite successful performance overall.

Let me move on to credit demand. It is important to emphasize that we continue to see demand in the markets we service. The total credit disbursements for the quarter amounted to $3.3 billion. Although the majority of disbursements was related to transactions up to one year, the medium-term portfolio continues to grow. This quarter alone medium-term disbursements to our traditional clients reached $513 million, which as a consequence contributed directly to increasing margins in the quarter. On the other hand, it's important to stress that we were not aiming at reducing the size of our portfolio in Q3. But the reasons we had lower end-of-period balances this quarter were; first, because of prepayments of several transactions; and second, quite a few clients requesting to defer the disbursement of some transactions to early in the fourth quarter.

As far as fee income is concerned, we had mentioned previously that we had a solid pipeline in our syndication business. During the quarter, we secured six important mandates of which four transactions have been already executed in Q3 and still remaining are being executed as we speak. These four transactions were done with clients from Peru, Honduras and Ecuador.

In terms of distribution of these deals it's important to highlight that we have worked with the important international, regional and local banks as well, thus contributing to consolidate our franchise in this important line of business and not less important, securing a stable and sustainable level of fee income.

As far as credit quality is concerned, it remains healthy. We saw no increase in non-performing loans and increasing [reserve] provisions was the result of adjusting the level of specific reserves to reflect the terms of restructured credits, which were already non-accrual status in previous quarters. Although we remain comfortable with the overall credit quality of our book of business, we're monitoring constantly our credit exposures, mainly in the sectors and countries that have been more negatively impacted in light of headline risks and the headwinds from the global and regional environments.

Then looking forward, the objective for Q4 remains the same as for Q3, increase average balances and margins, hit the momentum of the syndication activities to further increase fee income while expanding the client base. As far as 2015 is concerned, we now expect portfolio growth at a level of 4% for the year taking into consideration the sluggish economic growth and the headwinds the region is facing.

With that, let me talk about the outlook for Latin America. It indeed remains challenging and GDP growth forecasts for 2015 and 2016 have been revised down across the region. As you know, this sluggish economic performance may impact negatively the decision of companies to invest and grow. On the other hand, we have seen a wave of devaluations of currencies which impacted the decision of companies about whether or not to increase their indebtedness in US dollars. Not less important was the reduction in commodity prices, including oil prices, which reduced the need for financing of several of our clients. On the other hand, the US economy continues to improve and several countries in our region are benefiting from that, primarily Central America and Mexico naturally. The favorable trend impacts in a positive way the demand for credit in those countries where Bladex is well positioned to capture new opportunities.

Although not as vibrant as in the past, trade flows will increase in 2015 and 2016, which in itself is another important source for financing in US dollars. And again, this reality plays to our strengths as we specialize in financing trade. We are also seeing some activity in the M&A arena in Central America and some of our clients are looking to secure medium to long-term funds to provide them with a better liquidity and working capital management. This is another example of a positive impact in the demand for credit in US dollars, which for Bladex has significant positive impact, as; first, it helps to grow our portfolio; and second, it's an opportunity to continue to expand the syndication platform and then the sustainable fee income levels.

Therefore, although as you can see our business is being impacted by the current situation in the region in several ways, the Bank continues to be well positioned to capture the growth opportunities across the different markets we service as has been historically the case for this organization.

Okay, now, let's talk about the situation in Brazil. Everybody is concerned about Brazil. We just heard that Fitch downgraded Brazil to Triple B minus, [still being] investment grade rating, but again [an onus] downgrade. My first comment would be that the recent downgrade by Standard & Poor's and now by Fitch was not a surprise for us, as we had already anticipated and adjusted our internal rating last quarter.

The unfortunate deterioration of the economic environment in Brazil is something we have been monitoring since last year, thus our decision to focus on trade, short-term and companies with competitive advantages when doing new transactions in that specific country. Let me say that our concern is with a protracted recession associated with headwinds from the global environment in the foreseeable future. Nevertheless, as far as our portfolio is concerned, let me point out that Bladex has no exposure to the construction companies associated with the corruption scam in Brazil, the so-called Car Wash scandal. And the total exposure to Brazil is now down to 25% and the majority of our credits are short term, so much so that the duration of our portfolio it is only 13 months in that country and most of our exposure is trade related.

The non-exposure to Brazil, just to give you more color, quarter over quarter dropped by 10%, which amounted to almost $200 million. If we look at the accumulated credit disbursements for the first nine months of 2015, the reduction when compared to similar period last year was even more pronounced, 32%, amounting to $500 million. These figures demonstrate clearly that; first, we're managing proactively our exposure to Brazil; and second, we're being able to collect which just affirms the inherent quality of our credits in the country. For your information we have added a slide in our earnings presentation with updated information about our exposure to Brazil.

So let me move on to liquidity management. We maintain high levels of liquidity and continue to diversify and strengthen our funding base. Deposit levels remained stable at high levels, over $3 billion, and we continue to have very good access to liquidity through a variety of channels, [broader] replacements, banking lines, syndicated funding transactions, which provide us with medium-term funds and which you'll probably have already read about in some of our recent press releases.

Lastly, I'm pleased to inform that our Board of Directors has declared a dividend of $0.385 for the third quarter of 2015, confirming once again the positive view of the results of the Bank and the prospects for stable earnings generation moving forward. This represents a dividend yield of over 6% at the current price level, which makes it very attractive indeed.

With that I will now turn it over to Christopher to guide you through our presentation.

Thank you very much. Christopher, please.

Thank you, Rubens. Hello and good morning, everyone. Thank you for joining us on the call today. In discussing our third-quarter results, I will focus as usual 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, which is being webcast as we speak. So before we go into more detail, let's start a recap on pages 3 and 4 with a quick rundown of the key financial highlights and drivers that shaped this quarter. So the third quarter 2015 closed with net income to Bladex shareholders of $33.6 million, compared to $20.2 million in the previous quarter, and $26.6 million in the third quarter of 2014.

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 and also other income. We also refer to it as core income or income from core activities.

And so, in this business net income reached $29.2 million in the third quarter, up 30% compared to the second quarter, mainly as commission income caught up with expectations and structuring deals were finalized in the quarter. The other was increased net interest income, driven mostly from higher lending margins. Business net income was up 12% from $26.0 million in the third quarter of 2014, mainly due to increased net interest income from higher average commercial portfolio balances. The quarterly net interest margin was 4 basis points higher than previous-quarter levels as lending margins improved but trailed the level seen in the third quarter of a year ago, mainly on account of higher average liquidity balances.

The quarterly net interest spread showed a similarly quarterly pattern. Year to date both net interest margin and net interest spread are trailing prior-year levels by 3 basis points at 182 basis points and 166 basis points respectively, due to higher average liquidity balances and lower lending margins. While origination momentum continues robust, ending period balances declined quarter on quarter at the end of the third quarter on account of clients' decisions to defer disbursements to the fourth quarter, as already Rubens alluded to.

We continue to strengthen reserves moderately taking into consideration current market conditions with focus on our loan portfolio. The reduction of end-of-period contingency balances and changes in their exposure profile help mitigate the provision impact on overall reserves.

With improved operating results in the third quarter, business return on assets and return on equity, metrics increased quarter on quarter and year on year. The business efficiency ratio was 28% in the third quarter 2015, improved by five points versus the previous quarter, and also improved two points versus the third quarter of a year ago. The Tier 1 Basel III ratio stood at 15.2% at the end of the third quarter 2015, down from 16.1% in the previous quarter, which is below the Basel I levels, which we continue to report temporarily for the sake of period comparison purposes. The drop in Basel III versus Basel I capitalization metrics is attributable to more risk-sensitive weighting impacting assets under Basel III guidelines, which is consistent with what we are reflecting in our provision and reserve levels.

And last but not least, for the announcement that came out the day before yesterday, the Board of Directors declared a dividend payment for the third quarter of $0.385 a share, which continues to add an attractive dividend yield component to our total shareholder value proposition. So let's look into the numbers in a bit more detail.

Moving to the next slide, page 5, shows the evolution of net income for the nine months 2015 when compared to the same period of 2014. Year on year total net income nine months 2015 was up some 17%, compared to the same period of a year ago. Net interest income was the main driver for that on higher average portfolio balances. The increase in commission income this year lag behind the prior-year period and non-core income mainly from the participation in investment funds continues ahead of last year's levels.

Moving to the quarter-on-quarter comparison on page 6, we see net interest income rising compared to the second quarter 2015 on account of higher lending yields, which increased 10 basis points together with slightly lower cost of funds minus 1 basis point and a 1% increase in average lending balances. Fees and other income increased significantly versus the second quarter 2015 as four mandates were closed in our letters of credit and contingency business also showed more activity. Provisions increased at a slower pace compared to the prior quarter and expenses were nearly flat. Non-core income, which comes from the participation in investment funds swung back to a sizable gain in this quarter.

On page 7, we take another look at net interest income and margins. Year on year interest income was up mainly on weighted average portfolio balances while margins trailed by 3 basis points. The quarterly variance in net interest margin represents a turnaround as lending rates increased in an environment of higher headline risk in the region. The average original tenure of our disbursements increased slightly and that also contributed to the quarterly rise in our lending margins.

On the funding side, we benefited from our counterparties' preference for high-quality names on the one hand and the increase of average deposit balances on the other the combination of which allowed us to increase medium-term funding without adding to overall funding costs.

On page 8, we show average portfolio balances growth in segmentation. Year on year, both corporate client segments and financial institution segments grew moderately. Same story quarter on quarter where portfolio averages picked up 1%. Ending balances declined at the end of the quarter from a few prepayments and disbursements that clients deferred to the fourth quarter. The fundamental portfolio characteristics with trade finance focus and short-term nature remained intact and we believe these characteristics are very relevant and beneficial to Bladex in these times of greater uncertainty.

On page 9, we present breakdowns of our commercial portfolio balances by country on the left and by industry sector on the right. Among the more significant changes versus the previous quarter was the trimming of our Brazil exposures, just as Rubens already mentioned, to now 25% of the portfolio. While in Mexico we dropped some business that we felt was not well priced at this point. Instead, we grew in Central America, especially Panama, also Peru and some other places. Sector-wise, we decreased our exposure to oil and gas and increased the exposure to banks while all other sectors had only minor changes.

On page 10, we provide an update on our Brazil exposures, including sector exposures. Lending to top tier banks and producers of soft commodities represent the largest sector exposures. The pronounced bias towards credit finance and the short dated composition of our book of business remain in place.

Let's move on to page 11 where we show the evolution of credit quality and reserve parameters. While non-accruing loans remained stable quarter on quarter, we did increased specific reserves with impact in the provision line to reflect the current status of restructuring negotiations which are still ongoing. Overall, generic reserves for both funded and unfunded portfolio balances remained stable, despite lower end-of-period portfolio balances to the shift in portfolio exposures between funded loans and unfunded contingency business and between country, sector and client exposures. Also contributing to a high reserve coverage ratio were long original payments of our new disbursements.

On page 12, we show our fee income evolution. This quarter we were able to bring four mandates over the long awaited finish line, and that provided the expected jump in fee income, so we are very pleased with that. And as Rubens mentioned in his remarks, we expect further closings in the fourth quarter and early next year, subject of course to the requirements of our clients. On the letters of credit side, we continue to make progress, generating increased fees and commission income throughout the ebbs and flows of this very short-dated line of business.

Moving on to page 13, a quick recap of operating expenses and efficiency levels, expense levels were stable to slightly declining versus the comparison periods. The business efficiency ratio, which excludes the non-core income from the participation in the investment front and the overall efficiency ratio both showed improvement as a result of higher revenues, which is where we expect further efficiency improvements to come from.

On page 14, we highlight return on average equity and capitalization trends. Return on average equity continues to be on track. Capitalization levels remained strong with the Tier 1 Basel III ratio dropping to 15.2%, reflecting higher risk-weighted assets and mirroring the effect on reserves of shifts -- coming from shifts in portfolio exposures.

And finally, on page 15, we highlight our focus on total shareholder return. The Board of Directors continued its consistent approach in evaluating the Bank's core performance trends, and again declared a quarterly dividend payment of $0.385 a share.

And with that, I'd like to hand it back to Rubens for the Q&A section. Thank you.

Thank you, Christopher. Ladies and gentlemen, we're ready for the Q&A session. Katty please?

Yes, sir. At this time we'll open the floor for questions. (Operator Instructions) Jeremy Hellman, Singular Research.

I wanted to dig into the syndication pipeline a little bit, couple of questions there. First off, congrats on the number, and I'm curious is that figure in line with where you expected it to be as of our call a quarter ago? And then secondly, just looking at that slide 12, you are a joint lead arranger on three of the transactions noted. Were those, the other joint arrangers, local regional banks or are they multinational type banks?

Okay. Thank you, Jeremy for the question. The pipeline of syndications, as I alluded in my initial comments remains solid as we're seeing several opportunities coming from our clients, mostly in the liquidity and working capital management needs that they have. We have been working in the pipeline. There was -- when we mentioned the second quarter, there was around 9 to 10 transactions, we secured six mandates, as I said, four have been executed, two in execution, one of them is already executed, another one is in the process. And we have a good disposition from the clients with any of the pipeline to have at least two to four more in this quarter.

Of course, that will always be dependent on the clients' decisions to make, but the information that we have so far and what we're seeing leads us to be very confident about another good performance for the fourth quarter.

As far as distribution goes, I think that's one of the points I tried to highlight in my comments as well. It is quite remarkable that we are working with both local banks, regional banks and international banks. If you see the four transactions, you're going to see that the transaction in Peru, we did with an international bank, well known in the marketplace, was Banco Santander. Another transaction in Peru would be the Chinese bank and that was ICBC.

And transaction in Honduras we did with FMO, a regional multilateral bank from the Netherlands. And the transaction in Ecuador, we did with several local banks. So it provides you a good flavor about how important is the network of distribution we have with different players in the marketplace.

Okay. Thanks. That's some great granularity there. And then just one follow-up, just looking at -- you mentioned two to four more deals this quarter and even kind of looking over the horizon to the 2016, are deal sizes likely to be consistent with those that you closed in Q3, kind of that -- you've got $25 million, $40 million, $60 million, $102 million, I know in the past kind of the target market, I had in my head was kind of $50 million to $250 million, so I'm wondering, if you see any potentiality to start moving up into the nine-figure deal space?

You know that one of the interesting things about this business for Bladex is that our switch thought is different from the big banks. So we are in the range of deals that vary from $50 million to $200 million. So although, we have in our pipelines a few deals that are very close to $100 million, $150 million you will continue to see deal sizes around this figure. I would say around $70 million to $80 million. That is where we see majority of these deals coming, but you're going to see one or two or three deals that go over the three digits figure. And we are well positioned that there is one important deal that is going on right now, and the deal altogether, it's close to $300 million and a few other deals that are smaller. There is one of, if I'm not mistaken, $15 million to $20 million. One that we just closed was $100 million. And so, I would say you can expect a few transactions that are over $100 million, but we're going to be around this deal size of $80 million to $100 million in the majority of the deals.

Great. All right. Well, appreciate that and best wishes for the balance of the year.

Thank you.

[Claudia Velicia, BT Volaris].

Thanks for taking the call, the question. Would you like to comment on the off balance sheet provision changes over the last quarter, please? (multiple speakers)

Okay. I'll take that question. Thanks very much for the question. Well, provision changes are a function of, of course, our reserve methodology which as you know focuses both on funded transaction, meaning the loan portfolio, and also the unfunded transactions which is our contingency letters of credit business. We view both exposures basically in the same fashion in terms of risk exposure. So we apply the reserve methodology equally to both funded and unfunded transaction.

Of course the unfunded transactions are a little bit more volatile. Letters of credits are used in sparingly in the majority of the countries that we operate in and of course, are more widely used in countries that represent somewhat higher risk. And so, we have quite a bit of volatility in that in the contingency business in terms of balances, and also in terms of reserve requirements, given the fact that depending on the countries that we issue, that we confront those LCs.

And so, our approach generally is to balance out these -- the higher degrees of volatility on the unfunded side. And so, if you look at our portfolios, you'll see quite a bit of provision increase on the funded side which had a lesser degree of decline in balances, and also represented a greater shift in terms of our country and client exposures. We talked about reducing our exposures in Brazil, but that business in Brazil is mainly trade, it has good risk quality, that is taken into consideration by our risk methodology, reserve methodology. And so it will be compensated for that decline imbalances in places like Central America, which they have a lower country risk rating than other places and we have a decreased balances in such as Mexico and Brazil and Chile. And so as a reflection of that our funded portfolio did require more reserves and our unfunded portfolio required less reserves. The balance of it really enhanced that generic reserve levels, but non-specific reserves remained stable over the course of the quarter.

And the only increase actually in absolute reserve levels came from allocating more provisions through these non-recurring balances that we have, the $20 million that we have in non-accruing, and where we are reflecting the current status of restructuring negotiations. I don't know if this gives you enough color.

Yes. That sounds pretty good. And another question about -- regarding the hedge fund, I know you that guys plan to wrapping it up in the near future, but just to have an idea of how that might impact earnings in the next couple of quarters. Like what is the hedge fund actually invested in, what's the strategy, because the returns have been quite volatile one quarter up, one quarter down, I mean [four, four] is quite a lot. I don't know if you could give some more insight into that, please?

Now, let me tell you that first of all that we remain committed to exit the investment in the fund by April 2016 as we have announced since we decided to sell the asset management company. We continue to redeem over the course of the year, so our exposure is being reduced gradually as the fund provides us with returns. The fund is primarily invested in strategies in Latin America, but they have some strategies also to hedge elsewhere, but the primary objective its macro strategy in Latin America.

We are passive investors as of now. So, for us we are just hoping that the fund continues to perform well. But as you said, and that's the very reason we decided to exit this activity. This is very volatile and we can have a very good quarter as this quarter was, and another quarter that might be not as good. But so far, what we have seen is that the fund continues to have a good performance in these initial weeks of the months, but this is very difficult for us to predict.

For me what matters and is what we are demonstrating to you is the core is strong, resilient, and we are well positioned really to continue to deliver a stable 12% ROE, that's our target for this business.

Could you comment please on the attributions of why this fund was up so much this past quarter, just to have an idea of like where within the macro strategies of Latin America they might find themselves?

Well, the devaluation of the currencies, of course, play an important role. But I would prefer not to be commenting on the results of the fund other than say that it was a good quarter. They have demonstrated what they did in the past. If you remember and follow Bladex well, you remember that in the small volatile times, this fund always performed well, and had a stellar performance. So I think it's basically what they have been doing all along. That's what we had in this quarter. But you can see that with the volatility that we have experienced in Latin America, they have benefited quite a bit and got a very interesting return to us.

(Operator Instructions) Jordan Hymowitz, Philadelphia Financial.

Congrats on a good quarter. I have two questions. One, what do you think is the expected level of fee income next year on a quarterly basis or an annual basis, forgetting by quarter that is somewhat lumpy, is there a range, syndication fee income specifically?

Well, Jordan, nice to talk to you again. We are in the process of preparing our budgets for 2016. What we have seen so far indicates that we -- it's going to be a very challenging year. As you have seen this year, the deduction in syndicated loan facilities was very important overall in the market. But we positioned ourselves very well to be at levels similar to last year, which for us is quite an achievement. This is an important source of diversification of income to us, and we will continue to pursue. So I will be able to give you more color about this when we meet next time for the fourth quarter conference call.

Okay. Next question is loan growth fell and partially because you cut that exposure to Brazil. As the banks in Brazil itself are now shrinking on a real basis after inflation, do you think your Brazil loan book will grow next year in particular or said another way will growth in the portfolio if it occurs next be a result of diversification?

Well, thank you for the question. I think you saw in our presentation that we have provided you with information about our exposure in Brazil and how it evolved on the course of the last 10 years. We did see an important diversification that we have applied and we continue to do so in terms of our portfolio.

We are very concerned of the challenges we have in Brazil, but we are also very cognizant of the opportunities we have in Brazil that we will not let pass if they're within the guidelines that our risk area has defined for us to pursuing that specific country. So what you're going to see is that we'll continue our effort of diversification. There are markets where we can see more important growth such as Mexico. Mexico -- it's an important market for us, very, very competitive, but we expect to see more growth in that market. As Colombia really picks up, its investment in infrastructure we might see more opportunities in Colombia to grow our portfolio and then we will grow there. And as Chile also, although very competitive, presents now with all the changes we are seeing because of this headwind market in Latin America is experiencing, we're seeing opportunities also to diversify into Chile. Not less important Peru.

So in these countries, you're going to see Bladex making an effort to continue to grow in important ways. Central America, our home turf, also presents very good opportunities as it has continued to improve its economic outlook. These countries will benefit from this and then we might have more opportunities there. So overall, we are working, as I said to you on the previous question. And our budget for 2016, it's going to be another challenging year. Growth has been revised down. As we discussed already and you know very well, but we expect the growth to come from different countries and we will not let pass the good opportunities we might see in Brazil because there are still very good opportunities there.

Okay. So, final question, so said in another way, the growth next year in earnings, if there is growth, will basically be from the fee income in the diversification side, most likely, and not from the core banks.

Well the growth next year will come from a different type of mix of our portfolio and one thing that, I think, is important to highlight and thanks for asking this question, is that margins have been adjusted up.

So we expect also our net interest -- interest income to increase in an important way because margins are being adjusted up and you saw that we have been able to increase 9 basis points in the net interest margin. That means that our margins on loans increased quite a bit for us to achieve this amount in an increasing mean and that's going to be a reality.

So, next year you might expect that in terms of expenses we will remain very committed to efficiency and in terms of fee income, we will continue to invest in this platform of syndications, right, and we will benefit from the widening of margins in our traditional book of business. So it's a combination of the tree and we feel very comfortable with what we saw in this very challenging Q3 that might be a proxy for what's coming next year in 2016.

Got it. Thank you.

Thank you, Jordan. Nice talking to you.

(Operator Instructions) At this time I am showing no further question. Do you have any closing remarks before we wrap up?

Yes. Thank you, Katty. I'd like to thank you all for stepping into the call today. We are very satisfied with our performance in Q3. And as we have told you all along the Bank is well positioned to capture good opportunities in good times and in not so good times, and that's exactly what we're doing playing to our strengths. And we are looking forward to meeting with you next year when we talk about the full-year performance of Bladex. So thank you very much for your time today and for your confidence in our Company. Bye-bye.

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