Foreign Trade Bank of Latin America Inc (BLX) 2015 Q4 法說會逐字稿

Hello, everyone and welcome to Bladex's fourth quarter 2015 conference call on today, the February 19, 2016. This call is being recorded and is for investors, 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 line 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.

Thanks, Chelsea. Good morning everyone and thanks for attending our earnings call for the fourth quarter and full-year review of 2015. Yesterday, we released our results for the fourth quarter as well as the full-year 2015. I am very pleased with the overall performance of the Bank in a very challenging year, confirming the soundness of our operations and the resilience of our earnings generation.

Although my primary focus on the first call for the year has always been on the performance of the previous year, I realize that there is uncertainty about the performance of financial institutions in light of a prolonged cycle of low interest rates and possible credit problems given the backdrop of a sluggish growth of world economies and the reality of a continued reduction in commodity prices and its impact on the ability of companies to generate cash flows on a sustainable way.

On the other hand, there is concern about how emerging markets will behave most notably China and in our region, Brazil, and of particular importance to Bladex, the lackluster growth in trade flows. So it's not surprising that investors exhibit a certain degree of concern about the performance and prospects of our company in the near future. Therefore, please allow me to make some initial remarks about how you see in the current environment and why we remain confident about Bladex capacity to continue to deliver in a prolonged downturn cycle. Let me start with our view on Brazil and the Latin American economies.

The country has traditionally been the biggest market for Bladex although in terms of relative portfolio weight, you observe a downward trend since 2009. This long economic downturn in the country requires that we continue to monitor and adjust our relative exposure to Brazil. Our exposure is primarily with financial institutions and corporations involved with exports. 78% of the portfolio is short-term trade finance with duration not higher than 14 months. Any new transaction is focused primarily on trade finance, short-term with high-quality counter parties. My expectation is to finish 2016 with a total exposure not higher than 20% and possibly even lower if we don't see a meaningful improvement in the operating environment.

From a credit quality standpoint, the portfolio remains sound with a couple of exposures already restructured and two other transactions in process of renegotiation. The majority of the impact of such transactions is already recognized in our provisions.

Let's move on to the other Latin American economies. We have commented in previous calls that there is a divergent path of growth in the region. Countries with close ties to the United States are experiencing better than average growth as the American economy continues its positive trends. On the other hand, countries more dependent on commodities continue to face challenges as prices are still low and with a few exceptions don't show any signs of a stronger recuperation.

This means, that the countries where we are anticipating a possible growth in our portfolio should comprise of Mexico, Peru, Chile, and the Central American region. Although, we are comfortable with our portfolio in Colombia, the country is under more relative pressure because of the low oil prices, which has an important impact on the federal budget.

Therefore we will be more selective about the transactions we do in the country to keep the credit quality of our portfolio pristine. As an institution with capabilities of executing in most of the countries in the region, we will continue naturally to pay attention to the other markets as well as opportunities might arise or eventually any event of concern might arise.

Let me now comment about the portfolio mix, the funding structure, and how we see our net interest margin. In terms of portfolio mix, as the business environment represents a diversity of challenges in various economies, we are naturally focusing more on our traditional strengths, which are anchored in short-term trade finance business efficiently delivered to our client base of high-quality counter parties.

We will continue to consider medium-term transactions as long as they are complementary to our traditional business and reinforce our syndication and fee generation activities, offering an attractive risk-reward relation. In terms of our funding, we remain very focused on diversifying the sources of funding for the Bank while looking to closely match the funding structure to the asset profile, avoiding unhealthy funding gaps. Nevertheless, over the recent years, we have brought more medium-term funding on book to strengthen the stability of our liabilities allowing us to strategically develop our origination capacity while maintaining ample liquidity at all times.

I am very satisfied as our cost of funds remains very competitive despite a widening of spreads overall. I am particularly pleased with the level of funds available to our institution as our lenders feel very comfortable with the sound financial standing of Bladex, which continues to exhibit a strong capital base, a solid credit rating, and high-quality credit portfolio well diversified among countries and sectors.

In terms of our net interest margin, although we are focusing more on short-term trade finance, we do not expect a major negative impact in our NIM because of that focus. Let me highlight that we are already seeing a widening of spreads in the different markets we operate in for the traditional trade finance. If we look at the trends, using only December and January as example, our average net spreads went up already by 20 basis points. So let me now address the credit quality of our portfolio, what I believe of your major concerns.

The prolonged economic downturn, the sluggish growth of trade flows, and persistently low commodity prices will definitely continue to pressure cash flows of companies, a few of which might come to a situation requiring some sort of credit restructuring. During the last quarter of the year, we conclude a couple of renegotiations, recognized impairment in our bond portfolio, and absorbed a couple of charge-offs, which impacted the results of the quarter.

In terms of non-performing loans, as of today -- February, I'm pleased to inform that our total NPLs are down to 39% of the portfolio with a coverage ratio of 3.4 times. This represent only three loans; one in Brazil in process of renegotiation, one in Mexico in process of collection where we have very good collateral, and one in Colombia where we have agreed to a waiver of payment of interest while we expect a restructuring proposal from the company. These three credits have a specific provision of 70% of total exposures.

We're comfortable with the overall level of provisions in our books and absent any major credit event not on our radar currently, the movement in provisions will be a result of increase or reduction of balances in our credit portfolio.

Let me address also our business strategy and capital management approach. In terms of our business strategy, we have mentioned several times that our target ROE for our traditional trade finance business is 12%. Let me affirm that we continue committed to achieve this baseline ROE on a consistent basis. On the other hand, as we consolidate our non-interest income from our syndication business and secondary market activity, we are building the foundation for improved returns to contribute to increase the ROE to our long-term goal of 15%.

We continue to examine new initiatives complementary to our trade finance business, which can contribute to increase our fee income. We will provide more information on these activities as we bring them to market. I can anticipate, they are in the early stages of the business analysis.

In terms of capital management, I know that is a subject dear to your hearts, the Bank has a strong capitalization and a solid credit rating, which has been two important strengths of our organization. As you know perfectly well, it allows us to weather the more challenging business environment, which as I have mentioned previously, will remain the case for 2016 and possibly even longer. Nevertheless, the Board of Directors is committed to continue showing the positive results of the Bank with the shareholders primarily through an attractive dividend while always determined to maintain a very solid capital base.

Let me now make a brief comment about the performance in the Q4 of 2015 and highlight some key components of our performance in the year 2015. The results in the fourth quarter 2015 have demonstrated Bladex's resilient earnings generation capacity, which has allowed the Bank to reinforce our credit provisions as well as absorb an increase in expected credit losses for certain exposures as mentioned previously.

Christopher will walk you through the more detailed information about the performance in the fourth quarter. He will also focus on the changes implemented in our accounting as we moved from US GAAP to the International Accounting Standards known as IFRS, which was mandated by our local regulator for all financial institutions licensed in Panama.

So let me mention how we see 2015. ROAE for the year reached 10.4%, which is broadly in line with our goal of achieving consistent baseline returns throughout economic cycles. Our overall efficiency ratio improved to 30% confirming our commitment towards high productivity as well as cost discipline. Our capitalization remains very strong at 16.1% Tier 1 according to Basel III. End of the period balances for the credit portfolio remained essentially flat for the year as a reflection of the more challenging environment in Q4, but overall balance has increased in the year by $200 million as we managed our commercial portfolio within the context of cautious risk exposure management.

Total disbursements for 2015 reached $12.1 billion and let me add that in Q4 alone, we had pre-payments over $200 million. A case in point regarding our cautious risk management is our exposure to Brazil, which now represents 22.7% of the total commercial portfolio. That's down more than 5 percentage points from 27.5% at the end of the year 2014. In the fourth quarter alone, we reduced our exposure in Brazil by $200 million and more than half of the total reduction of $360 million in all of 2015. This reflects to our ability to swiftly and decisively react to deteriorating market conditions.

Despite the significant change in market environment, our fee income for 2015 reached the same level for 2014, [$21 million], consolidating our position as an important player in the syndication business in Latin America. In terms of syndicated transactions, we won eight mandates in 2015 having executed seven during the year and one is in process of being closed as we speak. We have also a strong pipeline at the beginning of this year.

We continue to share with you, our shareholders, the performance of the Bank as the dividends for the year totaled $1.54 per share representing a payout ratio of 56%, which offers a very attractive dividend yield to our shareholders. Overall, although the results of Q4 were lower than expected, the performance of our core business was very solid in the quarter despite an adverse economic context in the region providing very strong results for the year 2015.

Lastly, let me just give you some highlights for 2016 and you know that we are approaching the year with caution. Notwithstanding that, our loan portfolio will likely grow by 3%. Our NIM as I mentioned before, will continue to improve as margins are increasing. Our fee income from existing sources will remain at a minimum stable while we continue developing our additional sources of fee income and the reserves and impact on provisions will be a function of the size of the credit portfolio. So the majority of the impacts that we saw in the restructuring of the loans and credits, already absorbed, as I mentioned to you before.

So let me close my remarks by ratifying that I remain confident about the prospects for Bladex in 2016 as the Bank capitalizes on its position as a relevant player in the region with an important role in helping our clients diversify and solidify their market presence. With that, I will now turn it over to Christopher for his comments. Christopher, please.

Alright, thank you Rubens. Hello and good morning, everyone. Thank you for joining us on the call today. And in discussing our fourth quarter and full-year results for 2015, I will as usual, 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, which is being webcast as we speak.

So now, let's discuss first our transition to International Financial Reporting Standards (IFRS). As an accountant, you rarely get the chance to do something like that. So I'm pretty excited to talk about this and so bear with me for just a couple of minutes. We completed that transition at the year-end of 2015. The transition to IFRS follows a mandate established by the Panamanian regulator as Rubens already mentioned and that is the mandate for all fully licensed financial institutions in overseas. We began our work in early 2014 and based on our initial diagnostic analysis, we determined that any significant changes in our financial results arising from this transition would be quite unlikely.

And this expectation has basically proven true, even though quite a bit of time and work was put in to accomplish that transition. The main reason for this relatively smooth transition is of course that Bladex in not an overly big or complex institution. It has a focused business model, a book of business that is of high credit quality and with short average tenures, both of which helped us assimilate fairly well the early adoption of rule IFRS 9 Financial Instruments, which represented the by far, biggest departure from the concept we applied while under our previous accounting standard, US GAAP.

The adoption of the reserve model, which incorporates the concept of forward-looking Expected Credit Losses or ECLs in short as opposed to incurred losses like under US GAAP or even under previous IFRS standards, that can have quite a meaningful impact on many banks as they are required to look forward over a 12-month period or even as far as the remaining life of their exposures in the case of more advanced stages of credit deterioration. Bladex in contrast and as you well know, has an average of 330 days of life remaining on all of its commercial portfolio exposures and the majority of the business it originates has original tenures of less than a year to begin with. So these simple facts alone made the transition to the new standard much less impactful in regards to the effect on provisions and allowances.

The following Slide 3 on the presentation summarizes the main changes resulting from this transition and their impact on our financials. Other than the credit allowances and provisions I already mentioned, we have to account for a couple of changes in a few other areas. For example, our investment in the former Bladex Asset Management Unit lacked the control characteristics necessary to consolidate under IFRS in the first place, but that fact is merely a side note at this point, having consolidated that investments several quarters ago even under US GAAP and the effect of the other elements that I am going to mention are not very meaningful either.

So we also needed to change the way we account for FX gains or losses including cumulative translation differences, all of which are now reported in the income statement as opposed to other comprehensive income. We also had to change the cost amortization pattern for stock plans from straight line to accelerated amortization and we also needed to re-do other work that needs to be done to ascertain the effectiveness of our hedging relationships, which is now a work that is much more extensive and any quantified in net effectiveness needs to be recorded in the income statement.

This effect on financial statements can be viewed in the appendix of this presentation and also in exhibits 13 and 14 of the earnings release that we published yesterday. These exhibits are an abridged version of the details we will discuss in note 27 of our greatly expanded notes section of our financial statements. Those statements and notes now run a total of 115 pages compared to 69 pages of last year.

The statements will be published early next month and we trust the expanded information conforming to IFRS provides additional insights to shareholders, investors, and market participants, but overall, you should not expect anything that you did not know about before already.

On slide four and five, we get back into our regular earnings review results starting with a rundown of the key financial highlights and drivers that shaped this quarter and the full-year of 2015. So 2015 closed with net income of $104 million, up 2% from 2014 when we recorded net income of $102.4 million. And the fourth quarter 2015 closed with net income to Bladex shareholders of $23.2 million compared to $37.4 million in the previous quarter and $35.7 million in the fourth quarter of 2014.

As I will explain later in a little bit more detail, the main drivers of this quarter's performance were a $9 million swing in non-core results from the Bank's participation in investment funds and the strengthening of reserves that Rubens already alluded to including the charge-offs and the recognition of impairment loss from expected credit losses and investment securities in the face of increased credit risk and isolated exposures.

In order to accurately present performance in our recurring business activities, we focus as usual 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 other income. We also refer to it as core income or income from core activities. So this business net income reached $99 million for the year 2015, essentially flat compared to the prior year.

In the fourth quarter of 2015, business net income reached $25.3 million compared to $30.3 million in the third quarter and that is the effect mainly from provisions for expected credit losses and the recognition of impairment loss from investments securities. Regarding the dynamics of the main drivers of the variance compared to the fourth quarter of the year before, well, they were very similar to what I just described.

Asset growth was very cautious in 2015 with ending commercial portfolio balances nearly unchanged versus 2014 and the same is true for ending balances of the fourth quarter versus the third quarter and also versus the fourth quarter of the year ago. However, we did grow average portfolio balances very moderately over these periods with beneficial impact on net interest income, which grew 3% year-on-year.

On a quarterly basis, net interest income picked up 2% versus the previous quarter on average portfolio balances growth of 1% and a more robust trend in net margins that again Rubens already described to you. And speaking of margins, for the year 2015, net margins and by that I mean both net interest margin and net interest spread were actually slightly weaker compared to 2014 as a result of lending spreads that did not move in concert with the gradual rise of underlying LIBOR rates, which underpin our funding and lending rates.

Lending spreads actually tightened in the first three quarters of the year as market shifted credit focus to high-quality, low-margin business as economic conditions worsened in the region, but lending spreads however did start to improve in the second half of 2015 and by the fourth quarter, we could actually see more robust repricing in many parts of the region.

The evolution of fee commission and other income was quite good overall for the year 2015 considering the absence of structuring fee income from our syndication activities in the first half of the year as deals took longer to get over the finish line. However, the pace of syndications picked up notably in the second half and so we wound up successfully executing seven transactions in Venezuela, again as Rubens already explained in the third and fourth quarter to bring our fee income in that business to levels exceeding prior year levels. The pipeline for 2016 also looks good, so we are not anticipating having to go through the same dry patch of the first half of last year this time around. The other drivers of fee and commission income mainly our letters of credit and contingencies business performed quite well in all of 2015 and also in the fourth quarter as a result of our focus on more business diversification and improving rates.

On the provision and reserve side, there were a lot of moving parts that stemmed not only from a more difficult credit risk environment, but also from a different reserving approach as a consequence of our transition to IFRS. Please allow me a little detour here to explain. We now distinguish between performing, underperforming, and non-performing stages or buckets of credit risk and that drives varying degrees of reserve coverage dependent on the horizon of which expected credit losses are determined.

For the first bucket of performing loans, it's 12-months expected credit losses. For the other two buckets, its expected losses over the remaining life of these exposures. In longer-dated exposures, the effect of that reserving approach can be very significant. They now are mainly short-dated book, not so much. In the fourth quarter 2015, we continued to strengthen reserves, net of charge-offs of non-performing loans that either were successfully restructured and reclassified to a lower risk reserve bucket or had to be written-off due to reaching term limits imposed by our local regulator.

Our NPL has increased temporarily at year-end as an exposure in the oil and gas sector showed increasing signs of trouble, but it was alleviated by pre-payments that we received after the year-end close and which brought the NPL ratio back down again as already mentioned by Rubens. So the NPL ratio at this point in time is 39 basis points.

We did however increase reserves to lead the coverage ratio that contemplates what we foresee to be potential losses of the remaining life of these exposures. We also took an impairment loss on investment securities on expected credit losses related to the NPL exposures as indicated by market events that took place after the close. I should note that Standard IFRS 9 not only prescribes reserves for expected credit losses on loans and contingent exposures, but also on other financial instruments such as bonds. And those expected losses related to bonds are shown in the impairment gain or loss line in the income statement.

Changes in the overall credit exposure profile of the Bank with a sizable reduction in risk-weighted assets helped mitigate the provision impact on overall reserves this quarter. With all that, return on assets and return on equity metrics decreased slightly year-over-year and quarter-on-quarter, while remaining, and as already mentioned by Rubens in a range of returns that we think is still quite reasonable given volatile market conditions.

The overall efficiency ratio reached 30% for 2015, a 2 point improvement over the previous year and the business efficiency ratio, which focuses on core operations also showed year-on-year improvement and remained stable quarter-on-quarter.

The Tier 1 Basel III ratio stood at 16.1% at the end of the fourth quarter 2015, up from 15.1% in the third quarter and up from 15.5% from the end of the year a year ago. We by the way no longer show ratios based on outdated Basel I criteria now that we have compression periods with the corresponding Basel III data available.

And last but not least, per the announcement that came out a few weeks ago, the Board of Directors declared a dividend payment for the fourth quarter of $0.385 a share, which continues to add an attractive dividend yield component to our total shareholder value proposition.

Now let's look into numbers in a bit more detail moving on to the next slide. Slide five took a long time, I apologize for that, which shows the evolution of net income for 2015 compared to the same period in 2014 illustrating the items I essentially already highlighted just a few minutes ago.

Moving to the quarter-on-quarter on comparison on page seven, we clearly see the impact of the two main drivers of our quarterly performance, the significant swing in non-core results and the recognition of expected credit losses. On the other hand, the other element of core performance which is net interest income, fee income and expenses were quite robust and the same is true for comparison with the fourth quarter from the year ago.

On page eight, we take another look at net interest income and margins and the good news for us is that, in the last quarter of the year margins in each showed signs of an accelerated move in the right direction, something that we continue to see strengthening up to this point in the first quarter of 2016. Year-on-year interest income was up mainly on the slight increase of average portfolio balances, but margins trailed by 4 basis points.

The quarterly variance in net interest margin continued a turnaround that we had started to see in the first quarter of 2015 as lending rates increased in an environment of higher headline risk in the region. On the funding side throughout 2015, we benefited from our counterparties preference for high-quality names on one side and also from 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.

In the fourth quarter, we saw the effects of market rate moves set off by the decision of the Fed to raise its Fed funds rate, bearing out our fundamental premise that our ability to pass on base rate increases contributed to a net benefit arising from rising market rates.

On page nine, we show average portfolio balances growth and segmentation. Year-on-year corporate client and financial institution segments grew moderately while exposures to the higher risk middle-market segment declined. A similar story happened quarter-on-quarter, where portfolio averages also increased slightly and the portfolio mix remains relatively stable. Ending balances remained essentially flat for the year and for the quarter as well.

On page 10, we present breakdowns of our commercial portfolio balances by country on the left and by industry sector on the right. The main stories of the quarter was the continued trimming of our Brazil exposures to now 22.7% of the portfolio and also overall net exposures to the oil and gas sector which now stands at 12% of our commercial portfolio. We made up for that drop in balances in these areas with portfolio growth mainly in the Central American and Caribbean region.

On page 11, we provide an update on our Brazil exposures including sector exposures. Lending to sub-cue banks, the producers of soft commodities present the largest sectors exposures. The current bias towards to state finance and the short-dated composition of our book of business remain intact and are the main reasons we are comfortable with our activity in that country.

Moving on to page 12, we provide an update on our exposures in the oil and gas sector, which represent 13% of our growth portfolio, i.e., adding investment securities on top of the commercial portfolio. We continue to have no concerns for the integrated and downstream segments of our overall exposure as the impact of lower oil prices are either well contained or are a net benefit in these segments.

The upstream segment however shows increasing signs of stress that have translated to higher reserve requirements and the recognition of related impairment loss. The exposures are continuously monitored and current reserve levels reflect all forward-looking expected credit losses that we have been able to determine at this point. The exposure profile has a high level of contingent facilities i.e., non-disbursed commitments that in our view mitigate the overall risk profile considerably.

On page 13, we show the evolution of credit quality and reserve parameters. While non-accruing loans increased quarter-on-quarter pre-payments received after the closing date reduced these NPL substantially as already mentioned. We also discharged reserves associated with NPL that were either restructured or reached its statutory aging limit and resulted in a drop in our reserve coverage ratio. Without these discharges, the reserve coverage for the portfolio would have continued to increase as in previous quarters.

On page 14, we show our fee income evolution, which I already alluded to earlier. This quarter we were able to bring three mandates over the finish line and together with solid performance in our letters of credit and contingent business, we were able to provide for a slight increase in full-year income and fairly stable income in the fourth quarter compared to the comparison quarters.

Moving on to page 15, 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 fund, but also the overall efficiency ratio showed improvement as a result of higher revenues and the stable to declining expense base. We expect to be able to continue with the gradual improvement of these ratios in coming quarters.

On page 16, we highlight return on average equity and capitalization trends. We already talked about this, so I'm not going to delay with this much longer, but I do want to highlight the high level capitalization, which moved up a little bit to 16.1% Tier 1 Basel III on the basis of lower risk-weighted assets.

And finally, on Page 17, we highlight our focus again on total shareholder returns. As mentioned, the Board of Directors continued with its consistent approach in evaluating the Bank's core performance trends and again authorized a quarterly dividend payment of $0.385 per share. And with that, I'd like to hand it back to Rubens for the Q&A session. Thank you.

Thanks, Christopher. We realize that today we took a little longer in our initial remarks. To all of you, as we believed, we had a lot of information to share with you mainly the change from US GAAP to IFRS and to provide you color about the environment as we see it, but now we're ready for your questions. Ladies and gentlemen, please.

(Operator Instructions) Ali Mogharabi, Singular Research.

Hi, guys, your lower exposure to Brazil is certainly good news and in terms of where the best opportunities may be you mentioned basically the central region, Mexico, Peru, and so forth. So, good seeing you guys make those adjustments, but going back to Brazil, when do you expect to see improvements? I'm asking this because it looks like your exposure will still be around a fifth of your portfolio by the end of this year?

No Ali, nice talking to you. Thanks for your question. I'm a little biased because I'm Brazilian. So as a Brazilian, I really expect Brazil to improve sooner rather than later, but we know that the situation in the country unfortunately continues to deteriorate. Just two days ago, S&P downgraded a further notch Brazil and companies are really having a difficult time. We see a lot of companies now on the process of discussing restructuring of credit as they need more liquidity because the local markets are -- domestic markets are not growing and exports although a little bit benefited by the devaluation, the overall demand it's very low as you know. So our exposure is short-term. So in terms of our credit as I alluded in my initial comments and Christopher in his presentation, we are very comfortable as we have still space to reduce our exposure there and we continue to do so.

I mentioned to you that our prospect is that Brazil gets down to 20% and that might go even lower than that if the situation continues to be the case. We have several transactions that are material and the clients are paying. Still there is liquidity in Brazil, the local banks are providing that liquidity, but unfortunately it's very difficult at this stage to predict how soon Brazil can get better because there are so many components involved and the most important one is the lack of political consensus in which way to guide the country.

So we're very concerned, but rest assured that our exposure there, it's good quality and our intention is to continue to adjust the portfolio down as the conditions require.

Thanks, I appreciate that, that's positive and you guys have certainly proven that and then my last question, somewhat similar, I mean it looks like your exposure to oil and gas is also less, just your own opinion from a macro level, what are your thoughts on the oil and gas industry going forward not just in your region, but worldwide?

Well, that's a tough one. Definitely, this is interesting. I was talking to our chief economist the other day and I said to him, I remember quite well the last oil crisis and it was a crisis where oil prices went up and interest rates went up and emerging markets defaulted. So today, we have a crisis where prices are coming down, emerging markets are much better positioned to weather this storm and we see a big impact on the companies overall. So it is really a situation totally different from what we have seen in the past.

In our case, we're very fortunate because we focus our attention on the downstream and the integrated side of the business and reducing the upstream where the problems are more focused but it's a situation in our view, in our assessment, oil prices will continue to face a difficult scenario ahead. The projections are that oil prices can go to around to the $40s by year-end, but it's very, very unlikely because all these discussions in OPEC about whether or not to reduce production. Russia and Saudi Arabia agreed to a freeze in production, but what that means, they're freezing production at very high levels and if Iran still really continues to pump oil, so you see that the natural prices going down, there is a lot of discussions about traders benefiting now of storing oil.

There is an article interesting in Bloomberg today about this, if I'm not mistaken, Contango type of opportunity for traders to store oil, expecting that oil prices might rise, but overall, it's a very difficult scenario. We focus on the countries where we are more challenged and in our case it's Colombia where we have more challenge, but our exposure there, it's well covered in terms of reserves as I alluded to before. So overall very difficult to predict.

In our side of business, we're benefiting in a sense because our clients are benefiting except for the upstream that we'll continue to monitor. I am sorry to not to have any more details or it's just my personal opinion as you asked.

That's very helpful. I appreciate it; thanks.

Tito Labarta, Deutsche Bank.

Hi, good morning. Rubens and Christopher, thanks for the call. Just a couple of questions. We saw in the quarter your margin expanded a little bit, I imagine you're protecting margins with slow growth. I mean is this something you think you can continue to improve the margins for the rest of the year, just want to get a little more color on the outlook for that?

And then the second question in terms of asset quality. I know we saw some deterioration in the quarter, though it looks like came back in January, but just given the situation in Latin America, the slow growth and you're doing I think your best to protect the portfolio, but what do you think about the trends for asset quality for this year. I mean is it going to be like volatility as we saw at the end the year or was that just a one-time blip? Do you expect any areas where you are really concerned or where you can see some deterioration for the rest of the year? Thank you.

Thank you Tito, nice talking to you. In terms of margin, as I mentioned before, we had a net pickup for December and January, a rate of 20 basis points in terms of overall average margins, which is really signaling that the possibility of increasing margins will be a reality for the year 2016. We have overall in all of our transactions, pushed for higher margins and it's very, very seldom we see clients not accepting increasing of margins. So it is across the board, it's in different countries.

So to answer your initial questions, yes, we are working with the scenario of increasing, widening of margins throughout the year, unless something that really happens that would bring margins down, but we don't expect that although, you might argue that one way or the other, this negative interest rates that we see in developed markets, this continued quantitative easing by some central banks will force this liquidity to go somewhere, but as we see now, this liquidity is going to the US, it reflects the quality, they are avoiding the emerging markets for time being and we don't see any major impact coming from this pressure in the margins.

And in terms of competition, there is a great deal of risk aversion in terms of international banks and the local banks are very concerned with the local markets. So in terms of the business that we do, the trade financial business that we do, we see ourselves well positioned to capture this increase in margins.

In terms of asset quality, it is really very difficult to predict, in my previous answer to Ali, he asked me about Brazil and what might happen in Brazil. This is a very difficult environment and we're seeing companies and companies facing more challenges and the banks, it's philosophical, you have to be there in the good and the bad times and the banks cannot just retrench and stop lending because otherwise you might produce an effect that we don't expect that is companies really failing to comply with their obligation.

So I think we're going to see a lot of liability management in this year where companies really try to extend their profile, trying to eliminate some concentration of maturities, but in terms of credit risk per se, it will vary from country to country. In the majority of the countries we are in, we are very comfortable to tell you honestly. We don't see any credit deterioration problems in Peru. Central America is doing very, very well. The Central American countries are growing above the average of Latin America. Panama, the country where we are based is going to be growing by 6%, the Dominican Republic also growing by 6%. So there is a lot of activity going on in these countries and credit quality remains very good in these countries.

Mexico is still not growing to its potential, but still posting some growth close to the US. We don't see any major problems coming from Mexico. Peru, although there is an election coming up, the country is well-positioned as well. We see much more activity in the local currency there. That's why you saw eventually a reduction of our portfolio in Peru because there is favorable arbitrage toward the sol, Peruvian sol instead of the dollar, but that credit quality there remains intact.

Argentina, that was one of the countries of big concern -- we see that there is a new government and it will be a function of how well this new government can execute. From what we have seen so far, it seems that it's going in the right direction. So eventually there might be some opportunities in Argentina that we might consider, but we don't see in our portfolio any major problems there because we are basically financing what is strategic for the country. So our biggest concern continues to be Brazil, but again short-term trade finance in that country provides us with the protection that we need to weather this storm in Brazil. So overall, Tito honestly, we don't see any major impact moving forward in our portfolio other than ones we have identified, albeit any type of new credits that we are not foreseeing now.

(Operator Instructions)

Luis Adaime, Newfoundland Capital Management.

Thank you very much for the disclosure and the color that you gave on the oil and gas exposure on page 12, but just a further question on that, can you and I'm not sure if you'll be able to disclose that, but that NPL deterioration that we saw in the quarter, does it come from the oil and gas exposure or oil and gas sector and also you mentioned I think on the release that there's been somewhat of an improvement in the NPL ratio in the beginning of this year, but can you maybe give us some color specifically on the oil and gas exposure credit-wise in the beginning of this year, if you've seen an improvement or deterioration in that sector in the beginning of this year? Thank you.

Allow me to take your question and yes indeed the main moves in the NLP ratio and also arguably in our overall reserve coverage has to do with the oil and gas sector and so there is clearly a link there and again, we highlighted on that page the fact that we think that we have done as much as we can do at this point in time to solidify our position in that particular exposure to the oil and gas sector by receiving pre-payments from our disbursed loans, which is good news in our view and the fact that 50% of our exposure is contingent in nature only and so that is a significant element to consider in that exposure profile.

And finally, we do also see that not all the clients in that segment are in the same difficult position, others have been able to diversify their business focus, not only on oil but moving into gas and that has alleviated a lot of the problems for them and so we're not necessarily with the same level of concern for all of our client base, which is not many to speak off in the first place but anyways, so it's fairly an isolated exposure that we're really worried about and we believe that to the extent we know and we can foresee over the lifetime of what we have on our books, we think we are adequately positioned. I don't know if that answers your question.

And some of the exposure in the upstream also its associated with gas not oil, which is in a better position than the oil producers, which again mitigates the impact on our portfolio. So overall, as Christopher said, we're very comfortable except for this exposure that we alluded to before.

Excellent that's very helpful. And just one more question if you are allowed to disclose, is it one specific company or is it a generalized credit deterioration for the upstream sector?

We can't disclose names. We have the bank privacy law here in Panama, but it is a single exposure.

Huong Le, Great Lakes Advisors.

Hello, I just wanted a little bit more color on the impairments, the $4.7 million impairment in the treasury business; is that in the fund?

No, we had two impacts this quarter as I mentioned. One is the performance of the participation in funds, which had a swing of $9 million from $7 million plus last quarter and then $2 million minus this quarter. So that was impactful for sure, but the impairment loss, it has to do with the exposures in our investment portfolio which is the securities, the bonds basically that we have. We have a small bond portfolio and we do have issuers from all parts of the region and a couple of them are of course in sectors that are more exposed at this point in time.

And so, given the fact that standard IFRS 9 also requires setting up reserves for expected losses on your bond portfolio, so we had to show an impact there. And so, you can see on page 12 in the oil and gas deep dive page, that we do have a small portion of securities included in the overall portfolio exposure to that sector and those of course were the bonds that were most impacted by what I'm talking about. So the impairment loss is not a realized loss, but it's a mark-to-market of these securities and that per IFRS rules has to be shown in the P&L and that's what we did.

Okay and then with the fund, just remind me I think it expires in March. Is that correct? Like you're going to be out of the fund?

Yes. You're correct. You're correct. Our commitment with the fund expires April 1 to be precise.

(Operator Instructions)

Luis Adaime, Newfoundland Capital Management.

Yes. Just are you able to disclose how much are you redeeming from the hedge fund from the fund in April?

Well, I mean that's -- again I'll take that question if you allow me, that's pretty easy, just go into the balance sheet and look at the position of investments and that is the amount that will be redeemed. It sounds -- I think $53 million, yes.

$50 million?

$53 million. As of the year-end balances of course, year-end December 31.

All right, there are no further questions in the queue. So at this time I would like to pass it back over to Mr. Amaral.

Thank you, Chelsea. I like to thank you for your time today and for your confidence on our ability to deliver solid results through more or less challenging business environments. Thanks also for being patient today because it took a little longer for Christopher and I to go into the details and we really appreciate all of your questions, but rest assured, our Bank is stronger than ever. We are doing very well in a difficult region, but we know how to do it. So thanks for trusting us. I look forward to talking to you for the first quarter of 2016 when we meet again in April. Have a good day.

Thank you, ladies and gentlemen, this concludes today teleconference and you may now disconnect.