Foreign Trade Bank of Latin America Inc (BLX) 2016 Q3 法說會逐字稿

Hello everyone and welcome to the Bladex Third Quarter 2016 Conference Call on today, the October 20, 2016. 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.

With that, I am pleased to turn over the call to Mr. Rubens Amaral for his presentation. Sir, please begin.

Thanks Katie. Good morning, and welcome to the Bladex third quarter 2016 earnings call. The results of Q3, we just released, confirm the positive prospects of our traditional trade finance business, which highlights the improved earnings generation capacity as discussed in our previous call.

Christopher will comment, later, about our performance in the quarter, but I would like to emphasize that year-to-date results are positive, strong, and overall better than last years, so much so that it has enabled the Bank to absorb additional credit provisions in light of a more challenging credit cycle as already addressed last quarter. As a consequence of the strong performance and good prospects for Q4, the Board of Directors has approved again a dividend of $0.385, which continues to offer a very attractive dividend yield to our shareholders on top of double-digit ROE performance.

As this is our last call in the year, I always like to provide you with an overview about our outlook for Latin America and our business prospects for 2017. Although there is a high level of uncertainty in the markets due to, among others, the outcome of the elections in the United States, the lack-luster growth of the world economy and world trade flows, the reduced path of growth in China, the impacts of an interest rate hike by the Federal Reserve Bank and the reality of negative interest rates in Europe and Japan, we feel more positive about the prospects for Latin America in 2017, as far as economic growth and trade flows are concerned.

The more recent data from the World Trade Organization points to some positive trends that could help a trade recovery in the foreseeable future. For instance, the global trade grew, in Q2 2016, 0.3% for the first time after two years of declines. Certain key trade related indicators improved. For instance, container port throughput has increased, export orders have risen in the US, nominal trade flows in US has stabilized, and some Latin American countries have started to show imports growth in Q2 2016.

As far as projections for Latin America is concerned, the WTO expects a growth in exports of 4.4% in 2016, up from the initial 1.9% projection earlier in the year. For 2017, the expectation for exports is an increase within the range of 3.1% to 5.5%, as a consequence of exchange rates depreciation and improved economic outlook.

In summary, we expect that Latin America trade flows, imports plus exports will grow almost 7% in 2017, after a three-year period of decline. On the other hand, we expect also resumption of growth in the region with a forecast of the IMF of GDP growth at around 1.6%. This outlook naturally bodes well, very well, I would say, for Bladex in Q4 and 2017, and the Bank is well positioned to benefit from this positive scenario.

Nevertheless, we remain alert to the possible headwinds that can impact our scenario as mentioned before. Having said that, we expect to post a growth of 2.5% in Q4 2016 and a growth of 10% to 15% in 2017 starting from the second quarter of 2017, as the first quarter is seasonably slow in Latin America. As a highlight of the potential growth of our portfolio, in Q3, credit disbursements increased by 12%, but we still had some prepayments and some transactions have been postponed to Q4 in spite of our clients' request, thus showing reduction in our end-of-period portfolio balances.

Let me also comment a little about our views on some of the countries in the region. I'll start with Argentina. The country has returned successfully to the international capital markets and the new government has established an agenda to resume growth, control inflation, eliminate foreign exchange controls, and deal with expenditures by reducing subsidies. Nonetheless, the path to recovery is a long one and it will require discipline in implementing this promising agenda. Our objective is to increase our exposure in the country, but limited to short-term trade finance, primarily exports.

As far as Brazil is concerned, the recent political impasse has been resolved and the new government has committed to implement an agenda of fiscal austerity, pension plan reform, and more flexibility in the labor laws as well. It's still too early to say that Brazil is out of the woods, but at least there is a positive agenda from the new government, signaling that the country will tackle the more serious issues immediately leading the way to resume growth in 2017 as well. We have limited our exposure to the traditional business of trade finance and our exposure remains within a healthy branch of 18% to 20% of total portfolio. The credit cycle is still a challenge in Brazil, but we don't expect default rates to increase in 2017.

Moving on to Colombia, country is still dealing with the fiscal deficit, but our forecast points to an improvement in 2017, as well as a slight increase in GDP growth. Although the initial reaction of the people was to vote no for the peace treaty, our expectation is that there will be continued negotiations to improve the treaty and eventually win the approval next year.

On the positive side, the country has a very strict fiscal responsibility law, lower indebtedness, and an important investment plan in infrastructure which can set the base for sustainable growth path in the years to come. Our portfolio in the country is primarily with financial institutions and 62% matures within a year.

In terms of Mexico, the country continues to implement the agenda of reforms which, we understand, requires time. Mexican economy continues to grow albeit modestly with a prudent fiscal policy. The increased uncertainty about the impact of the US elections in the Mexican economy, should there be any renegotiation of NAFTA terms, is contributing for the perception of increased downside risk. In our view, the two economies are very connected; and in the short term, we don't see any major negative impact. Our portfolio is well diversified in the country and 90% of our exposure is with sectors with positive or stable outlook, 58% matures within a year.

Let me talk about the story in Latin America these days, Peru. Peru has shown increased political maturity, with governments of different ideologies pursuing a positive agenda of growth along with prudent fiscal policy. A strong central bank, a new government with experienced and well-qualified people and an important plan for continued, I repeat, continued investments in infrastructure have definitely set Peru in a path of sustainable growth for the years to come. Our exposure in the country is also well diversified, with an average duration of six months.

As far as the other countries, I'll now comment about a region of Central America and the Caribbean, very important to Bladex. Overall, this region presents a relative stable economic environment. The region might be impacted by the outcome of the elections in US as well, depending on the immigration policy in the new government which could have, later on, an impact on the level of remittances from the US to these countries. Nevertheless, we don't see any immediate impact that could affect negatively the region in 2017.

Panama, the Dominican Republic continue to exhibit solid growth levels. Bladex has a total exposure of 30% for the region, which is well diversified by country as well as industry, with financial institutions being the most important one. Therefore, as discussed in our press release, we're doubling down on what makes Bladex strong, i.e., its traditional trade finance business, diversification of the revenue stream with more fee income coming from our syndication platform and contingency business, and not less important, our continued focus on increasing productivity throughout the organization to improve our efficiency levels.

Let me close this initial remarks by repeating my comments in our last call. I can't help, but feel positive about the prospects for Bladex in Q4 2016 and next year, as we expect to show a solid portfolio growth as the positive outlook for the region becomes a reality in the months ahead.

Thanks again for your attention, and I now will turn it over to Christopher for his comments. 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 for 2016, I will focus on the main aspects that have impacted our results and I will make reference to the earnings call presentation that we have uploaded to our website together with the earnings release, and which is being webcast as we speak. After the highlights given to you by Rubens, why don't we do a quick rundown of the key financial metrics, you will find on pages four and five of the presentation.

The third quarter of 2016 closed with net profit of $28 million compared to $22.3 million in the previous quarter and compared to a $37.4 million in the third quarter of 2015. As I will explain later in more detail, the main drivers of this quarter's performance, both quarter-on-quarter and year-on-year, were higher levels of net interest income from rising margins in our core business and lower operating expenses, while quarter-on-quarter lower provisions continue to strengthen our reserve levels regarding non-performing loans undergoing restructuring and recovery efforts.

Contrary to the third quarter of 2015, which showed an inflated net income number or profit number, I should say, relating to non-core elements, we no longer have impacts from non-core items this time around, as our final chapter of the participation in investment funds was definitely closed last quarter.

With that, third quarter business profit from core operations now equate exactly to our total profit reaching $28 million in the third quarter 2016 compared to $22.1 million in the second quarter and compared to $30.3 million in the third quarter of a year ago, mainly reflecting solid margins and normalized levels of provisions.

This quarter, average commercial portfolio growth in dollar terms reversed its downward trend seen over the last few quarters with a modest growth rate of 1% quarter-on-quarter. Our active de-risking of certain exposures, especially in Brazil, has largely run its course in our view, and some of the portfolio mix has consolidated and stabilized with only minor changes versus the previous quarter.

Origination activity, however, continued to pick up as credit disbursements increased more than $300 million versus the previous quarter. So far, the majority of this disbursement growth in origination has served to replenish contractual maturities and prepayments, also mentioned by Rubens, but we are seeing signs of a trend towards incremental new business with existing and new clients, heading into the fourth quarter and into 2017, a year which, as you have heard from Rubens, looks quite a bit more promising.

Fee, commission and other income in our syndications business slowed compared to the very strong second quarter. Nevertheless, we closed three syndicated transactions which either were led or co-led by Bladex in what still is a very sluggish LatAm's syndications market. Our letters of credit and contingent credits business is also picking up, albeit still running below prior-year levels. We have more details on both businesses later in the presentation.

On the provision and credit reserves side, fewer additional provisions were needed to adjust according to the progress of ongoing restructuring and recovery effort, as the NPLs and non-performing loan portfolio remain stable. The efficiency ratio was 26% in the third quarter of this year, and 27% on a year-to-date basis, reflecting efficiency gains and lower performance-related compensation expense. So, as a result of these drivers, the business return on assets and return on equity metrics recovered quarter-on-quarter, reaching double-digit levels both on a quarterly and on a year-to-date basis.

Meanwhile, the Tier 1 Basel III capitalization ratio strengthened to 15.9% at the end of the third quarter of 2016, on declining leverage even as risk-weighted assets increased slightly on changes in the portfolio mix, mainly in Ecuador and Argentina. We feel well equipped with these capitalization levels to meet our growth expectations in what looks to be a more promising market environment going forward.

Let's move to the next slide to focus on the key highlights. Starting with Page 6, which shows the evolution of profit for third quarter of 2016 compared to the previous quarter and a quarter of a year ago.

Reduced provision requirements, compared to the prior quarter, allowed us to record profit reflecting stabilized and recurring levels of profitability. The year-on-year comparison, of course, is heavily skewed by the absence of non-core elements, I already mentioned, different from the situation of a year ago when we recorded strong quarterly results from our former participation in investment fund.

On Slide 7, with the year-to-date profit comparison, we again see this non-core effect overshadowing the significant progress in core results which are tracking well ahead of last year's numbers on net interest income growth and increased efficiency.

On Page 8, we take a closer look at net interest income and margins, which strengthened again in the third quarter of 2016, illustrating the positive effect that a gradual rise in market reference rates and that, in our case, means LIBOR rates, the effect that it has on our portfolio even as we accelerated the low risk and lower yield trade mix in our portfolio.

With that, quarterly net interest margin reached 213 basis points for the quarter and 208 basis points on a year-to-date basis. Both significantly improved from prior-year levels, with its positive effect on net interest income.

On Page 9, we show average portfolio balances and segmentation reporting positive yet still modest growth in average balances. This is a change from the downward trend in portfolio balances we saw in prior quarters. And that leaves us with the expectation to be able to deliver more significant asset growth in coming months and quarters. As mentioned earlier, we saw a little need to further adjust country exposures in places like Brazil, focusing and improving the risk profile instead by growing our traditional short-dated trade book, which now reached 61% of total portfolio balances.

On Page 10, we highlight credit disbursement trends showing significantly increased origination activity in the third quarter, mainly focused on the short-term trade business.

Moving on to Page 11, we present breakdowns of our commercial portfolio balances by industry segments, with little variation overall, as I mentioned already. In regards to our concentration in the oil and gas business -- sector in general and also without major changes at all in the more problematic upstream segment in particular, which is the reason we did not include a separate breakdown of that oil and gas sector in the presentation this time around.

On Page 12, we present a breakdown of our exposure profile in Brazil. Exposures there account for 18% of the commercial book, stable compared to the prior quarter. As mentioned earlier, we believe our active de-risking of our exposure profile and actual reductions in absolute balances in that country have largely run their course. We are happy with the current industry mix and the high trade content of our business there, and look to gradually and selectively expand on that base going forward.

On Page 13, the evolution of credit quality and reserve indicators show stable non-performing loan levels, with provisions that accounted for selective adjustments of reserves pertaining to exposures with ongoing restructuring and recovering activities.

As we move on to Page 14, we show our fee income evolution. As I already mentioned, we completed three syndication transactions this quarter which brings us to eight transactions year-to-date, which has our syndication business tracking ahead of last year's level. All this, in a LatAm syndications market that is significantly below prior year volumes. On the contingency side of our fee and commissions business, we saw a pickup in letters of credit activity this quarter a trend that we expect to see continuing, even as we are still tracking a bit below prior year levels.

On Page 15, a quick recap of operating expenses and efficiency levels. Expense levels declined versus the comparison periods on efficiencies and reduced expense levels in US dollar terms in our foreign offices. Performance-based compensation expense was also lower year-to-date compared to the previous year.

Moving on to Page 16, we highlight return on average equity and capitalization trends. The business return on average equity increased quarter-on-quarter on stronger business performance and capitalization levels remaining strong, reaching double-digit levels on a year-to-date basis with a Tier 1 Basel III ratio strengthening to 15.9%. Leverage stood at 7.2 times, indicating ample room for asset grow going forward.

And finally on Page 17, we highlight our focus on total shareholder return. Valuations remain very attractive. In addition to that, the Board of Directors continued its consisted approach in evaluating the Bank's core performance strengths and again authorized 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 so much.

Thanks, Christopher. Ladies and gentlemen, we are ready for your questions.

Thank you sir. At this time, we'll open the floor for questions. (Operator Instructions) Tito Labarta, Deutsche Bank.

Hi, good morning, Christopher and Rubens. Thank you for the call. Couple of questions, I heard you say loan growth is going to resume. So, my question is, how would that then potentially impact spreads? We saw some good margin expansion this quarter, I think partially attributed to the tightening in loan growth, but as loan growth resumes, can you maintain these level of margins or would there be some pressure there, particularly, I guess, if maybe competition comes back? I just want to understand kind of the outlook for margins as loan growth increases.

And then my second question would be also in terms of asset quality, would you see NPLs kind of stable this quarter following the pickup we saw last quarter? When can that also improve, I guess, as you grow faster? Any other concerns in terms of asset quality or when can you begin to see some improvements given that the NPLs are typically much lower than the 1.3% we're seeing today? Thank you.

Thank you, Tito. Let me tell you, first of all, that we plan to grow, but doubling down on our traditional business trade finance short term, so trade finance short term, it's lower margins. We expect that, that will have an impact that will be compensated by the growth that we're going to exhibit; thus, increasing the bottom line and not reducing the bottom line, although we might have lower spreads. So, the outlook, it's -- for spreads, is an outlook in our view that will be slightly down from the levels you see, but compensated by the volumes we're going to be able to place and sooner rather than later.

As far as asset quality, and then Christopher you can jump in any time to complement, we see that we have achieved a level that we expect not to deteriorate further. There are ongoing negotiations with the existing non-performing loans, and we expect recovers to start sometime next year. So, it's a process that is going to take time, but we don't expect it to further deteriorate. The movement in provisions, that you might see, will be a result of our growth. That's primarily our outlook, and Christopher, if you want to complement.

Yes, an additional comment to the net margin question, Tito. I mean the transition or the gradual portfolio mix shift towards short-dated trade business is already happening and still we show increased overall margin levels and that has to do with the reference base rates, and they have displayed the continued growth over the last months and quarters. We don't know whether that growth will continue. Arguably there is the expectation of Fed action going forward, which would support, again, higher net interest margin levels. And so far, this mix shift has been overcompensated by the rise in underlying base rates, and we continue to expect that the base rates will continue to support somewhat elevated levels of margins. Even though, I have to agree with Rubens, the more we do trade finance business short dated which is a lot safer, of course, but also has lower margins, we should expect the overall NIM to decline gradually, but not precipitously.

Okay, that's very helpful. And then maybe just one follow-up in terms of the provisions, you mentioned you're on ongoing negotiations with some of the non-performing loans. So do you think that there could be potentially some recovery, so maybe next year we could -- maybe we can see provision reversals next year?

Yes. Tito, again this is Christopher. To that, I would point to our past history of NPLs. And arguably in cycles of economic recession, we have seen increases in NPLs and we have seen declines in NPLs in the periods following those cycles. And so we don't have a reason to expect anything otherwise. And you also know that we have been quite successful in achieving reasonably higher recovery rates, but eventually, it takes time, as Rubens mentioned.

We don't expect these restructuring efforts to be completed overnight and yield immediate results, but clearly our client base is large corporations, financial institutions that have significant business, and we'll have going concern going forward and we'll regain their ability to generate the cash flow set that are needed in order to repay their debt, and so that is clearly our expectation, yes.

William Mejia, GAM.

Thank you very much for presentation. Could I please ask you to focus a little bit more on the prospects for growth on the asset side? And you're saying that most recently the origination seems to have a pick-up significantly and that the prospects for the fourth quarter looks quite strong and going to 2017 as well. Is that whether you can quantify little bit that how much we could expect the loan growth to be? That's my first question.

And the second question, obviously, is on the fee income side. I mean, there is a slide in the presentation where you actually see that it was a little bit weak this first nine months on the letters of credit and off-balance sheet instrument side. What kind of levels you think is actually going to be more recurrent going forward? We see normalization basically in volumes and client activity. Yes, that's pretty it on my side. Thank you.

Okay. Thank you, William. This is Rubens. Let me answer your question about growth and then Christopher can answer your question about fee income.

As far as the growth is concerned, as I mentioned, we have already identified demand for Q4, where several of our clients that had disbursements planned for the Q3, asked us to postpone disbursements for Q4. We see the resumption of imports growth in Latin America, as I alluded to before in my comments. So, the way we see is that, we're going to be able to post a solid 2.5% growth in end-of-period balances by the end of 2016. That will come primarily from the countries that I have mentioned in my, during the presentation, initial comments, that's going to be Mexico, that's going to be Peru, that's going to be Colombia. Brazil will grow as the other countries grow, but we'll keep our target level of exposure between 18% to 20% and more towards 18% than 20% this year, because we still need to see what happens with the country in terms of the political measures implemented by the government.

And then Argentina is -- really starts to pick up. This is into finance and the crops that might be a good opportunity for us to jump in and finance exports in Argentina, as I alluded to before.

So, that's the prospects for Q4. And as we're seeing growth, very solid growth prospects for 2017 of almost 7% in trade flows in Latin America, and also a solid growth, I would say, in terms of GDP growth, because from negative almost 1.0%] this year, we're going to go to a positive of almost 1.6%, according to the IMF. That in itself gives us a good opportunity to continue to grow in these countries, as I mentioned to you before.

As far as Central America is concerned overall, we expect to remain stable because we have a very important sizeable exposure to the region. But we'll expect to grow in the countries that I mentioned to you, giving us a possibility to increase our portfolio by 10% next year is our lower estimate, and our more optimistic estimate would be 15%. But we are very comfortable with the 10% level, coming from these countries and focusing on trade finance business.

So, Christopher,.

Yes. I'd just expand a little bit on -- focusing on the letters of credit business and the contingency credits. And I think some of the -- most of the drivers that Rubens mentioned are also true for more activity in this LC business, and you've seen a decline year-on-year in that business, which primarily is attributable to the commodities, specifically oil and gas prices that have been significantly reduced versus prior-year period. And the reason for that is that we have a strong business activity in confirming LCs issued by governments to import refined fuels into their countries.

And clearly this market has eroded by lower oil and gas prices. And so,, we don't anticipate a significant pickup in oil and gas prices, there's nothing we could base ourselves that there's something on, but we do have worked on to diversifying our client base in LCs, not just not confirming in the majority of our transactions, but also issuing on behalf of corporate clients and those will certainly benefit from the improvement in trade flows. So, our view is that the LC and contingent credit business will recover to levels seen in prior years, maybe not this year, but for sure we expect there is an improvement next year.

Okay. But just to confirm on the asset growth first, I mean if I add out all the numbers that you gave me, overall you think that the loan growth for 2017 can be definitely above 5% at least with conservative assumptions right?

Yes.

Yes.

And then the -- just to also confirm the numbers that you gave me on the other fee income side, obviously the fee income dropped year-on-year by 55%, right? Is that something that we should also see going to the fourth quarter, gaining at a level, the base that you reported in the fourth quarter of 2015, what is still elevated?

I think we should see a slight pick-up in the remainder of the year and certainly a more significant pick up next year too, which hopefully will get us to the levels we've seen in the comparison period. I don't know if this answers your question. I mean we don't expect to post fee income numbers on that line of business equal to 2015 this year around, but in 2017, we should aim to get back to those 2015 levels.

Okay. If I just may just have a follow-up question now that I just remembered that I asked you one quarter before right, a quarter ago, and it's on the operating leverage because clearly, you are extracting operating leverage that is quite significant. And if I run my numbers correctly and I allow basically for some growth in OpEx year-on-year for the fourth quarter, yet you're going to see a contraction in OpEx for the year of -- close to high-single digit levels, right? You said that obviously you're working out of a profile on efficiency, right? But going into 2017, are we going to see still a lot of operating leverage coming through or what is your expectation?

Yes. Thank you, William, for the question. This is again Christopher. To your question regarding operating leverage and expense levels, I would say the following. I think operating expense, excluding variable compensation for performance, should definitely continue a trend of stable -- you should not assume significant growth there at all. I would put an inflation number on that growth maybe 0% to 2% or something like that. Clearly, we have no desire to increase our expense base, and we don't see a need to, because we have ample capacity to deal with additional business, both on a technology, human capital side as well. And the variable compensation based on performance will exactly rely on that. If the numbers look very good, then you should see a pickup in that expense piece, but only then.

So net-net, the bottom line should definitely improve and the overall expenses should not be a factor, it should decrease the efficiency or not improve our efficiency ratios. Clearly, our target is to continue to improve the efficiency ratio by either growing the revenues strongly, which is clearly our target next year and certainly not looking to boost expenses the same way, but much less though. Does that answer the question?

Yes. Thank you very much.

(Operator Instructions) Catalina Araya, JPMorgan.

I have a follow-up on asset quality. I know provisions came down significantly from previous quarter, but my first question is, did -- you provisioned something related to specific clients in 3Q that were kind of similar or similar clients that we saw in 2Q, is out of the $4 billion, is there something related to this specific exposure?

And then my second question, a bit more strategy wise or should we think -- when we look at the Tier I ratio, I mean it's quite strong close to 16%, should we expect a higher payout ratio in the coming quarters given that growth this year was a bit sluggish?

And with regard to the first question, Catalina. Hi, how are you? In regards to credit quality, the adjustments we made on the effective provisions this quarter were adjustments in minor scale in our view, [pre-con] for the progress is being made on the restructuring efforts and they always tend to take longer than initially anticipated, and we have to account for that, because remember our IFRS 9 rules requires to account for all expected losses until the end of the maturities that are in questioning in this NPL book, and so that is the majority of the effect there in the book.

As it relates to existing exposures that we already know about, that has been identified already, have already -- we monitor how they move from the buckets that are required based on IFRS 9 rules, which as soon as we see any significant deterioration in risk, we have to account for a longer horizon until the end of the maturities and that inevitably will increase the reserve requirement. And so this is normal course of business every quarter, of course, and so nothing really out of the ordinary is in that regard.

And, sometimes, depending on the negotiations we're engaged into with the clients, you might have collateral that needs to be sold and then evaluation of this collateral can change, and we need to adjust accordingly to the last assessment provided to us, appraisal. So, I think it's primarily what Christopher has said and we don't feel, as I mentioned before in the first question, that asset quality will deteriorate further. It's the opposite, we expect really to be successful in these recovery efforts and the next year we'll start showing improvements in the NPLs. So, can you repeat your second question, please?

One follow-up on provisions. So, if asset quality improves next year, how should we think of a recurring level of provision expenses, like on a quarterly basis, should be closer to $4 million or below $4 million a quarter, around about.?

I'll take that question, Catalina. That will be a function of our asset growth, of course. In the first place, if we manage to grow the way we expect to grow, you should -- you see a commensurate increase in reserve requirements. Given that this growth will primarily be happening at least for our vision in the low risk trade finance arena, you should not assume that the reserve requirement would be any greater than it is now. That should be quite a bit less.

So the end, we don't narrow it down to numbers that you should expect to see on a quarterly basis that will be too much of guidance, that we don't feel comfortable giving at this point, but it should be in the lower range of what you just mentioned. I think the $4 million should definitely be at the high end of that, and that again will primarily be a function of the rate of growth of our assets.

Okay. Perfect, thank you. Very clear. And then now my second question was more related to growth and dividend policy. I mean --

Dividends, okay. Yes, dividends, of course, we've maintained or rather, I should say, the Board which has ultimate discussion on this, of course, has decided to maintain the payout of $0.385 over the last several quarters already. And that really has to do with the appreciation that the core performance trends while not bad at all, given economic cycle, we haven't really displayed a significant growth rate in our net income numbers or profit numbers as you've seen over the last quarters and even on 2015 and this year.

So, in the past, the decision to adjust the dividend payment levels was primarily based on the underlying performance, and so -- and also taking in consideration of the fact that the dividend yield is very attractive as is. So, I think this will change the moment we will show rising return equity numbers, rising asset growth, rising bottom line performance, and that will certainly be taken into consideration by the Board.

Yes, definitely. Catalina, this is Rubens. The Board is very cognizant of the importance of rewarding the shareholders. And we review, on a yearly basis, how we are in terms of the dividends. And naturally when we need to review year-end 2016, the Board will make an appraisal whether we should adjust dividends. But as Christopher has mentioned, the Board feels very comfortable with the dividend levels that we have today, and you have to keep in mind that one of the important points for us to keep a strong capitalization is to preserve our rating.

So, that's one thing that the Board also takes into consideration when you see Bladex with higher levels of capitalization. This is a protection to our rating that in this situation currently in Latin America is playing to our strengths, because overall Latin America has experienced downgrade and we can remain strongly in our rating, that's one of the reasons why we kept being more successful in the margins, because now we have an arbitrage in comparison to the clients overall in the industry.

So, it's all these components, but definitely the commitment of the Board is to share the good results with the shareholders.

(Operator Instructions) Greg Eisen, Singular Research.

I want to go back to the loss reserve provision. If I heard you correctly, it sounds like you continue to add to the reserve for the existing relationships, which were identified last quarter, but which IFRS requires you to consider for the life of the loan until it's eliminated to consider all potential future losses that might occur based on that loan, carrying cost and such I guess. Did I hear that right?

Yes, that is correct.

Is that the bulk of the $4 million provision this quarter?

Yes, it is.

Okay. And my follow-up question then is, should we expect, in Q4 and maybe the first couple of quarters of 2017, that you would continue to have to add provision for those particular relationships until you resolve them? Is that still going to be adding in each quarter?

I think -- this is again Christopher taking your question, Greg. Thank you very much. As Rubens mentioned earlier, we don't really anticipate a further deterioration of the existing exposures that we know have -- are undergoing restructuring efforts. And so we don't -- the answer to your question is, no. And we expect, however, to see a need for increased reserves of provisioning on the basis of asset growth.

As you put a new loan on the book, clearly there is -- you have to put up a reserve for that new loan. And since we expect incremental business going forward, not as we have seen over the last several quarters from rather stagnant portfolio balances, we expect to see rising balances going forward and that certainly will trigger provisions in every quarter, but that is normal course of business. So, it has nothing to do with deteriorating asset quality or anything like that. And that is what we essentially expect for the coming year.

Kevin Brenes, BG Valores.

Regarding the capitalization, is there a specific Basel III ratio the Bank targets or one that the credit rating agencies have mentioned that they want to see to keep you guys at the current ratings?

Thanks, Kevin, for the question. This is again Christopher. Allow me to take your question. There is not a definite number that any agency and remember we're rated by three agencies: S&P, Moody's and Fitch, that is being put out there as a threshold number. But clearly, we have already indicated, in our corporate presentation that you can see on the website and download, that we would not want to drop below a 13.5% Tier I capitalization ratio, 13.5% why because we've done internal stress testing and shock scenarios, which would indicate that in aggregate shock scenario of an Argentina crisis plus a Lehman financial crisis, if we maintain levels of 13.5% or better, we should not run into any regulatory problems in regards to our capitalization, and this is how we define sort of a lower threshold of where we would want to stay clear of, and that is, you'll see us currently well above this level, which allows us to think that we can grow our business safely without jeopardizing our stress case scenarios and calculations. And so, I hope that answers your question.

Yes. I was just trying to think on and if you are to grow at 10% in the following year in addition to where the dividend is currently at, and what kind of buffer would that create, and 13.5% is decently below where you currently are. So, that --

Yes. I think it does leave us with ample room for growth in the coming years not just one year. And of course as this growth is accentuated in the lower risk trade finance arena, again, this will also be taken into consideration your capitalization requirements and so, we don't really feel any impediments to pursue reasonable growth going forward.

(Operator Instructions) At this time, I am showing no other questions in the queue. I'd now like to turn it back over to Mr. Amaral for closing remarks.

Thanks Katie, again. Ladies and gentlemen, thanks for taking the time today to listen to our call. As we highlighted during the presentation, we are very positive about our results, very happy with the strong results we have presented in this third quarter of 2016, and we look forward to talking to your next year presenting the final results for 2016. Looking forward to talking to you in February. Have a good day.

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