Foreign Trade Bank of Latin America Inc (BLX) 2017 Q1 法說會逐字稿

Hello, everyone, and welcome to the Bladex First Quarter 2017 on today, the 21st of April 2017. 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 today. 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, Katie. Good morning, everyone. Thanks for joining us today. We just released the results for the first quarter of 2017. I am pleased to report improved financial performance quarter-over-quarter with a slight improvement of ROE to 9.4%, with net income reaching $23.5 million, which represents earnings per share of $0.60 of a dollar.

Let me comment about some key components of our activity in the quarter, which are reflected in the Slides 3 and 4 of the presentation being webcasted.

So let me start with loan growth. This quarter reflects the seasonality we experience every year due to slow economic activity in Latin America during this period. There was an abundance of liquidity available to Latin America, which led to less demand for U.S. dollar-denominated transactions and, not less important, prepayments of existing exposures repeating what we saw in the fourth quarter of 2016, thus hindering our ability to increase our balances in the quarter. Nevertheless, I would like to emphasize that total disbursements increased year-over-year by $1 billion, reflecting our approach of back to basics, meaning more short-term trade finance is working.

As far as fee income generation is concerned, we're off to a good start in terms of the letters of credit business as we have built momentum as anticipated last quarter, posting increasing revenues of 31% year-over-year. The pipeline of syndicated loans is solid, and we anticipate closing some transactions in the coming weeks, which will add to our fee income generation.

Moving to funding. We continue to strengthen our funding base, with deposits reaching $3.2 billion by the end of March. These deposits have proven to be sticky over time and have helped the bank to exhibit a competitive cost of funds.

Let me move on to margins, so from funding to margins. We have been able to maintain the net interest margin over 20% for the quarter due to the competitive cost of funds, as alluded to before, and a continuation of our selective approach to new transactions focused on better yields on the asset side.

So move on -- moving on to credit quality. I'm glad to report that we have made important progress to resolve 2 of the problematic loans we had in our portfolio. As far as provisions are concerned, as you know very well, this bank takes a very conservative approach. And considering the time required to restructure certain credits, we have increased some specific reserves to reflect the reality of the ongoing negotiations. Although the worst of the negative cycle is over, as I had mentioned in the last call, we continue to monitor proactively our existing credits to enable the bank to act promptly if we identify any early signal of possible deterioration.

And last but not least, efficiency. We remain totally committed to expense discipline, focusing on improving productivity throughout the organization, which is part of -- well, you know now, our culture of constant improvement, helping the bank to maintain a healthy cost-income ratio below 30%.

With that, I would like to comment some -- briefly about our views for the year. The recent world economic outlook released by the IMF this week confirms that global economic activity is picking up and that prospects are brightening for many countries as the world economic growth is now forecasted to reach 3.5% for 2017, up from 3.1% in 2016. Although the global economy is poised to improve this year, we remain aware and very alert to the potential threats represented by the greater emphasis on protectionism and economic nationalism and the heightened geopolitical risks. Notwithstanding, we continued cautiously optimistic about the growth of trade flows in Latin America as the economic downturn experienced in the last 2 years is bottoming out.

Exports and imports are forecast to grow around 4.1% this year, which represents a multiple of 3x the underlying GDP growth for the region, estimated to reach 1.3% in 2017. Our pipeline of new deals of the traditional core business as well as of the syndicated loan activities support our expectation to revert the negative trend observed in the last quarters of reduction in the balances of our portfolio. Against this backdrop, we reaffirmed our growth expectation for the year, around 8% to 10%.

We are confident in our franchise and our way of doing business, which have demonstrated our ability to adapt and adjust quickly to a changing, challenging environment and continue to present sustainable results. The Board of Directors, after reviewing the performance of the quarter and the prospects for the year, has approved again a dividend of $0.385 of a dollar, which continues to offer an attractive return to our shareholders.

With that, I will now turn it over to Christopher to provide you with more color about the numbers in the quarter. Christopher, please.

Thank you, Rubens. Hello, and good morning, everyone. Thank you for joining us on this call today. In discussing our first quarter 2017, 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.

So Rubens already gave you an account of our performance in the first quarter of 2017 on Pages 3 and 4, so let's dive right into a more detailed recap of the numbers starting on Page 5. The first quarter of 2017 closed with profit of $23.5 million compared to $13.3 million in the previous quarter and compared to $23.4 million in the first quarter of 2016. In our profit walk on this Page 5, we summarized the main drivers of our business performance in the first quarter of 2017 before we highlight further aspects in the following pages.

As you heard from Rubens, the economic and political environment remained relatively volatile in the region during the first months of the year, adding to the seasonal slowdown in business activity that we usually see during this time of the year, especially in Southern countries. We also continued implementing measures to derisk our exposure profile, prioritizing pure-trade and short-term transactions while taking a hard look at country, sector and client concentrations.

The combined effects of these elements made it very difficult to produce asset growth during this quarter, and net interest income declined quarter-on-quarter and year-on-year as a consequence. But just as we believe key LatAm economies are showing signs of bottoming out, we also believe that our internal derisking efforts have neared their end, leaving us well positioned for growth going forward.

Fee and other income also declined quarter-on-quarter on the absence of closed transactions in our syndications business just as was the case a year ago. But fee and commission income showed progress on a year-on-year basis as we become increasingly effective in reviving our LC business, our letters of credit business, which focuses on letters of credit issuances as well as letters of credit confirmations also now much more diversified client base.

Operating expenses continued their downward trend quarter-on-quarter and year-on-year, reflecting both seasonality and our continued drive to streamline costs aligned with revenue generation. The big story of this in recent quarters, of course, is the provision line. And here, we can see Bladex moving into calmer waters as provision charges for expected credit losses have stabilized. NPLs remained unchanged, so there was no news in terms of emerging problems to report. And so we focused on grinding through the lengthy and protracted restructuring process of the existing problem exposures in large companies, where a number of different share -- stakeholders need to see common ground from banks to bondholders, to suppliers, to other constituents.

In the case of Brazil, this is proving to be an especially challenging process as the legal framework there does not really allow for fast progress. Our forward-looking and, therefore, time-sensitive reserving approach based on IFRS 9 needs to reflect these delays. And hence, we decided to increase specific reserves as it relates to these Brazilian exposures.

Now, moving to Page 6. We take a closer look at net interest income and margins. While net interest income declined quarter-on-quarter and year-on-year mainly on account of lower average portfolio balances as mentioned earlier, net interest margin performance was quite resilient, slipping a few basis points compared to the comparison quarters despite a significant mix shift of the portfolio towards short-term trade exposures, which, as you know, are normally lower yielding.

The continued rise of underlying market rates, which, in our case, is LIBOR, is being effectively repriced in our book of business, and lending spreads moved essentially as a function of the tenor mix and, to a lesser extent, also as a function of the country mix as well. The tenor-driven gradual drop in lending spreads is something we already discussed in previous calls, and it is indeed happening, albeit, at a slower pace than initially expected. We, as always, remain committed to pricing discipline and focus on bringing in business that is accretive to risk-adjusted return on equity.

On the funding side, we continue to benefit from excellent access to diverse funding sources, which has allowed us to maintain relatively stable spreads even as longer tenor debt has increased in our funding mix, which provides a great deal of stability as evidenced in high leadings of our net stable funding ratio metric, which follows Basel III guidelines.

Which brings me to more details about our funding structure on Page 17 (sic) [ Page 7 ]. Here, we highlight our funding mix in the column graph in the upper left. Quarter-on-quarter and year-on-year, the share of deposits in our funding mix has risen to now above 50% at the expense of short-term borrowings, which represented only 12% of the mix. Medium-term borrowings and issuances have also continued to rise in percentage terms, adding stability to the funding mix and also in preparation for the repayment of the $400 million Bladex 2017 bond, which happened earlier this month. Average funding cost rose in tandem with underlying base rates.

On Page 8, we show average portfolio balances and the segmentation of our commercial portfolio, which saw a decline in the first quarter 2017 on account of aforementioned seasonality and the derisking of credit exposures with a marginal quarter-on-quarter but significant year-on-year reduction in Brazil, which was partially compensated by growth in other parts of the region, foremost in places like Chile and Mexico.

As in prior quarters, this growth was primarily in short tenor trade transactions, as shown in the column graph depicting the share of trade transactions in the total portfolio as well as the tenor structure of our portfolio, which continue to migrate towards the short end. The pace, however, of these portfolio mix shift is slowing down as we are nearing our target exposure profile aligned with current market conditions. This should position us well for asset growth going forward, and we are certainly ready for it.

A quick look on Page 9 with the breakdown of our commercial portfolio balances by industry segments. Little variation overall, with the upstream oil and gas segment marginally lower while we grew in other segments that have benefited from improved terms of trade.

On Page 10, we present a breakdown of our exposure profile in Brazil, where exposures accounted for 18% of the commercial book, basically stable compared to the prior quarter. For us, this means we essentially have reached a bottom even if it is still way too early to predict an uptick in the relative weight of Brazil in our portfolio mix. The exposure profile there continues to be overwhelmingly trade focused with short tenors and is centered in large-cap financial institutions and also clients in export-oriented sectors that are able to benefit from improving terms of trade.

On Page 11, the evolution of credit quality and reserve indicators showed unchanged NPL levels, nonperforming loan levels, which represented 114 basis points of lower total portfolio balances. The NPLs stayed confined to Brazil mostly and to certain industrial sectors, mainly soft commodities, as shown in the graph in the middle. Reserve coverage of these NPLs increased following the provisions made in the quarter to reflect the slow progress in restructurings, as discussed earlier.

On Slide 12, we show the overall allowances covering our book with a more moderate increase in coverage levels. The walk of loan allowances from stages 1 to 3 for the quarter illustrates reduced reserve requirements for new business on book, offset by reserves for Stage 3, i.e., NPL exposures, which again were adjusted to reflect slow restructuring progress.

Moving on to Page 13. We show our fee and other income evolution. The letters of credit business continued its upward trend over the last couple of quarters as demand is picking up from a more diversified slate of clients. Compared to 2 closed syndication transactions last quarter, we had no closings this quarter as was the case also for the first quarter of 2016. That said, we have several transactions slated for closing this second quarter as well as a solid pipeline of transactions for the second half of the year.

Page 14 shows a quick recap of operating expenses and efficiency levels. Expense levels declined versus the comparison periods on seasonal effects and lower performance-based variable compensation expense nearly offsetting a quarter-on-quarter decline in net revenues. As a result, we recorded an efficiency ratio of 29% compared to 28% in the previous quarter and compared to 33% from a year ago.

On Page 15, we recapped return on average equity and capitalization trends. The return on average equity reached 9.4% compared to 5.3% in the fourth quarter of 2016 and compared to 9.6% in the first quarter of 2016. Meanwhile, the Tier 1 Basel III ratio strengthened to 19% on an increased capital base and lower risk-weighted assets. Leverage declined, therefore, to 6.9x.

And finally, on Page 16, we highlight our focus on total shareholder return. The Bladex stock valuations remain very attractive, and the Board of Directors again authorized a quarterly dividend payment of $0.385 a share, which represents a robust 5.5% dividend yield.

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

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

(Operator Instructions) Our first question comes from Tito Labarta from Deutsche Bank.

Couple of questions. I guess, first, on provisions. If I understood correctly, you said about $5 million in provisions for ongoing restructurings. Do you expect to have more provisions for these ongoing restructurings going forward? Or when should that end? And once it does, what's a more recurring level of provisions? Given the decline in growth in the quarter, it looks like excluding that, the provisions would have actually been negative. So just want to get a sense of how you see that evolving for the rest of the year.

And then my second question, on margins. You mentioned the shift in mix, sort of lower-risk loans impacted margins a bit, but you have higher interest rates in general. So how do you see that evolving as well? Could there be some more pressure on margins from the mix? Or can we start to see some increases in the margin going forward?

Thank you, Tito. I'll respond to your questions, and Christopher will complement with more details for you. In terms of the provisions, the evolution that you're seeking for the year, as I tell you all the time when we talk about the subject, my expectation is to adjust provisions up as the portfolio grow. So that is my primary focus: the growth of the portfolio and the necessary new provisions that comes with it.

But as you know well, we have transactions in this nonperforming category that are requiring us to go through a negotiation process that is taking much longer because the majority of these credits are in Brazil. And things in Brazil, although improving a bit, continue to be very challenging. So the length of time that we're taking really to reach the negotiations with the companies forces us as we have adopted, as Christopher mentioned in his initial remarks, IFRS 9, to adjust these provisions accordingly.

So we expect -- I mentioned in my comments as well that we resolved basically 2 outstanding issues that we had in the problematic category. One of them is in Brazil. So we expect that really to have a positive impact. But there remains a few other ones still open that might be subject to some adjustments. But they might be, if any, minor, in our view, moving forward.

In terms of the margins, naturally, we are focusing on what I call back to basics, and that really puts pressure in terms of NIM. You saw a slight reduction, but we are keeping still over 2%. But as we have alluded before in our calls in previous quarters, you might prepare yourself eventually for some adjustment in these margins. So Christopher, please, you can complement with more color to Tito.

Yes. Just going back to the provision question, Tito, if you look at the Page 12 of the earnings presentation, here, you can see in this allowance walk the $5 million that you mentioned in regards to increases in the stage 3, the NPLs. And that compares to a reduction in reserving requirements in stage 1, the new business that's being brought on the book. And as Rubens mentioned, our expectation is that the stage 3 pressure is going to diminish over the course of the next few quarters. And depending on asset growth, reserve requirements will start to increase on the stage 1, which is a new business that we'll bring on the books. Net-net, we think it should be overall lower levels of provisions compared to the ones we are seeing right now, but there will certainly not be 0 provisions or even releases of provisions that you should not expect. And moving on to the other question regarding net margins, I mentioned in my comments that we were actually even anticipating a more -- a faster decline in NIM given the pace of our portfolio shift -- mix shift towards the shorter ended towards the trade finance business transactions. And actually, this has been quite mitigated by 2 things: one, pricing discipline, as mentioned before; and secondly, the fact that LIBOR rates, the underlying base rates, have continued to increase gradually and continuously. And that has helped us mitigate the impact. And we don't foresee a change in that overall environment. We don't foresee a change in pricing discipline. We do not foresee a change in expected rises in the underlying market rates. So there will be some pressure on NIM, yes, but it will not be precipitous declines. It will be very gradual declines and a few basis points quarter-over-quarter. That is our expectation. I hope that helps.

Yes. No, it's very helpful. So if I understood correctly, on the margins, no room for improvement but kind of stable, maybe very small declines given the shift in mix?

I think that sums it up. And to the extent this mix shift has run its course and we are starting to be more confident in the progress of the economies in the region, and we can start looking at more medium-term transactions. We may be able to revert that trend again, but that is -- remains to be seen.

(Operator Instructions) Our next question comes from Greg Eisen from Singular Research.

Going back to the shorter-term trade finance activity within your loan book, I believe that the chart on the slide deck showed it reached 62% of loans outstanding at the -- for this quarter. And you said earlier that you're slowing down the transition to that category. Is there a target you want to commit to as to how big a percentage of the portfolio you'd like to see short-term trade finance get to this year?

Thanks for your question. In our view, we work with a 65-35 type of group, and you see that we -- we're very close to that. And that's -- it's a sweet spot for us in terms of our book of business because we continue to have an important portfolio with financial institutions. And for financial institutions, it's where we really look at eventually developing these nontrade transactions. So this category -- also, it's important to us, financial institutions, because this is a very liquid asset because they are also short term in nature and allows the bank really to have access to readily available liquidity if we need, eventually, as we had in the past, to resort to any type of reduction in our portfolio to strengthen liquidity. So 65 to 35, it's a sweet spot that we look at. And this might have a slight variation, up or down, depending on how well we develop the portfolio of financial institutions. But I would work with 65-35.

Got it. Got it. Okay. Let me move on. Going back to the loss provision and the loans that are being protracted and getting to resolution on restructuring. Was it -- was there any deterioration in the overall quality of -- recoverability of those loans? Or are you seeing -- is it more a case of -- essentially, the overall -- how do I say it? I guess, the time cost of money before you'll resolve it, causing that -- causing the increase in provision. I'm trying to understand. Can the situation with those particular loans then get -- add to provision next quarter or the quarter after that? What's to stop it, I guess, is my question.

I think the answer to your question, Greg, and then allow me please to take your question, is the latter. It's what it -- taking into consideration the time factor because, indeed, the collateral will not get better if it takes longer to market that collateral and if -- and so that is taken into consideration. And that is the primary reason why reserves would need to be adjusted upwards. It's not a deterioration of the situation itself. It just takes longer to get to the final conclusion, which is to get to the recoveries that are expected, yes? And so essentially, it's the time factor. And to the extent that these proceedings, mostly legal in courts of justice and so forth, if they continue to experience delays, that would be the primary driver of further adjustments. But other than that, the economic environment is certainly not deteriorating any further. There's growing concern for these clients of ours, no question. And so any pressure in regards to provision requirement would essentially come from the time factor.

(Operator Instructions) At this time, I am showing no further questions in the queue. I would now like to turn it back over to Mr. Amaral.

Thank you, Katie. Ladies and gentlemen, thank you for your attention today. And we are looking forward to talking to you next quarter. Have a good day.

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