Foreign Trade Bank of Latin America Inc (BLX) 2017 Q2 法說會逐字稿

Hello, everyone, and welcome to Bladex's second quarter 2017 on today, the 21st of July 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, Cynthia. Good morning, everyone. Thanks for joining us today.

Earlier today, we reported earnings of $40.9 million for the first half of the year or equivalent to $1.04 per share. During the quarter, challenging operating conditions continued in the markets we -- where we operate; thus, affecting our financial performance. Although we posted a weak overall result and we were not able to grow our portfolio according to our expectations, let me highlight some key points we consider important as we look and consider this quarter's results. Please refer to the Page 3 of the presentation being webcast.

First point. The effort of diversification is paying off. We have now a much more diversified book of business in terms of countries, industries and individual exposures. For instance, for the first time, Mexico's loan book now represents the largest exposure we have to a country at just 18% of our portfolio. You can see how this diversification is working. Second, fee income coming from our syndication and LC businesses posted solid growth of 42% quarter-on-quarter and 11% year-on-year. Deposits also reached record highs at $3.4 billion, which has contributed importantly to mitigate our cost of funding overall.

And the brightest spot that I'd like to highlight today. New disbursements, for the first time in recent quarters, exceeded the maturities, indicating we are poised to reverse the downward trend experienced during the last quarters. This bodes well for our performance in the second half of the year, which seasonally has a history of always performing better than the first half of the year.

Lastly, solid capitalization. The bank has ever stronger capitalization with a Tier 1 ratio according to Basel III of 20.3%.

And not less important, we presented lower NPLs. Overall NPLs were down 4% for the quarter, showing that our efforts for credit recoveries are starting to show results. But we have also not such a bright side. Let me address the more challenging aspects of our performance in the quarter.

First, portfolio growth. We have been able to reverse the negative trend in our disbursements. But the second quarter confirmed again the reality of increased U.S. dollars inflows towards the region with very active capital markets. Companies raised funds at very favorable terms, leading to a higher-than-expected level of prepayments of bank loans during the quarter, which represented a reduction in our balances of over $320 million.

It's important to highlight that our diversification effort also contributes to a lesser growth as well as we seek to reduce individual exposures to clients, sectors and countries. We are working diligently to expand our client base. But due to persisting economic and credit conditions in the region, we haven't been able to accelerate our customer acquisition strategy.

Provisions level, another important component. The combination of a slower pace of credit recoveries in Brazil and a minor exposure entering judicial restructuring proceedings added to the nonperforming category in that country and necessitated additional adjustments to the level of provisions, the effects of which were offset by a successful credit recovery in Panama, the good news on this side.

Operating costs. The increase is considered nonrecurring and comes from severance expenses associated with changes at the senior management level.

And financial expenses. We had an adjustment to the amortization of forward points associated with certain deposits and foreign currency, which produced the negative impact in our net interest income. The bulk of this adjustment has been already recognized this quarter. And for the remainder quarters, the adjustments are minor.

As you have now better understanding about the components of our financial performance for the quarter, let me state that our outlook remains positive for the second half of the year despite the lower-than-expected performances so far.

The pipeline of new deals for the traditional lending as well as for the syndications platform is solid. We expect that the positive trend observed in Q2 for new disbursements will consolidate in Qs 3 and 4, allowing the resumption of growth in our book of business.

We have reviewed our growth projections for 2017, and we now expect to finish at levels equivalent to last year's end-of-period balances and probably even slightly higher. Nevertheless, we are aware and ready for the possible challenges to our business performance during the second half of the year. And let me highlight a few points.

First, the economic growth in the region remains uneven and modest, thus limiting credit demand overall. But we are pleased to see an increase in trade flows, which can impact positively the demand for U.S. dollars.

Margins are still under pressure as clients push to keep all-in rates at existing levels despite the increasing base rates as the region continues to experience excessive liquidity, as commented previously.

Credit recoveries. We continue to work diligently to resolve the remaining nonperforming loans. But we again emphasize the time element in establishing solutions primarily in Brazil, which requires a constant reviewing of the provision level for such credits. We expect a resolution in Q3 for 2 important cases in that country.

Let me conclude this initial remarks by saying that the Board of Directors has reviewed carefully the performances so far as well as the outlook for the second half of the year and has decided to maintain a solid dividend of $0.38 -- $0.385 for the second quarter.

With that, I will now turn it over to Christopher to provide you more color about the details of our financial performance.

Thank you, Rubens. Hello, and good morning, everyone. Thank you for joining us on the call today. In discussing our results for the second quarter and first half of 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 a fairly detailed account of our performance in the second quarter of 2017 on Page 3. So let's dive right into the numbers, starting on Page 4.

The second quarter of 2017 closed with profit of $17.5 million compared to $23.5 million in the previous quarter and compared to $22.3 million in the second quarter of 2016. Profits for the first half of 2017 amounted to $40.9 million compared to $45.7 million in 2016.

In our profit walk on Page 4, we summarized the main drivers of our business performance in the second quarter of 2017 and first half of 2017 before we go and 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 second quarter of this year, with especially Brazil taking a turn for the worse. Business activity in most markets remained subdued, and U.S. dollar liquidity was ample in light of net inflows into the region, brought about by increased activity in debt capital market issuances, funds repatriation programs and record levels of remittances.

We also continued to derisk our exposure profile, prioritizing pure trade and short-term transactions. The combined effect of these elements impacted portfolio growth negatively this quarter as we recorded lower average and end-of-year -- end-of-period balances. Net interest income declined quarter-on-quarter and year-on-year as a consequence.

We also had to make an adjustment to the amortization cost of derivative instruments that cover a handful of existing deposits in foreign currency to ensure that the amortization profile correctly aligns with the time-based recognition approach that we normally choose to apply for these cases. This drove an increase in interest expense this quarter, representing mostly a onetime adjustment.

Fee and other income increased quarter-on-quarter and for the first 6 months as we successfully completed 2 syndication transactions and as our letters of credit business had more robust performance compared to a year ago.

Operating expenses recorded a very rare quarter-on-quarter and year-on-year increase primarily related to severance payments, the size of which we consider nonrecurring.

Significant focus remains on the provisional line, which showed the net effects of very mixed developments in our small book of nonperforming loans, with the successful resolution of our NPL in Panama versus continued slow progress of restructuring proceedings and a new, albeit small, NPL entrant both in Brazil. Compared to a year ago, however, the strain in the provision line has significantly reduced both quarter-on-quarter and also on a first half year basis.

Now moving to Page 5. We take a closer look at the trends of our key performance metrics, which this quarter showed the impact of the quarterly performance and some nonrecurring elements that we just discussed on the previous page. The return on average equity reached 6.9% for the quarter and 8.1% for the first half of 2017 compared to 9.4% in the first quarter of 2017 compared to 9.1% in the second quarter of 2016 and compared to 9.4% for the first half of last year. Meanwhile, the Tier 1 Basel III ratio strengthened to 20.3% on an increased capital base and lower risk-weighted assets.

Expense levels increased versus the comparative periods as net revenues declined, resulting in an efficiency ratio of 37% for the quarter and 33% for the half year versus 29% in the previous quarter, 23% compared to the quarter of a year ago and compared to 28% for the first half of 2016.

Moving on to Page 6. We show our fee and other income evolution. We successfully closed 2 transactions this second quarter and have a solid pipeline of transactions slated for execution in the second half of the year. The letters of credit business was a bit slower quarter-on-quarter on account of the same market dynamics impacting our loan book, but it remains comfortably ahead compared to the same period last year. All in all, fee and other income continue to track ahead of last year's pace, and we expect that trend to persist, as you already heard from Rubens.

On Page 7, we discuss net interest income and margins. Net interest income continued to slip quarter-on-quarter and year-on-year, mainly on account of lower average portfolio balances and lending spreads as the mix shift of the portfolio towards short-term trade exposures continued and as lending spreads moved as a function of the tenor mix and, to a lesser extent, as a function of the country mix as well.

The quarter was also impacted by the amortization cost of forward points that will not affect coming quarters to the same extent. The rise of underlying market rates, which, in our case, is LIBOR, continues to reprice in our book of business, both on the asset and liability sides, with net positive effect to net interest income, net interest margin and the bottom line, which brings me to more details about our funding structure on Page 8.

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 60% at the expense of short-term borrowings, which represented only 9% of the mix. Medium-term borrowings and issuances have started to decline in percentage terms following the repayment of the $400 million Bladex 2017 bond, which happened early in April. The resulting overall mix of our funding is starting to follow the tenor trends on the asset side and benefited the recurring average cost of funds. Overall, however, funding costs continued to increase mainly with the rising market rates.

On Page 9, we show average portfolio balances and the segmentation of our commercial portfolio, which saw a decline in the second quarter 2017 on account of the market dynamics that Rubens and myself discussed earlier. As a result of continued derisking of credit exposures, and for the first time ever, we saw Mexico displacing Brazil as the #1 country of exposure in our book of business as that market displayed distinctly better growth dynamics than the rest of the region.

Amongst the other bigger markets, Peru and Chile showed relative improvement quarter-on-quarter, while Colombia and Argentina displayed market weakness in the tenors and industry segments that we tend to favor.

As in previous quarters, focus on business origination was in short-tenor trade transactions, as shown in the column graphs depicting the share of trade transactions in the total portfolio as well as the tenor structure of our portfolio, which continued to migrate towards the short end.

And now a quick recap of Page 10 with a breakdown of our commercial portfolio balances per industry segment. Of note is the growth of the relative share of financial institutions in the overall industry mix as most of the derisking is taking place in the corporate sector and in commodity-driven industry segments.

On Page 11, we present the breakdown of our exposure profile in Brazil where exposures accounted for just 18% of the commercial book, stable compared to the prior quarters. This does seem to indicate a bottom. But just as I commented last quarter, it continues to be way too early to predict an uptick in the relative weight of Brazil in our portfolio mix.

Certainly, conditions in that country have not improved to the extent that we need in order to grow our presence there. The exposure profile in Brazil 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.

Last but not least, the evolution of credit quality and reserve indicators on Page 12 shows a small decline in NPL levels in both absolute and relative terms, representing $62.6 million or 112 basis points of total portfolio balances.

Now more than before, the NPL are almost entirely confined to Brazil, and reserve coverage for these NPLs increased to 73% following the provisions made in the quarter to reflect the slow progress in restructurings there.

On Slide 13, we show the overall allowances covering our book with an incremental increase in coverage levels. The walk of loan allowances from stages 1 through 3 from the beginning of the year shows reduced reserve requirements for the new business on book, offset by the strengthening of reserves for stage 3 NPL exposures while stage 2 exposures reflect the performing loans being assessed on a lifetime expected loss basis due to the generally more elevated credit risk prevalent in most of our -- the region.

And finally, on Page 14, we highlight our focus on total shareholder return. In our view, the Bladex stock remains very attractively valued, with the Board of Directors again authorizing a quarterly dividend payment of $0.385 a share, which represents a robust 5.5% dividend yield.

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

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

(Operator Instructions) Our first question will come from Yuri Fernandes, JPMorgan.

I just have one question. Actually, 2 questions, on volumes and margins. On volumes, I would like to know more how you are seeing the demand. And I noticed you revised the guidance from 8% to 0% this year. And should we believe that this is okay? Because probably, you are going to see a very good evolution in the third and fourth quarter. So the first question is about volumes, how you are seeing the region and if you feel comfortable with this. And the second one is about the margins. If you can talk a little bit more about how you see a potential margin expansion for the third and fourth quarter. I understood you had like some effect from derivatives that impact your NII, and that probably should help a little bit. But also, if you can describe a little bit more the funding and how you are seeing the spreads on your loans.

Thank you, Yuri. Let me address the questions, and then, Christopher, feel free to please jump in anytime to add any comments you might like. So my first answer to your first question is yes, we feel comfortable that we'll be able to deliver on the growth that we have assessed, that we probably will achieve the same levels of the end of the year last year. So it's a growth that will be around 8% if we look at today's book of business. So we feel very comfortable that, that will be achievable. Christopher gave you a good description about the different countries, but we see demand picking up a little bit. And here, I'd like to go back to one of the points I mentioned in my preliminary comments about disbursements. To give you a perspective, although we haven't posted growth that we expected, it doesn't mean that we're doing less. In fact, we're doing more. And if you see our attachment about credit disbursements, you're going to realize that growth year-on-year of disbursements were 34%. We finished the first 6 months of the year with $7 billion worth of new disbursements compared to $5.2 billion in 2016. So that shows clearly to you that we are doing more, but also demonstrates to you that we are doing what we promised we would do. There is more short-term transactions, more trade finance transactions. And that impacts our book of business because they are short term and we have liquidation of these transactions in our normal course of business. And eventually, we finished the quarter with lower-than-expected end-of-period balance. But we're very confident we'll be able to achieve the volumes we are providing you with the guidance we have now, the revised one. As far as margins are concerned, we have several different pressures in terms of margins. We are working diligently to make sure we can keep the margins at the levels they are. But there are pressures coming from the increase of base rates. The base rates have been increasing over time. And because of this phenomena that we are seeing in the region with more liquidity coming from remittances, coming from more active capital markets and lower economic activity within the countries, clients really pressure us to keep the all-in rates. So you might see some impact on our margins moving forward and also because we are focusing more on the short-term trade finance, which normally present lower margins. So it is a component of really working hard to increase the volumes to make up for eventually the reduction, although we'll work to make it very small in terms of margins.

Yes. I just wanted -- sorry, I just wanted to add that as Rubens mentioned, some of the effects that impacted the markets in most recent quarters, especially the ample liquidity that we're finding in most all of the countries that we operate in, we don't believe that this is a permanent feature. Capital flows have a way of changing constantly. Remittances will certainly not remain at these very highs that we are seeing as of late. Funds repatriation programs like the ones we are seeing in Argentina will not last forever either. So we do expect liquidity to become a little tighter, which would support the margins that we can ask for. And again, the underlying rise in base rates, as we price our book of business, do have a beneficial impact in mitigating any lending spread deterioration as well. So we don't believe that the NIMs that we are looking at, they now will be worse going forward. We should be entertaining the fact that we had a nonrecurring impact in second quarter NIMs. We should expect to see NIMs improving slightly from second quarter levels, probably not reaching the 2% levels that we saw last year but certainly remaining well within that range of NIMs, between 180 basis points and 200, hopefully closer to 200 than 180.

No. Super-clear. If I may, just one thing about, like, your sustainability ROE levels. Like, how do you see the ROEs in the midterm? And did you have any, I don't know, potential employment inefficiency, lower expenses, some kind of plan to improve the ROEs, even though the NIIs should be more challenging ahead?

So this is a -- the same question that our board asks of us every time we meet and we discuss results. This is a constant challenge we have ahead of us how really to improve ROE. And first of all, it is making sure that we resume growth, we keep the margins where they are. And we deliver in what we believe has been so far very distinctive feature of Bladex, our syndication business. That is generating fee income that really can lever importantly the ROE. As far as the cost side is concerned, we don't see any increases in our administrative costs. It's the opposite. We just mentioned what you saw this quarter was onetime nonrecurring severance expenses. It's the opposite. We are looking really to return to the normal levels of costs that we have overall, and we continue to improve the cost of funds. As you saw, we have reached record highs in deposits. That's just a very important component in terms of our cost structure. We don't have any major investment to make. So at the end of the day, when you look, costs will be under control. We'll grow our business, and we'll continue to consolidate our fee income. So the combination of these 3 factors will help us, hopefully, to get back to the double-digit ROEs by next year. This year, it's challenging. We're still in single digits -- higher single digits. It's going to be around 8%, 9%, 8.5%, 9.5%, we expect, at a minimum, but we're working very hard to go back to double-digit ROEs.

(Operator Instructions) Our next question will come from [Jonathan Shafter], [ERC].

So as I understand it, loans are hopefully going to end the year flat to year-end '16 levels. Capital is building and you're derisking the portfolio. And I've been a very long-time investor in Bladex over a decade now. And one of the things that's great about the company is that you take down exposures where risk reward doesn't create value. But at this point, where are you comfortable letting leverage levels drop to, right? I mean, if the portfolio growth continues to be muted, much less shrinking, at the current point while capital is building, at what point will you consider putting in place some form of buyback to return capital that the company is unable to put to use?

Thanks, Jonathan. Thanks for your question. Thanks for being a long-term shareholder of Bladex. We appreciate. Thanks for your comments. This is something that is recurring in our discussions with our board. We are always looking at ways of maximizing the return in capital. And believe me, if we get to a conclusion that we don't have that capacity, the board will act immediately, and we will do something as far as returning capital is concerned. But this is not in our horizon anytime soon because what we need to keep in perspective is that we're coming from maybe one of the most negative credit cycles for Latin America with the drop in commodity prices that we experienced after 2015, both oil prices and commodities overall, soft commodities and metals, that impacted tremendously the region. We had, as you rightly commented, to adjust our activities to derisk reward in the most efficient way. So what we have seen is that we have reached a tipping point, and we're seeing now that there is a good possibility of growth and deploying this capital. This year, it's impacted, but whatever has happened already in the first half. But we see a very positive second half. Demand from our clients in the different countries because of the increasing trade flows are showing that we're going to have a growth as we said. Eventually, I don't want to promise because you know that we're very careful about guidance. The only guidance we offer is growth, and we are conservative. But we firmly believe that we can finish the year on a flat at a minimum. There might be a possibility for us to grow, and believe me, we are not hesitating to grow. I think the disbursement, as I alluded to before, proved this, that we really -- or proved that we really are increasing our activities. So this is in our constant discussion, but we don't see any measures in the foreseeable future. It's the opposite. We want to deploy the capital to make sure we can impact the stock price in a positive way by the results we deliver.

No. That's fine. And again, you know that I've been here long enough that I'm not trying to propose strategies to goose the stock in the short term. But it seems only prudent to have in place a buyback that does not have to be utilized. That opportunistically, if the market gives you the chance to buy back your stock, particularly below book value, not to have that in place because if the market gives you that opportunity by the time you have it in place, that opportunity may no longer be there. And there is no reason not to have it there. And then just don't utilize it if you have a better use for the capital.

We agree with your assessment. And that's what we have been discussing at the board.

Our next question will come from Greg Eisen, Singular Research.

Could you identify what percentage of your loan portfolio will be classified as trade finance this quarter? We talked in prior quarters that you were almost up to the goal level that you had for trade finance as a percentage of your total loan book. But could you identify that for us?

Greg, allow me to take your question. This is Christopher. As per our earnings release, we are at 69% of our total book being represented by trade finance exposures. And indeed, it crept up a little bit quarter-on-quarter from, I think, 66% or 67%, a couple of percentage points. And we frankly don't think that we will see levels of 80% or even higher percentage of our total book being represented by trade finance exposures. That is not realistic. And we do believe that we should not expect to see those numbers to climb significantly going forward also as a matter of preserving net interest margins and net interest income because, as you know, short-term trade finance transactions are generally modestly priced due to the shorter tenors primarily. So to answer your question, we do believe that we're reaching somewhat -- some -- getting close to the levels that we would have expected given our strategy to go more and more into trade finance exposures but don't necessarily believe that this trend will continue unabated going forward. I hope this answers your question.

Yes. That answered my question. Turning to another question. If you look at what's happened in your business since June 30 so far in July, do you see any signs of activity in your loan activity that -- so far in July that justify your optimism for the year? Is July bearing that out?

Allow me to answer first, and Rubens may jump in anytime, of course. In the first half of any month, it's quite hard for us to pinpoint exactly where the end of the month will wind up being because of the fact that a lot of the companies really focus on month-end balances. And so for the time being, what you normally would see is a small drop in balances at the beginning of the month and then a pickup towards the end of the month. And again, we are seeing a pickup towards the end of the month as usual. And we believe that our -- what we're seeing is not detrimental to what we just expressed in terms of our growth expectations for the remainder of the year.

Understood. Okay. I'll accept that answer. Moving on to another question. It sounds like despite the high level of disbursements that you had this past quarter, that the portfolio dropped because you essentially lost some loans from your book because people went elsewhere. They took it -- this is elsewhere on buying cheaper rates. They were very rate-sensitive. As you look at your loan portfolio, do you -- how can -- how do you quantify? Is it possible for you to quantify? And could you explain to us how you look at it, the risk on your net interest margin and the size of your loan portfolio of continuing to lose business just on people buying rate elsewhere if this liquidity continues in your marketplace?

Yes. I think the very end of your question, I think, answers the question is whether liquidity will continue this trend and the way that we have seen so far. I think Christopher made some comments during his initial comments that we don't see that trend that will continue for too long. And the situation is, for us, it's difficult to predict that and that could impact NII because basically, what's happening is that companies are having access to more medium-term financing in the capital markets and they are taking advantage of that and paying short-term transactions they have in their portfolio. So it's not that they are benefiting from smaller or reduced rates compared to what we have to offer. It's that they have access to medium-term financing that is, well, available for them in the market and they are benefiting from that. So what we're seeing -- Christopher mentioned something about July -- is that the situation, it's improving towards the end of the month, and we expect this to continue to be the case. And we don't expect that these prepayments to become a reality. This has been a reality in the last 2 quarters. You remember that I mentioned last quarter that we had some prepayments as well. But this quarter, when we saw the bulk of it happening -- but in our projections, we're not expecting that this trend of prepayments will continue. It's the opposite. As the region improves the risk profile a bit, we have very interesting pipeline of syndications that will help us also to offer medium-term financing for these companies. So we expect to see a growth in our book of business associated with more medium-term financing in the second half of the year as well.

Understood. Understood. And if I could just ask one more question about -- your operating expenses came in at $12.6 million versus $11.2 million last quarter. Could you discuss what -- can you give a little bit more color on what was the nature of any nonrecurring expenses that might have occurred in this quarter that we should not -- that we can expect not to see in the next 2 quarters?

Yes, Greg. It is Christopher again. Well, changes in senior management are quite rare in Bladex. And so you should not expect to see that happening every quarter or -- and so that's what happened. We made -- we had some senior people leaving the bank and being replaced by new staff. And the costs that we incurred this quarter were associated with the severance payments that were made to these exiting staff.

Is the dollar amount of the nonrecurring costs very similar?

Yes. It's very close to the variance that you saw quarter-on-quarter.

(Operator Instructions) At this time, we have no further questions in the queue. So I'd like to turn this conference back over to Mr. Rubens Amaral.

Thank you, Cynthia. Thanks, everyone, for your attention today. I'm looking forward to talking to you again in October. Goodbye, and have a good day.

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.

Thank you, Cynthia.

Thank you very much. Have a great day.

You, too.