Foreign Trade Bank of Latin America Inc (BLX) 2022 Q3 法說會逐字稿

[Operator Instructions] Good morning, and welcome to Bladex's Third Quarter 2022 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investors section of the company's website, www.bladex.com. There will be an opportunity for you to ask questions at the end of today's presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode. Now I would like to turn the call over to Mr. Carlos Baene, Investor Relations Officer. Please go ahead.

Good morning, everyone, and thanks for joining our third quarter 2022 earnings call. Before we begin our presentation, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to [materially either], including factors that may be beyond the company's control. For a description of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and our earnings release. Speaking on today's call is our CEO, Jorge Salas, who will provide an overview of performance for the quarter and review the drivers behind these results and latest advances on the execution of the renewed strategy. Ana Mendez, our CFO, will then discuss the quarter's financial results in more detail. And after that, we will open the call for your questions. Also joining us today are some of my colleagues from the executive team that will be available for Q&A. With this, let me turn the call to Jorge. Please go ahead.

Thank you, Carlos, and good morning, everyone. Bladex continue to deliver strong results in the third quarter as we execute our strategic plan in advance on our goal of driving profitable growth. Economic activity in Latin America has remained resilient with foreign trade flows reaching record highs. The economic activity in the region, together with tight credit markets and the successful execution of our strategy has contributed to higher commercial volumes as well as an expansion in lending spreads for Bladex. Net income maintained the positive momentum we delivered in prior quarters, up 70% year-on-year to almost $27 million. This new level of net income, along with a more optimized capital structure resulted in an expansion of ROE to 10.3%. Our strategic initiatives contributed to sustained growth in our credit book to nearly $9 billion at quarter end and maintaining a very healthy asset quality with NPLs at nearly 0%.

I want to point out that we have accomplished this strong performance while consistently improving our efficiency ratio. Ana will talk more about this shortly. Now let's turn to Slide 4 for a brief update on our progress on the strategic plan. As I mentioned last quarter, we aim to capitalize on the strength we have consolidated in over 40 years of banking in Latin America with the goal of enhancing profitability, ensuring long-term sustainability and, of course, increase the overall value creation for all stakeholders of Bladex. Today, I would like to highlight that the strong results we are presenting are largely the product of the strategic plan and to a lesser extent, driven by the current macro environment. The plan has been in place since the start of the year. And in this 9 months, it is already delivering very positive results. During the first phase of our plan, we optimize the balance sheet, allocating our capital more profitably. We began the year with a core equity Tier 1 ratio of 19.1% and we closed the third quarter with an optimized capital ratio of 14.4% as we expand our loan book while maintaining a very good asset quality.

We also increased penetration with existing clients, while we continue to expand our customer base. During the first 9 months of the year, we increased new active customers by 13%, with over 50% of the book growth driven by new customers. In addition, our profitability focus, along with the overall higher rates have allowed us to expand net lending spreads. At the same time, we have continued to optimize the portfolio mix, both in terms of industries and geographies, all while maintaining a deep focus on cross-selling. Just as an example, in just 9 months, the penetration of our letters of credit product increased by 10% within our client base. We're also pleased with our progress achieved in terms of driving fee income from our loan indication debt that keeps showing good momentum. As a matter of fact, this week, we announced another syndicated deal, a $130 million senior secured amortizing facility for Favorita Fruit, a carbon-neutral corporation and one of the largest banana exporters in Ecuador. Bladex acted as a sole lead arranger and book runner for this deal. I'm going to leave it here for now and turn the call back to Ana, our CFO, who will walk you through our quarterly results in more detail. After that, I'll make some closing remarks before we open it up for questions. And that's it for now, Ana can you please go ahead, please.

Thank you, Jorge. Good morning to all. Starting with Slide 5. Total assets continue the growth trend, up another 4% during the quarter, reaching over $9 billion on the back of sustained loan growth complemented by an investment portfolio, which allows us to further diversify our exposures by country, including investments in non-PAM issuers, mainly from the U.S., representing 52% of the total. Our cash position mostly invested with the New York set, stood at 11% of total assets, reflecting our rigorous liquidity management, which follows Basel III liquidity standards as required by the Panama banking regulator. The bank's core business, namely our commercial portfolio is constituted by the loan portfolio, which totaled $7.1 billion at quarter end, together with contingencies or all balance sheet assets for another $0.8 billion, the latter mainly consisting of the issuance and confirmation of trade-related letters of credit. We continue to expand the loan book, mainly reflecting the increase in cross-sell and deeper penetration with the existing customer base and the addition of new clients as contemplated in the initial phase of our 5-year plan. We have also experienced higher demand given sustained economic activity and trade flows in Latin America. Further on, we will explain in more detail how this asset growth has been consistently supported by a well-diversified funding structure.

As shown on Slide 6, our geographic exposure remains diversified, with Brazil maintaining the largest share at 16%, followed by Mexico at 12%, commensurate with the size of these economies, where we plan to continue focusing on expanding our client base. We remain and will remain well diversified in other countries throughout the region with an important portion in non-LatAm investment-grade exposure, mostly in the U.S., Europe and Asia related to transactions carried out in Latin America and the Caribbean. Overall, exposures in investment-grade countries represented 43% of the total commercial portfolio. In terms of sectors, financial institutions represent 43% of the portfolio, up by 2 percentage points from the prior quarter as we capitalized on business opportunities arising from the liquidity constraint in the region, all while keeping a stringent focus on maximizing credit spreads. Exposure to top-tier corporates throughout the region continue to be influenced by growth in commodity-related sectors, such as oil and gas, mainly downstream, which now represents 16% of the total, followed by manufacturing industries at 8%, while electric power and food and beverage accounted each for 7% of total exposure.

Turning to Slide 7. Again, this quarter, credit disbursements of over $4 billion exceeded collected maturities and represented over half of the commercial portfolio. This denotes the short-term nature of our portfolio, characteristic of our business model with 70% of loans maturing within the next 12 months and the average remaining tenor of the portfolio at approximately 1 year. This provides agility to rebalance our book through economic cycles in the region. Lending spreads on new loans exceeded those of maturing by 14 basis points, reflecting our focus on optimizing our portfolio mix to maximize net lending spreads and margin expansion.

Moving on to Slide 8. Sustained asset growth is supported by a well-diversified funding structure. Our resilient deposit base accounted for 42% of Bladex's funding sources, while 48% of deposits come from our Central Bank Class A shareholders. This strong deposit base is complemented by an ample availability of bilateral credit lines from a wide range of correspondent banks and by the continuous access to the global capital markets, where Bladex is a recurrent issuer, is mainly but not exclusively in the U.S. and Mexico as well as the global syndicated loan market, all of which represent the remaining 58% of the bank's funding sources. In August, Bladex closed a new public issuance in the Mexican market, which amounted to PLN 5.5 billion or the U.S. dollar equivalent of $275 million, with 2 tranches of 3.5 years and 5 years.

Turning to Slide 9. The bank's capital strength remains a pillar of our business model and a critical factor recognized in our ratings. In recent quarters, we have taken advantage of increased demand for short-term trade financing while widening lending spreads, allowing us to achieve a more efficient use of capital. We remain committed to maintaining a sound capital position and anticipate a deceleration in loan growth in the coming quarters, unexpected slowdown of economic activity and commodity prices. In this sense, we expect an inflection point in capital ratios, having reached a Basel III Tier 1 ratio of 14.4% and the Panamanian regulators' capital adequacy ratio of 12.2%, both well above regulatory minimums. In addition, the Board recently declared a dividend of $0.25 per share for the quarter, unchanged from preceding quarters, representing a payout of 34% of third quarter earnings. We continuously analyze capital management alternatives to optimize our capital structure and to support growth opportunities.

Please turn to Page 10. The top line, revenue growth, remains mainly driven by solid NII performance, which in turn is backed by strong net interest margin and net interest spread expansion. Net interest spread representing the rate differential between interest-earning assets and financial liabilities have been continuously expanding on the account of increased lending spreads, as mentioned earlier. In turn, net interest margin, which also considers the portion of assets financed by our equity was supported by both higher net interest spreads and by the impact of increasing market rates on the overall yield of assets financed by the bank's equity.

Let's now move on to Slide 11. Presenting in more detail the quarterly evolution of NII, which increased by $7.5 million sequentially. The continued positive trend in net interest margin that I just discussed, up 23 basis points sequentially and reaching 1.77% in the third quarter, resulted in a rate effect increase in NII of $5.3 million in the period. At the same time, the average loan portfolio increased by $423 million sequentially, accompanied by the related increase in financial liabilities and a continued proactive liquidity management. This resulted in a positive net volume impact on NII of an additional $2.2 million for the period.

Moving on to Slide 12. Fee income from letters of credit remained stable from previous quarter and up from last year, representing a consistent support in fee generation, complemented by loan structuring and syndication fees and activity that picked up during the quarter with 4 transactions executed, resulting in a sequential increase of $2 million. Syndication activity is transaction-based. So its trend should be analyzed on an annual basis. After a period of nearly no activity during the pandemic, we started to see transactions again since the second half of 2021. In the trailing 12-month period ending September 30, 2022, fees from syndication activity totaled $6 million.

As shown on Slide 13, Bladex maintained strong asset quality levels. Provisions for this quarter increased to $4.8 million compared to the $0.8 million in the prior quarter. Stage 1 exposure, which accounts for 98% of the total, increased by $204 million during the quarter on new loan origination, requiring $1 million in credit allowances at a 41 basis point reserve coverage. Lower Stage 2 credit exposure was offset by the increase in reserve coverage at close to 15% as a result of a $3.9 million credit provision requirement in connection with a couple of isolated credits with increased risk since origination. In addition, NPLs or Stage 3 credits remain unchanged at close to 0% of total loans. Reserve coverage increased 9 percentage points for this loan compared to the previous quarter, compensated by recoveries from loans written off in previous years, resulting in minimal Stage 3 provisions.

Moving on to Slide 14. During the third quarter, the efficiency ratio improved to 31.6% as strong revenue growth more than offset an increase in operating expenses, which totaled $14.6 million. The new variable compensation structure closely tied to strategy execution and financial performance, together with new hire supporting the underlying business growth remain the main driver behind the $2.8 million annual increase in salary-related expenses. The increase in other operating expenses mostly relates to strategy implementation costs. By design, strategy execution expenses have been programmed so that they can be covered by incremental revenue throughout this process as it continues to be the case in this quarter. As we scale up the business under the new strategy, we expect to see further improvements in efficiency in the medium term.

Turning to Slide 15. We delivered this quarter an annualized ROE of 10.3%, up from 9.1% in the second quarter and 6.1% a year ago. This improvement in profitability was driven by several factors, including the sustained trend in margin enhancement, continued loan growth resulting in a more efficient use of capital. This, together with top line growth, including higher fee generation, ongoing capture of operating efficiencies more than offset increase in expenses and credit provision, all of which resulted in a profit of $27 million for the quarter, up by 17% sequentially and 71% year-on-year. I would now like to turn the call back to Joe for closing remarks. Thank you.

Thanks, Ana. So we are pleased to report another quarter consistently delivering on improved operational and financial results capitalizing on Bladex's unique position with operations in over 30 countries across the region. Prior to closing this call, I'd like to remind you that we will be hosting a virtual Investor Day on November 14. That day, we will take a deeper look in our strategic plan. Several members of my management team will join me in sharing with you more details about the different phases of our plan and the progress on each front. We will discuss how we are focusing on attracting and retaining the required talent and improving our processes and infrastructure to effectively scale our operations. Moreover, we will provide near-term and midterm operating and financial goals and KPIs to track progress over time. We look forward to sharing our plans with you. In the meantime, our Investor Relations team is available to you to answer any questions. And now I would like to close the call and open it up for the Q&A.

Thank you. We will now move to the question-and-answer section. [Operator Instructions] So our first question comes from Ricardo Vallarino from Ingenieria Orion -- there are actually 2 questions.

Question one, can you please give us specific numeric goals for the 5-year plan, for instance, ROE, capital ratios and lending margins. Where do you see the range for all of these at the end of the 5-year plan? And question two, can you share the rationale behind the decision by the Board of Directors to not raise dividends, the latest EPS of $0.74 gives a projected annual EPS run rate of approximately $3. The current payout ratio is 33%, which is the lowest Bladex has had for more than 15 years...

Yes. Thank you, Ricardo, for your 2 questions. I'm going to tackle the first one first. We will talk extensively about our metrics and the guidance and the rationale behind in the upcoming virtual Investor Day, as I just mentioned, it's November 14. I can say, however, that we plan to achieve sustained ROE in the mid-teens by the end of 2026. Additional value-added products on the commercial side and the treasury side will be discussed extensively, and that will be key for that increased ROE. I can tell you that the pace of growth will not be as fast as you have seen this year, the focus will be profitability and our base case is to grow organically through retained earnings accumulation.

And the second question was about dividends and the fact that we have the lowest payout ratio in years. It is true. It is the lowest payout ratio in years. But it is also true that for years, life has experienced very minor changes. I mean, very limited growth and frankly, subpar returns -- certainly below our cost of capital. Bladex has entered a new phase. The plan we have put together is delivering and will be delivering growth and higher returns going forward. And in this volatile context, the Board is having active discussions on capital management. I can tell you though that one principle that is not going to change is the strong capitalization will remain. It's a pillar of our ratings, and I know that will not change going forward.

Thank you. So our second question is a voice question and comes from James Adam from Max Solutions. James, please go ahead. James, I'm not sure if you're on mute, but we can't hear you. Are you there? I think we'll have to come back to James. So our next question is a text question, and it comes from Patrick Brown. Patrick says, congratulations on the good results. You explained well how Bladex has done a good job of taking advantage of the current context and implementing the new strategic plan. But just in regards to perhaps some headwinds, that's mostly a slowdown in growth due to a deterioration in the regional and global economic context. My question is, what does that do for your business? Are you going to be able to keep the margin expansion?

Thank you, Patrick. There's no doubt that rising rates are combined with inflation and the quick tightening of the monetary conditions have made the world more volatile and more uncertain. It is also true that for Latin America, the economic outlook has deteriorated. We see fiscal pressures, our growing financing costs algorithm and you see a lot of countries with currency devaluation pressures. But our model has allowed this bank to successfully navigate through challenging environments like this before. The performance during the pandemic is perhaps the clearest and most recent example. And I can say, certainly not the only one. We did, as I've said before, very active risk management, we are able to reshuffle the portfolio and keep asset quality under control, actually improving. Now the flip side of this is that historically, in LatAm, in moments of crisis or recession like this one, Bladex competition from Global Bank reduces. Also, the debt cover markets alternatives become less available and more expensive for our clients, corporates and NFIs as well. So that combination has historically favored Bladex because it allows us to increase our margins as we are doing today. And we do not expect this time around to to be different. I would also like to mention that the pricing discipline that has been installed by our new Chief Commercial Officer, is here to stay, and we will favor margins even if that means reducing our volumes going forward.

Thank you. So our next question is a voice question comes from Jim from Singular Research. So, Jim, please go ahead.

Yes. Thank you. Can you hear my question and hear my voice?

Yes, we can hear.

Okay. Great. So yes, a very encouraging quarter. The results are a clear indication that you are managing the business very effectively and prudently. You also explained well in regards to the risks that Bladex faces, particularly in the LatAm region. However, I am just curious in regards to just future direction in terms of preparing for any type of headwinds. So as you mentioned, we have a high inflationary environment, a currency devaluation in many of the countries in which you service. We're facing higher interest rates by many of your clients. And so I'm just kind of trying to get an understanding what are some of the actions that you are looking to do going forward to address that? So I know that you've kind of strengthened the loan portfolio. But what about in terms of like the provisions are you going to be booking higher provisions going forward? And just any other things that you're going to do in terms of managing that business. Thank you.

I'm going to turn the call to Sam Canineu, our Chief Commercial Officer.

Thanks, James. Thanks for the question. I'll say first and foremost, I'll split the answer in two. When we look at from a credit standpoint, -- when we look at the headwinds, we believe that we come strong in terms of our portfolio composition in terms of the type of clients that we have. We are not -- I mean, our NPL ratios, they really evidence the reality, which is a low-risk portfolio. And given our portfolio is so short term, we basically test it quarterly. We have -- we basically had almost EUR 4 billion of repayments in the last quarter, and we collect it all. So I think from that side, I think we came well prepared. We continue to manage prudently every new client that we have meet such tenders. And then when we look from the commercial side, I think it's actually a great opportunity because we -- I think as Jorge mentioned earlier, we can reprice fast and take advantage of higher spreads, I think, much more than the average. And in moments like this and also as it was mentioned by Jorge, we managed to really take advantage of increasing spreads to, I would say, to higher-grade clients who normally wouldn't pay such margins. But in moments like this, they want to tap liquidity. They want to be with the [cushion]. And we do have -- we keep limits approved uncommitted limit, so it doesn't cost us much but to be ready to take advantage of such opportunities. And when we're pricing such transactions, we're looking at our cost of opportunity, being the bond prices if the client has public instruments as well other sources. So I think all in all, we believe that this can be favorable. Of course, we are managing very carefully and being selective. But I like, from a commercial standpoint, it's -- I think it's favorable. I like where it's going. Thank you.

Yes, that's great. You addressed the operationally what you plan to do forward and that's very encouraging. Can I also ask is there any thought towards any M&A activity? Like is there any kind of thought into perhaps any acquisitions of maybe a smaller bank or joint venture or acquiring different product footprint, like perhaps retail banking or investment banking or brokerage or anything else that relates to banking. Is there any -- is there any thought towards any expansion and taking advantage of market opportunities that way?

Thank you for that question. The short answer is no. This plan has been put together on top of the competitive advantages that Bladex has. We believe that there are lots of opportunities within the trade space. We will not change our focus from trade. We'll be expanding our product mix within trade, both on the commercial side and on the treasury side, but the profile of our customers will not change and we will not be adding additional product lines outside of those within, let's say, the trade and trade-related world. Just perhaps the only thing that I mentioned in the last call is we are starting to get our feet wet with project financing, and we'll be talking more of that in our Investor Day.

Thank you, Jorge.

Thank you very much. I'm not seeing any more questions. So perhaps I can hand back to the Bladex team for closing remarks.

Well, thank you all very much for your questions and looking forward to have you all, so we can discuss extensively on our virtual Investor Day, November 14. Thank you very much.

That concludes the call for today. Thank you, and have a nice day.