Banco Latinoamericano de Comercio Exterior, S. A.
Q1 2018 Earnings Call Transcript

Published: 20 Apr 2018

[Operator:]

Hello, everyone, and welcome to Bladex's First Quarter 2018 Conference Call on this 20th day of April, 2018. 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. Gabriel Tolchinsky, Chief Executive Officer; and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on the earnings release, which was issued earlier 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. Tolchinsky for his presentation.

[Natalio Tolchinsky:]

Thanks, Chantelle. Good morning, everyone. Let me start by recognizing your vote of confidence at our Annual Shareholders' Meeting last week when you elected me as a board member and ratified my appointment as the new CEO of Bladex. On behalf of our Board of Directors and myself, thank you for your continued support of Bladex since it was first listed in 1992, and thanks for joining us today. In this call, I will discuss key aspects of our earnings results of the first quarter; our perspectives for 2018, considering the quarterly performance; and our views of the Latin American economic and business environment. But before I dive into it, as you are aware, the Board of Directors approved a $0.385 a share quarterly dividend. This decision reinforces once again the board's positive view about the prospect of our financial performance. Now moving on to earnings. The first quarter has always been a slow quarter for Bladex, and this year was no different. But in addition to the seasonal effect, tighter lending spreads, resulting primarily from the combination of lending to financial institutions with short tenors, rising base rates and abundant liquidity in key markets impacted our results further. Despite our lower-than-expected performance, I would like to share some key points that should take us onward. Please refer to Slide 3 for a summary. End-of-period loan balances were 5% lower in the first quarter than in the fourth quarter 2017. Nevertheless, average loan balances for the first quarter were 2% higher than in the previous quarter as we were able to maintain the positive growth -- positive origination growth trend that started in 2017. Looking at Slide 4, we can observe that new disbursements continued their growth trajectory with another strong quarterly performance. These significant origination amounts confirm that trade flows in Latin America are solid and our lending activity is strong. This has yet to translate into increased end-of-period balances, partly due to the short-term nature of trade finance and our clients' production cycle, but also due to seasonality. That said, we intend to actively pursue longer average loan tenors even in our short-term trade book. Our short-term origination -- loans with maturities of less than 1 year -- was strong, but too short-dated as evidenced by a full turnover during the quarter. Here's how the situation progressed. We started the quarter with $3.7 billion in our short-term book, had $3.6 billion of maturities and originated $3.5 billion of short-term loans. The average life of our originations was only 89 days. Q1 2018 short-term origination amounts were 5% higher than in the fourth quarter of 2017. We worked hard to originate, but from a loan balance perspective, we essentially stood still. We're working to increase the average tenor of our short-term origination as seasonality is over. Economic activity is also picking up, and we see increased demand from corporations where tenors are higher than the 89 days that we had -- or that we experienced in the first quarter of 2018. It is our expectation that this effort will be reflected in subsequent quarters. In 2017, our focus was to strengthen our balance sheet from the credit losses that resulted from the Brazil crisis and the decline in commodity prices. Our origination priority was short-term trade and trade-related loans. Therefore, our portfolio construction was biased towards the short-term book. A better economic outlook and a stronger balance sheet sets the right conditions for a better portfolio mix and should allow us to extend our average origination duration in subsequent quarters. Moving on to net interest spreads. We're still not out of the woods in terms of improving the spread as we continue to face some downward pressure during this quarter to replace maturing loans with the same or higher net interest spread in new loan origination. We believe that with longer average tenor, our net interest spread bleed will abate and, with higher credit demand, should start to improve. As far as medium-term origination, with a stronger balance sheet, we're ready to increase this origination. Our origination force is working diligently with our clients to cater to their CapEx and liability management needs. We see a solid pipeline of medium-term opportunities in many of our countries for both financial institutions and corporates. Regenerating medium-term lending requires time, but given our strong pipeline, we expect our medium-term origination effort to pick up speed in the second quarter. In terms of new clients, we are increasing our efforts to prospect new clients throughout the region. This is critically important to achieve our goal of diversification and growth of end-of-period balances, which we are committed to achieve, and it is a priority for the bank in 2018. Contingencies and letters of credit continues to perform. With $3 million in revenues for the quarter, it was up slightly from the previous quarter and down slightly from the same quarter last year. This bodes well for our fee income generation capacity. In syndication, we did not book any new transactions this quarter. Syndication fee income tends to be lumpy. That said, our pipeline for syndication is robust, and we expect some transactions to hit in the second quarter. Credit quality. The credit quality of our portfolio remains strong, with no new NPLs and a shrinking number of credits and amounts in the credit-monitored portfolio. That said, we increased credit provisions by $2 million, mostly to reflect the slower speed of resolution for one of our workouts in Brazil. As has always been the case, Bladex will continue to manage its credit provisions conservatively, prudently anticipating any potential increase in the probability of losses from its NPL portfolio. Moving on to the economic environment. Our meetings at the recent Inter-American Development Bank gathering in Mendoza, Argentina, confirmed our view of a strong business environment with prospects for healthy economic growth for the region and strong trade flows. Although not yet reflected in our quarterly performance, we see clear demand for medium-term money from the financial institutions and corporate clients we met in Mendoza. We face a competitive environment from both local and international banks, which makes us all the more mindful of strict credit underwriting standards and risk/reward parameters. We believe we are in a strong competitive position as our cost of funds has markedly improved and our financing structures and proposals add value to our client because we understand their trade-related financing options and needs. I can also assure you that the bank is changing in response to a more competitive market. We will continue to build a culture of continuous improvement to become a more nimble and capable competitor. This means, for example, that we will be rolling out productivity standards for our origination sales force as well as for the rest of the organization. As I've said before, we will analyze what works and what doesn't and where we should be deploying more capital and which lines of businesses we should be reinforcing and which ones we should be exiting. And controlling cost will always be a priority. We continue to look favorably to growing loan balances in Argentina, Brazil, Colombia and Peru and expect our position in Central America to remain strong. Against this backdrop, the management of Bladex as well as its Board of Directors are cautiously optimistic about the outlook for the second quarter and for the remainder of 2018. With these initial and very brief comments, I will now turn it over to our CFO Ana Graciela to provide you more color about our financial performance in the first quarter of 2018. Ani?

[Ana Graciela de Mendez:]

Thank you, Gabriel. Good morning, and thank you all for your interest and participation in today's call. Let me dive right into the line item variations in the quarterly results of operations and the effect of financial position changes. Looking at Page 5. Net interest income of $26.6 million for the quarter was down 6% quarter-on-quarter and 23% year-on-year. The main driver of this decline for both periods comparison was narrower lending spreads, mainly as a result of short-term origination experienced throughout 2017 and particularly during the first quarter of 2018, as Gabriel mentioned. The bank prices its loan book as well as its funding on LIBOR-based rates plus a spread reflecting tenor and credit risk in general. Due to the short-term nature of its loan portfolio, the bank continued to have a narrow interest rate gap structure, enabling it to pass along LIBOR-based rate increases in its funding to its assets very rapidly. To give you some color on this, while average funding base rates increased by 29 basis points on a quarter-on-quarter basis, average base rate on loans increased by a similar figure of 28 basis points. Moreover, the average spread component on Bladex's cost of funds continued to decline. For instance, in the first quarter 2018, it was 7 basis points lower than in the previous quarter as the bank was able to maintain its average deposit level, mostly coming from its central bank shareholders at $3.2 billion, representing 61% of average interest-bearing liabilities while maintaining a solid overall funding structure. In addition, the net effect of average asset and liability volume variation had an immaterial impact on net interest income for both periods comparison. Offsetting all factors described before was the average lending spread reduction, which we calculate to be 21 basis points lower quarter-on-quarter and 67 basis points lower year-on-year. Considering minimal impact from average net base rate and net volume variations, the decrease in lending spread takes all the credit for net interest income reduction. To put all these aspects into perspective, had lending spreads remained at the same average level experienced during the fourth quarter 2017, net interest income would have been $3.1 million higher in the first quarter of 2018. In a similar manner, had they remained at the same level of the first quarter of 2017, net interest income would have been $9.2 million higher. In both cases, reversing the net interest income reduction to a net increase when compared to each of these periods. Naturally, lower lending spreads drove net interest margin down to 1.68%, a 10-point and 34-point quarter-on-quarter and year-on-year decrease, respectively. Moving on to Page 6. Fees from letters of credit and other contingencies remained relatively stable at $3 million for the quarter. No new syndicated transactions were closed during this first quarter. Therefore, no structuring fees were recorded, evidencing the transaction-based nature of this business and its cyclicality when compared to a solid fourth quarter 2017 performance, which incorporating the closing of 2 relevant transaction. However, as Gabriel pointed out in his comments, we do have a robust syndications pipeline. In addition, during the first quarter 2018, the bank reduced its exposure related to a previously executed structured transaction, reflecting a $0.6 million loss on loans sold. On the next slide, we have segregated the variable compensation expense to show a more realistic trend on quarterly expense base given the annual variable compensation expense incurred in the first quarter of 2018 for $4.8 million. Aside from variable compensation, the quarterly operating expense base of $9.5 million shows a declining trend during the first quarter 2018, reflecting the bank's focus on cost reduction and increased productivity through a continuous effort on organizational structure, processes and technology improvements. Page 8 depicts the Commercial portfolio, including loans, letters of credit and other contingencies, which continues to be well diversified in terms of country and industry exposure and mostly short-term trade-related. Main country exposure remained in Brazil with 16% of total portfolio, although at a significant lower level than in previous years; followed by Mexico with 15% and Colombia at 13%; while the Central American and the Caribbean region remains strong with a combined participation of 27%. Argentina, Peru and Chile showed a quarterly increase of 1 percentage point each to 6%, 5% and 4%, respectively, of total exposure. Shorter-tenor loan origination is evidenced by the increase in the level of exposure, maturing within the following 12 months, representing 88 -- I'm sorry, 82% of total portfolio at March 31, 2018, a slight increase of 1 percentage point from a quarter ago and 5 percentage points higher than a year ago. The industry exposures remained well diversified with an increase in predominant exposure in the financial institutions sector, the bank's traditional client base, representing 47% of the total Commercial portfolio at March 31, 2018, followed by the overall oil and gas sector that is integrated, downstream and upstream combined, which represented 19% of total exposure. The remaining is well diversified among several industry sectors, none of which exceeded 4% of total exposure. As presented on Page 9, credit quality indicators remained relatively stable quarter-on-quarter with an improving annual trend as no new NPLs were registered during the first quarter 2018 and its level decreased by 10% from a year ago. NPLs totaled $58.8 million, representing 1.1% of total loans with ample reserve coverage of 1.5x. The annual reduction was attributable to collections and write-offs of certain exposures against existing individually allocated credit reserves as a result of finalized renegotiation agreements, all of which were accounted for during 2017. Allowances for expected credit losses experienced a quarterly increase of $2 million, mostly related to increased specific provisions from a restructured loan in Brazil. Total allowances represented 1.6% of the total Commercial portfolio at quarter end. On Page 10, we describe the composition of the bank's funding sources. As already mentioned, deposits remained solid with the continued support from Bladex's Class A shareholders, represented by central banks or other designated state financial institutions, which accounted for 70% of total deposit base at quarter end and represent a very stable and cost-efficient funding source. Geographic, tenor and product diversification are the foundation of a solid funding structure, while the bank has been very successful in lowering funding cost spreads in an increasing market rate environment. Page 11 shows Bladex's stock price evolution as compared to its book value, which stood close to 1.1x at the end of the first quarter. As mentioned by Gabriel in his initial remarks, the Board of Directors recently declared a per share dividend of $0.385, maintaining its quarterly dividend unchanged for the last 3 years. This quarterly dividend, which exceeds earnings generation during the quarter, continues to deliver an attractive annualized yield above 5%. I will now turn the call back to Gabriel to open the Q&A session. Thank you.

[Natalio Tolchinsky:]

Thank you, Ani. Let's open the Q&A. Chantelle, please?

[Operator:]

[Operator Instructions]. Our first question will come from Yuri Fernandes, JPMorgan.

[Yuri Fernandes:]

I have a question on your variable compensation. I note here a big increase. And I think this may be related to the management change that you had recently. So my first question is regarding how much of this $4.7 million they are related to the management change? And how much of this is recurring? Because if we look to the last year, about $2 million are kind of the recurring level for the first Q. So just would like to have a sense on how much of this is nonrecurring and how much is normal part of business?

[Natalio Tolchinsky:]

Thank you, Yuri. The $4.7 million variable compensation is overall related to the restructuring that has taken place. And it's an annual number. So it's not a number that you should even remotely expect to see in subsequent quarters. So it basically relates to incentive, very much related to the restructuring that took place and very much related to -- just within the context of a bonus compensation for -- within the scope of an annual time frame. And the full -- because it was paid in 2000 -- in the first quarter of 2018, we took the entire amount for the quarter.

[Operator:]

[Operator Instructions]. Our next question will come from Arthur Byrnes, Deltec.

[Arthur Byrnes:]

Could you give a little bit more detail on how you intend to spread the tenor of the loans into a longer period? It's my understanding that by charter you're a trade bank. I've seen you in the past -- not you, but the bank, change its modus operandi when trade financing was not as lucrative as it's been in different periods. And the results haven't been good. So would you kind of clarify what sort of loans you're looking for and how it's different from what you're doing now, please?

[Natalio Tolchinsky:]

Sure. Thank you very much for the question. We intend to stay within the context of our mission, which is trade finance and Latin American regional integration. It is within that context that we intend to pursue little bit longer tenors for the financing of trade transactions. Very often, cycles can be extended if the financing is there. Those are conversations that we have going on actively with our clients. It is in the interest of the clients to finance -- and I'm talking within the short-term origination part of the book that -- what is essentially trade or trade-related. We are having conversations with them with respect to what should be the financing of those credit transactions given the context, for example, that the Fed is on a schedule for rising rates and whether some of those rates should be locked in, even within the context of short-term loans. So what we're saying is that, so far, a priority has -- our priority has focused on continuing to build our short-term portfolio and not as much on the portfolio mix of different average tenors. We do have the capacity to have tenors that go beyond the 89-day average origination that we had in the first quarter. I also would like to point out that what we've seen in previous years is that, in general, the first quarter tends to have shorter tenors than subsequent quarters. And part of the reason is, a lot of our focus is in South America. The first quarter is when South America is on vacation. So the decision-makers are not there to negotiate better terms of payments on their purchases and extend their cycles within trade transactions. And all we're saying is, a difference between an 89- or a 90-day average origination tenor and 120-day, which is very much within the context of trade and trade-related transactions, makes a big difference in terms of how often our portfolio turns over and overall end-of-period balances. So that is what we're going to be focusing on in subsequent quarters. And we already are seeing a little bit of an effect of that with the beginning of the second quarter.

[Operator:]

Thank you very much. Speakers, at this time, we have no further questions in the queue. I'd like to turn this conference back over to Mr. Tolchinsky for closing remarks.

[Natalio Tolchinsky:]

Thank you, Chantelle, and thank you all. I hope we've addressed some of the issues that we've experienced during the first quarter. We remain, as I said and Ana Graciela reiterated, cautiously optimistic for the second quarter and the remaining of 2018. We are working hard to increase overall loan origination amounts and push maturities up within the context of our mission of promoting trade throughout Latin America and regional integration. And with those comments, I would like now to end the call and pass it back to you, Chantelle. Thank you very much for joining us, and we look forward to talking in the next quarter. And we always remain very open to any conversations or any meetings you'd like to have to clarify any particular aspect of our performance and how we see things going forward. Thank you.

[Operator:]

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone line and have a great weekend. Thank you.