Banco Latinoamericano de Comercio Exterior, S. A.
Q1 2017 Earnings Call Transcript

Published: 21 Apr 2017

[Operator:]

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’re a member of the media, you’re 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 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 statements in the press release. And with that, I’m pleased to turn the call over to Mr. Rubens Amaral for his presentation.

[Rubens Amaral Jr.:]

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 slides three and four of the presentation being webcasted. So, let me start with loan growth. This quarter reflects the seasonality we experience every year due to the 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 US dollar-denominated transactions and, not less important, prepayments of existing exposures, repeating what we saw in the fourth quarter of the 2016, thus hindering our ability to increase our balances in the quarter. Nevertheless, I'd 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 an 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 has helped the bank to exhibit a competitive cost of funds. Then we move on to margins. So, from funding to margins, we have been able to maintain the net interest margin over 2% 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, moving on to credit quality. I'm glad to report that we have made important progress to resolve two 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 in 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 have 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 – you know now – our culture of constant improvement, helping the bank to maintain a healthy cost to income ratio below 30%. With that, I’d like to comment 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 protectionist and economic nationalism and the heightened geopolitical risks. Notwithstanding, we continue cautiously optimistic about the growth of trade flows in Latin America as the economic downturn experienced in the last two years is bottoming out. Exports and imports are forecast to grow at around 4.1% this year, which represents a multiple of three times 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 reaffirm 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 change in 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 cents 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 and the quarter. Christopher, please.

[Christopher Schech:]

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 three and four. So, let's dive right in to a more detailed recap of the numbers, starting on page five. 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 five, we summarize 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 Cone countries. We also continued implementing measures to de-risk 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-over-quarter and year-on-year as a consequence. Just as we believe key LatAm economies are showing signs of bottoming out, we also believe that our internal de-risking efforts have neared their end, leaving us well positioned for growth going forward. Fee and other income also declined quarter-over-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 of the now much more diversified client base. Operating expenses continued their downward trend quarter-over-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. As so, we focus on grinding through the lengthy and protracted restructuring process of the existing problem exposures in large companies where a number of different 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 relates to these Brazilian exposures. Now, moving to page six, we take a closer look at net interest income and margins. While net interest income declined quarter-over-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 re-priced in our book of business and lending spreads move essentially as a function of the tenure mix and, to a lesser extent, also as a function of the country mix as well. The tenure-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 focused 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 tenure debt has increased in our funding mix, which provides a great deal of stability as evidenced in high readings of our net stable funding ratio metric, which follows Basel III guidelines. Which brings me to more details about our funding structure on page 7. Here, we highlight our funding mix in the column graph in the upper left. Quarter-over-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 borings 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 costs rose in tandem with underlying base rates. On page eight, 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 de-risking of credit exposures, with the marginal quarter-over-quarter, but significant year-on-year 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-tenure trade transactions, as shown in the column graph depicting the share of trade transactions in the total portfolio, as well as the tenure structure of our portfolio, which continued to migrate towards the short end. The pace, however, of this 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're certainly ready for it. A quick look on page nine, 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 ten, 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 the 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 tenures and is centered in large cap financial institutions and also clients in export-oriented factors 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, non-performing loan levels, which represented a 114 basis points of lower total portfolio balances. The NPL 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 of the last couple of quarters as demand is picking up from a more diversified slate of clients. Compared to two 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 recap 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 I ratio strengthened to 19% on an increased capital base and lower risk-weighted assets. Leverage declined, therefore, to 6.9 times. 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 with that, I'd like to hand it back to Rubens for the Q&A session. Thank you very much.

[Rubens Amaral Jr.:]

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

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Tito Labarta from Deutsche Bank.

[Tito Labarta:]

Hi. Good morning, Rubens and Christopher. Thanks for the call. Couple of questions. I guess, first on provisions, if I understood correctly, you said about $5 million in provisions for ongoing restructuring. Do you expect to have more provisions for these ongoing restructuring 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 provision would have actually been negative. So, just want to get a sense of how you see that evolving through the rest of the year? And then, my second question on margins, you mentioned the shift in mix towards lower risk loans impacted margins a bit. But you now 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 you start to see some increases in the margin going forward? Thanks.

[Rubens Amaral Jr.:]

Thank you, Tito. Good morning. 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 this subject, my expectation is to adjust provisions up as the portfolio grows. 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 non-performing category that are requiring us to go through a negotiation process that is taking much longer because 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 two 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 the subject of some adjustments, but they might be, if any, minor in our view moving forward. In terms of margins, naturally, we are focusing on, what I called, 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.

[Christopher Schech:]

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're seeing right now, but there will certainly not be zero 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 portfolio shift, mix shift towards the shorter end, towards the trade finance business transactions. And actually, this has been quite mitigated by two 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 rate. So, there will be some pressure on NIM, yes, but it will not be precipitous. It will be very gradual declines, in the few basis points, quarter-over-quarter. That is our expectation. I hope that helped.

[Tito Labarta:]

Yeah. 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.

[Christopher Schech:]

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 remains to be seen.

[Tito Labarta:]

Okay, very helpful. Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Greg Eisen from Singular Research.

[Greg Eisen:]

Thank you and good morning. Going back to the shorter-term trade finance activity within your loan book, I believe the chart on the slide deck showed – it reached 62% of loans outstanding 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?

[Rubens Amaral Jr.:]

Greg, good morning. How are you?

[Greg Eisen:]

Doing good.

[Rubens Amaral Jr.:]

Yeah. Okay. Thanks for your question. In our view, we work with a 65/35 type of group, and you see that we’re very close to that. And 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 this non-trade 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 and down, depending on how well we develop the portfolio of financial institutions. But I would work with 65/35.

[Greg Eisen:]

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 there any deterioration in the overall quality of the recoverability of those loans? Or are you seeing – is it more a case, essentially, the overall – how do I say it – just the time cost of money before you’ll resolve it causing the increase in provision? I’m trying to understand, can this 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.

[Christopher Schech:]

And I think the answer to your question, Greg – and then allow me please to take your question – is the latter taking into consideration the time factor because indeed the collateral will not get better if it takes longer to market that collateral. 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. And so, essentially, it’s the time factor. And to the extent that these proceedings, most legally in courts of justice and so forth, if they continue to experience delays, that will be the primary driver of further adjustments. But other than that, the economic environment is certainly not deteriorating any further. There is 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.

[Greg Eisen:]

Understood, understood. Okay, I'll let someone else go. Thanks.

[Christopher Schech:]

Thank you.

[Rubens Amaral Jr.:]

Thank you.

[Operator:]

[Operator Instructions]. At this time, I’m showing no further questions in the queue. I would now turn it back over to Mr. Amaral.

[Rubens Amaral Jr.:]

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

[Operator:]

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