Banco Latinoamericano de Comercio Exterior, S. A.
Q2 2014 Earnings Call Transcript

Published: 24 Jul 2014

[Operator:]

Hello, everyone, and welcome to Bladex Second Quarter 2014 Conference Call on today, the 24th of July, 2014. 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 this 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. These comments will be based on the earnings release, which was issued yesterday. 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.

[Rubens V. Amaral:]

Thank you, Katie. Good morning, everyone, and thanks for joining us today. Yesterday, we reported an ordered quarter of good results and positive trends in our business. I will comment on the highlights of our results for the first 6 months of 2014, and Christopher will provide you with the details of our quarterly performance. For your information, when I refer to net income, I'm using the concept of business net income as defined in the appendix of our presentation. In terms of fee income, I'm referring to our traditional contingency business, syndication's platform and other income from our debt intermediation activity. Let me start with total disbursements. During the first semester, we reached a total of $6.7 billion being $1 billion in medium-term transactions with an average life of 3.2 years. This important level of disbursements, as discussed in previous calls, is a consequence of our business strategy of

[Christopher Schech:]

Thank you, Rubens. Hello and good morning, everyone. Thank you for joining us on the call today. In contrary to Rubens, you may always ask and inquire about the World Cup results with me personally. In discussing our second quarter results, I will focus on the main aspects that have impacted our results and I will base myself on the earnings call presentation, that we have uploaded through our website together with the earnings release. And which is being webcast as we speak. So before we go into more detail, let's start on Page 5 of the presentation, with a quick rundown of the key financial highlights and drivers that shaped this quarter. Rubens already give a recap of our 6 months results, so I will focus my comments more on the quarter -- quarterly variations. The second quarter of 2014 closed with net income to Bladex shareholders of $20.7 million compared to $23.5 million in the previous quarter, and compared to $21.7 million in the second quarter of 2013. In order to accurately present performance of our recurring business activities, we focus on business net income, as already mentioned by Rubens. And which is recurring net income derived from our principal business activities of financial intermediation, which generate net interest, commission and fee income. We also refer to it as core income or income from core activities. And this business net income reached $22.9 million in the second quarter of this year, down from $24 million in the first quarter of this year, mainly due to the provisions of credit losses brought about by the strong growth of our commercial portfolio. Business net income grew 17% compared to the second quarter of 2013. Net interest margin continues to increase rising 5 basis points during the quarter versus the previous quarter and that is 12 basis points ahead of the levels in the second quarter of a year ago. The net interest spread, which was the difference between average interest rate earned versus average rates paid also improved in a similar manner. Business return on assets and return on average equity metrics, dropped quarter-on-quarter because of the volume driven in reserve increases, but nevertheless, improved significantly compared to prior year levels. The business efficiency ratio improved 3 points quarter-on-quarter and remained 4 points below prior year levels. Our Tier 1, Basel I capitalization continues to be comfortable, reaching 15.2% at the end of the second quarter. So let's look into quarterly results in a bit more detail. Moving to the next slide, Page 6, which shows the evolution of net income compared to the previous quarter and compared to the second quarter of 2013. Net interest income rose compared to the first quarter of 2014, benefiting from higher average loan portfolio balances that marginally increased lending spreads and stable cost of funds. As mentioned already, there was movement in the provision line this quarter on account of portfolio growth, compared to minimal reversals of provisions recorded in the first quarter. Non-core income, which mainly represents the participation and investment funds fell back to a larger loss, compared to the previous quarter. Fee income remains largely stable as stronger activity in the letters of credit business offset lower income from fewer closed transactions in our structured finance and syndication business. That said, activities in the syndication business are trending well ahead of prior year's levels. Year-on-year, quarterly net interest income was also substantially ahead on greater average portfolio balances and lower funding costs. Non-core results have been let down so far, as already mentioned by Rubens. As prior year cumulative gains stemming from our participation in investment funds slump to a current year loss. We see there's a further validation of our decision to exit this business and this exit is progressing as scheduled. The evolution of operating expenses highlights our determination to boost efficiency in our organization, as we exercise tight cost control while portfolio balances and revenues continued to grow. The next, Page 7, provides a closer look at net interest income and net interest margins. The positive evolution quarter-on-quarter and year-on-year of both metrics benefited from higher average loan balances and lower to-stable cost of funds, as evidenced by rising [ph] spreads. Average lending rates had a slight improvement of 1 basis point this quarter, which underscores our aim to generate substantial asset growth, but not by sacrificing risk return expectations. Average portfolio balances grew strongly this quarter, as we saw demand pick up from prior quarter levels. Average funding costs remain stable this quarter, as deposit balances grew to new highs, nearly topping $3 billion of the balances by the end of the quarter and offsetting the effects of expanding balances and tenures in our medium- and long-term borrowings, as $250 million of 3.5 years syndication closed early in the second quarter. As already mentioned by Rubens, we also just announced the very successful completion of our second bond issuance in the Mexican market, which solidifies our overall medium-term funding base at very attractive cost and also provides us with the profit funding capacity to support our lending growth in medium-terms in that country. On Page 8, we show our efficiency levels, which continued to improve compared to the previous quarter and the second quarter of the year ago. The business efficiency ratio looks at our recurring base of expenses and revenues excluding non-core revenues and expenses, and it showed a meaningful, a quarterly and year-on-year improvement. We see this as an early indication that our Lean Six Sigma process improvement initiative is putting us on the right track and is starting to make an impact. On Page 9, we saw the evolution of average portfolio balances. Demand from financial institutions remained robust, while our corporate segment showed very good growth momentum driven by strong demand. On Page 10, we highlight our fee income business. A number of our growth initiatives are centered on increasing and diversifying our fee income base with significant focus on the distribution of loans originated by our sales force. A good example is our structured finance and syndication platform, which targets distribution in primary markets, and which again made a significant contribution to income as we closed 3 transactions this quarter, maintaining Bladex at the top 10 of the relevant lead table. Growth prospects remain very good for the segment, as we look at a healthy pipeline of deals in the second half of the year. But we're also focused on distribution in so-called secondary markets, as the tool to optimize risk exposures, improve profitability and to free up capacity to do more business with valued clients. Rubens has mentioned that we announced a risk-sharing facility with the International Finance Corporation, which focuses on commodity finance. This type of facility, will not only allow us to achieve the strategic target I just mentioned being risk dispersion, client profitability and freed up capacity, that will also generate distribution income, which is accounted for in the other income line, together with income from secondary market transactions. So on this page, we show that the distribution income combined with the fee and commission income as a summary of our total fee-based income that we derived from our contingency or letters of credit business and from intermediation and distribution activities. So year-on-year, combined fee income growth was 50%, as a result of increased scale of our structured transaction platform, growth in the contingency side of our business, as well as the main season of commodity shipments is underway in South America and other income generated from secondary market operations. Moving on to Page 11. We discussed our non-core income, essentially resulting from the remaining classes investment in the investments funds [ph], formally owned by Bladex. As mentioned before, performance in the funds deteriorated this quarter. Effective April 1, we made a partial redemption from the funds, bringing our participation in the Feeder Fund below the 50% threshold, and as a result, we deconsolidated the Feeder Fund during the second quarter. And continue the target our final redemption on April 1, 2016, at the very latest. On Page 12, we highlight return on average equity trends, which remain ahead of prior year levels. We expect the business return on average equity expansion to continue in the second half of the year based on underlying core trends, while we continued to maintain conservative capitalization and leverage levels. And finally, on Page 13, we highlight our focus on total shareholder return. Just recently, the Board of Directors authorized a quarterly dividend payment of $0.35 a share, as we continue to maintain an attractive dividend yield for our shareholders. And with that, I will hand it over now to Rubens. Thank you very much.

[Rubens V. Amaral:]

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

[Operator:]

[Operator Instructions] Our first question comes from Yuri Fernandes from JPMorgan.

[Yuri R. Fernandes:]

Just a quick overview on Tier 1. It shows 120 bps this quarter, so I would like to just know how do you see this evolving? And at what level of Tier 1 capital, are you comfortable with?

[Christopher Schech:]

Yes, thank you very much for your question, Yuri. This is Christopher. So yes, we have seen a reduction of our Tier 1 capital, which is calculated on Basel I criteria. And with using Basel I criteria to 15.2% at the end of the quarter, this is actually in line with what we have said on the line, in terms of trying to get closer to 15% Tier 1 level. And the fact that it has dropped over the last quarter is just -- the reason for that is our strong portfolio growth this quarter. It slowed [ph] our risk-weighted assets nearly $500 million in 1 single quarter. And clearly that had an impact on our Tier 1 capitalization and we aren't necessarily saying that this radar for portfolio growth will continue unabated in the following quarter, especially having the agreement with the IFC in place, which will allow us to share some of our origination with them. And we do believe that our portfolio growth will continue in the same way, as already alluded to by Rubens. And that we will, of course, compensate the additional use of capital with the generation of incremental revenues and income which is part of what we are planning to do this year.

[Rubens V. Amaral:]

And in terms, if I just may add, Christopher, we're looking at also changing the way we're measuring a capital to Basel III, we are doing internal calculations and although, the regulator in Panama does not require us to do so, we're looking carefully at that and then eventually in the future, we might come up with minimum levels according to Basel III. But we'll keep you posted. So far, as Christopher said, we are around this 15% give or take, a little bit, but this is our target so far.

[Yuri R. Fernandes:]

Do you -- may I ask another question? Very quickly on the loan on growth. This quarter was very good as you said. Can you share any trends for the rest of 2014? And maybe just by which country in Latin America may drive this growth?

[Rubens V. Amaral:]

Yuri, no problem at all. Christopher mentioned and I, as well about the transaction we just did in Mexico, in the capital markets. And one of the reasons we do that is because we're anticipating growth in Mexico. So one of the countries we're going to be growing in an important way, and also in terms of our medium-term portfolio is Mexico. The other 2 countries where we're looking to grow, it's Colombia and Peru, 2 other countries, that are priorities for us. In terms of Brazil, our exposure, as I've mentioned in my comments, it's down to 28%. We don't expect any meaningful increase in there. But we might grow slightly in Brazil, as well, as we diversify into different countries. Central America continues to be an important region for us, so the Central America plus Carri represents 25% of our portfolio and we're comfortable with those levels. So you might see growth coming primarily from Mexico, that today is a already #2 country in our country exposure, which is very important. And Peru, Colombia, eventually is something more in Central America and a very small growth, I would say, in Brazil.

[Operator:]

[Operator Instructions] At this time, we have no further questions.

[Rubens V. Amaral:]

Okay, Katie. Thank you, very much. I hope we didn't bore you too much today. So you can ask any questions, I was provoking you guys to ask me about the World Cup and the results, but I think our investors and shareholders are fortunate to have a CFO that's German. And so having said that, I would like to thank you very much for attending our call today. And I just want to tell you that we're looking forward to analyze challenging, but very promising second half. And we continue to meet it, to achieve, and improve the results on your investment in our company. Thank you very much. Have everyone, a good day. Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen. This concludes today's conference. You may now disconnect.