Banco Latinoamericano de Comercio Exterior, S. A.
Q3 2014 Earnings Call Transcript

Published: 16 Oct 2014

[Operator:]

Hello, everyone, and welcome to Bladex’s Third Quarter 2014 Conference Call on today, October 16, 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 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 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 statements in the press release. And with that, I am pleased to turn the call over to Mr. Rubens Amaral for his presentation. Sir please begin.

[Rubens Amaral:]

Thank you, Katie. Good morning, everyone, and thanks for joining us today. Yesterday, we reported strong results confirming the positive trends of our business as we had informed you in our previous calls. I am especially pleased with improvement in the quality of our earnings as our traditional trade finance business posted solid growth, our fee income is steadily increasing as a result of our syndication business, and nevertheless importantly, we continue to increase efficiency throughout the organization. As already highlighted in our press release, I would like to use this opportunity to comment briefly on the business environment and our view for 2015. Christopher as always, will provide you with the details of our business performance. So let’s start. The economic growth in Latin America this year will be a modest 1.4%, due to weaker exports, low commodity prices and poor internal demand in different countries. As we know, the story is not the same in every country, but all the projections have been revised down for the reasons mentioned before. The foreign trade will grow only marginally when the value of exports increasing timid 0.8% and the value of imports decreasing by 0.6% for the year. Nevertheless, as we have appreciated in our press release, our portfolio presented 9% growth for the first nine months of the year, which is in line with our expectation for 2014, is well between 10% and 13%. We have been able to achieve this growth by increasing our client base with 48 new clients and catering to markets such as Colombia, Mexico, Peru and some countries in Central America, where more dynamic economic activity opened up new business opportunities. Let me now give you a quick overview about some of the countries in our region. Let’s start with Argentina. Our exposure is down to $162 million from $392 million, which was the total outstanding when we last met. Our focus remains on the transactions related to the strategic sectors for the country, mainly the import of oil and export of grains. We expect no surprises in that front. We are also monitoring closely what happens in Brazil, as the economy has slowed down almost to a halt. Although, we do anticipate macroeconomic challenge to the country in the near future, we are reviewing certain individual exposures in our portfolio to determine whether there might be any possible credit impact, mainly because of the drop in commodity prices. The majority of our portfolio is trade finance, and as you know exposures short-term up to one year, the total exposure to the country is now at 28%. In Mexico, the economic activity is gaining momentum as the US economy continues to show gradual improvement and the reforms gain more attraction, signaling new investments in the country. Our total exposure to the country is now over $1 billion, making Mexico our second largest country exposure in the region after Brazil. I am also glad to inform that we have established a new subsidiary in Mexico, BLX Solutions, with the objective of increasing our local leasing activity. We have already booked our first transaction and expect more to come in the fourth quarter. We continue to diversify our portfolio in Colombia and Peru by doing more medium term transactions. In those countries, we are focusing on selective corporate names associated with either trades or regional expansion. The total exposure to Colombia and Peru amounts to $1.4 billion, which represents 19.6% of the portfolio of the bank. In Central America and Caribbean, we work with financial institutions and large corporations. As this [indiscernible] an average GDP growth this year of 3.8%, we were able to identify good business opportunities, thus increasing our portfolio in both sectors. The total exposure stands now at $1.6 billion, which represents 22% of our total portfolio. I would like once again to highlight that we continue to monitor constantly the quality of our credits and we do not expect any movement from changing our provisions requirements, except the natural movements stemming from the growth of the current portfolio, as it was the case in the previous two quarters. Thinking about 2015, GDP growth in the region is forecasted by the IMF to increase by 2.2% and the trade fields according to the WTO, World Trade Organization to increase by 2.2% for exports and 4.8% for imports. Although, we recognize this projections are on the long-end side, they represent an important improvement in comparison to this year with GDP and trade flows growth were very modest. Again, there will be countries were activity will be more dynamic than others. And as you can appreciate from this year’s performance so far, Bladex will continue to be well positioned to benefit from these pockets of more prosperity across the region. We are cognizant of the risks of prolonged cycle of slow disappointing economic growth, but as the forecast for the region is positive for 2015 and we expect countries to get their focus on investing in the so-much needed infrastructure, we are cautiously optimistic about another year of good performance for Bladex. Nevertheless, we are well aware of the outside risks that can impact Latin America’s prospects for 2015. With that, I thank you for your time today. And I will now turn it over to Christopher to guide you through our presentation. Thank you. Christopher, please.

[Christopher Schech:]

Thank you very much, Rubens. Hello, and good morning, everyone, and thank you again for joining us on the call today. In discussing our third quarter results, I will focus as usual on the main and key aspects that have impacted our results, and I will base myself on the earnings call presentation that we have uploaded to our website together with the earnings release, which is being webcast as we speak. But before we go into a little bit more detail, let’s just start with a rundown of our financial performance this quarter on Pages 4 and Page 5. And those are the key financial highlights and drivers that shape this quarter. So the third quarter of 2014 closed with net income to Bladex shareholders of $26.6 million, compared to $20.7 million in the previous quarter and $22.8 million in the third quarter of 2013. In order to more accurately present performance in our returning business activities, we’d like to focus on business net income, which is recurring net income derived from our principal business activities of financial intermediation, which generate net interest, commission and fee income, also refer to it as core income or income from core activities. And this business net income reached $26 million, up 14% from $22.9 million in the second quarter 2014, mainly due to net interest income growth brought about by the group’s overall commercial portfolio and higher margins. Business net income was down actually 3% compared 2013 but that quarter with the release of credit reserves [ph] were posted increased provisions that were in line with portfolio balances growth as Rubens already mentioned. Net interest margin continues to increase rising 9 basis points during the quarter versus the previous quarter, and that is 3 basis points below the levels during the third quarter of a year ago, due to the fact that market rates have been declining year-on-year. The net interest spread, which represents the difference between average interest rates earned versus average interest rates paid also improved rising 10 basis points quarter-on-quarter and dropping just 1 basis points year-on-year. Business return on assets and return on equity reduced metrics increased quarter-on-quarter and year-on-year because of the volume margin and spread drivers I mentioned before. The business efficiency ratio improved 2 points quarter-on-quarter and remained nearly 4 points below prior year levels. Our Tier 1 Basel I for capitalization continues to be comfortable reaching 14.7% at the end of the quarter. So let’s look into quarterly results in a bit more detail moving through the next slide, Page 6, which shows the evolution of net income compared to the previous quarter and compared to the third quarter of 2013. Net interest income rose compared to the second quarter of 2014 benefiting from higher average loan portfolio balances and increased average lending rates. Also lower average cost of funds. There was movement in the provision line again this quarter owing to portfolio growth. Non-core income, which mainly represents the participation in investment funds that we formally owned was partnered compared to the losses in the previous quarters. Fee income remained stable with stronger activity in the letters of credit business and stable income from our structured finance and syndication business. Overall fee income is 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. As mentioned earlier, these non-core results have turned around a bit this quarter but still remain negative on a year-on-year basis. Operating expenses remained stable at prior quarter and prior’s year levels. Next page, Page 7, provides a closer look at net interest income and net interest margins. The positive evolution of second quarter [ph] of both metrics benefited from higher average to loan balances and lower cost of funds as evidenced by rising spreads. Average lending rates had an improvement of 5 basis points quarter-on-quarter as we continued to emphasize margins over sheer volume. Nevertheless origination continued on a strong pace, backed by solid demand across the region and with that ending in the average portfolio balances grew this quarter carrying momentum into the fourth quarter. Average funding costs dropped again this quarter as deposit balances grew to new highs, comfortably topping the $3,000 [ph] mark by the end of the quarter. At the same time, we continued strengthening our internal structure and geographical diversification now in medium and long-term borrowings as we successfully completed the bond issuance in the Mexican market early in the quarter and as we executed a series of small finance [ph] private placements throughout the third quarter. With these activities, average funding costs in our medium and long-term borrowings came actually down reflecting decline in market rates [ph] and strong appetite for our main. Year-on-year quarterly average rates have come down on both sides of the balance sheet. However, net margins and spreads have held up fairly well in this environment of year-on-year declines in base rates. On Page 8, highlights the portfolio growth and segmentation. Demand from even finance corporations were the main driver behind growth as we sharpen our focus on mostly Latina companies to grow [indiscernible] some of the size thresholds that used to [Technical Difficulty]. Lending to financial institutions quarter-over-quarter [Technical Difficulty] on the corporate side. On Page 9, we highlight our fee income business, which continued to show good progress. In this slide, we also include the fee income that we derived from intermediation activities by which we mean secondary market transactions and fee income is actually recorded in the [Technical Difficulty] in the fee and commission income. So we combine that here on this page. Our structured finance and syndication platform targets distribution in primary markets and we managed to make a significant contribution to fee income. One of the transactions closed this quarter was actually the case of [Technical Difficulty] another transaction on behalf of the same corporate client that built on the original transaction we structured a couple of years ago. This points to the scalability of our syndication platform on top of the healthy pipeline of transactions that we use in syndication [ph] clients. The risk sharing facility with the International Finance Corporation, which we announced earlier in the quarter, has already seen significant activity levels and looks to be fully utilized before the end of the year. Our contingency and letters of credit business also performed well with increased levels of activity in a geographically more diversified portfolio. Overall, fee and other intermediation income is tracking well ahead of prior year levels. On Page 10, we show our efficiency levels which again were improved over the previous quarter and the third 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 both business and the overall efficiency ratios showed good trends that go in the right direction in our opinion. Operating expenses were well under control this quarter as revenues continued to rise. We have reached our interim target of 30% efficiency ratio or at least we have on a quarterly run rate basis. And with this we are on track to be able to sustain that trend and be consistently at around or even below that level in the quarters to come. On Page 11, we make reference to our non-core income, which is essentially resulting from the remaining passive investments in investment funds formerly owned by Bladex. This third quarter the participation related to small profits which we hold them expect to be a turning point of several quarters of losses. At any rate, we do not expect any significant impact on our earnings either way, and we continue to target our final redemption in April of 2016 at the very latest. On Page 12, we highlight return on average equity and capitalization trends. Here return on average equity continues to be on track in our opinion. So the capitalization levels remain strong and this quarter was very luckily the last time we speak about capitalization based on Basel I criteria, as we move to publish our Q1 levels based on Basel III criteria starting in the fourth quarter of this year. There is no regulatory requirement that asks us to do this, it’s just the fact that we have completed our internal evaluation and implementation process that allows us to be ready for this step. In case, you are wondering, I can tell you that we have determined a Tier 1 Basel III capitalization as of the third quarter to be actually higher than the Basel I figure at 15.2% and that is on account of the favorable risk profile inherent in our current portfolio mix. And finally on Page 13, we highlight our focus on total shareholder returns. We are very pleased to see the stock price and liquidity of BLX evolving favorably. Just recently the Board of Directors authorized a quarterly dividend payment of $0.35 a share and the Board remains committed to maintaining an attractive dividend yield to our shareholders going forward, based on the performance of our business. And with that, I would like to hand it back to Rubens for his closing remarks. Thank you so much.

[Rubens Amaral:]

Thank you, Christopher. Now ladies and gentlemen, we are ready for your questions.

[Operator:]

Thank you sir. At this time, we will open the floor for questions. (Operator Instructions) Your first question comes from Chris Delgado from JP Morgan.

[Chris Delgado:]

Good morning, and congrats on a good quarter. I guess I have two quick questions. First, loan growth has been quite good in the past two quarters and I wanted to get a sense of you see that continuing into the fourth quarter and then what your thoughts are on loan growth for 2015? My second question relates to your overall portfolio mix. When you look at the industries you’re exposed to, about 25%, 26% is to oil and gas. And given the recent decline in oil prices, I wanted to get a sense if you had any concerns about that exposure? Thanks.

[Rubens Amaral:]

Thank you, Chris. This is Rubens. Nice talking to you. In terms of the overall growth of the portfolio, I can tell you that we remain within the confines of our target for this year, between 10% and 13%. We are seeing a strong demand still, but and the different countries can vary. Mexico for instance is gaining momentum as I alluded to in my initial remarks, and we might see possibilities there to continue our growth. Brazil, because of elections and the slowing down of economy much [indiscernible] drew the loan BR continues to be very [Technical Difficulty]. So we expect to have at least a moderate growth for the fourth quarter. And for 2015, so far our guidance is going to be around 10% for the whole year. In terms of the oil and gas industry, honestly, we are not that concerned with the reduction in prices, because majority of our clients are importers of oil. So they will benefit from reduction in oil prices. We are not so much involved with the production of oil, the downstream – the upstream I mean, but much more with the importers of oils. So at the end of the day, our clients will benefit, and we will need to do more work to get to the same levels of exposure that we have to the sector.

[Chris Delgado:]

Okay, great. Thank you.

[Rubens Amaral:]

Welcome.

[Operator:]

Thank you. (Operator Instructions) Sir at this time, we have no further questions. Do you have any closing remarks before we wrap up?

[Rubens Amaral:]

Thank you, Kate. Thank you everyone for attending our call today. We are very pleased again to present solid results, and I think at the end of day, the results speak for themselves. We are looking forward to a strong fourth quarter. We are well aware of the challenges ahead of us. We have seen what’s happening to the markets as we speak yesterday and today, and we understand the downside risks that can come from Europe and what’s going on with the region updations across the globe, but again [Technical Difficulty] America toward the prospect in 2015. I am looking forward to talking to you in our next call in February 2015 and I’d like to wish all of you a holiday season. Thank you very much.

[Operator:]

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