Banco Latinoamericano de Comercio Exterior, S. A.
Q3 2013 Earnings Call Transcript

Published: 17 Oct 2013

[Operator:]

Hello, everyone, and welcome to Bladex Third Quarter 2013 Conference Call on today, the 17th of October 2013. 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 statement in the press release. And with that, I am pleased to turn the call over to Mr. Rubens Amaral for his presentations.

[Rubens V. Amaral:]

Thanks, Chantal. Good morning to everyone, and thanks for taking the time to attend our call today. My comments will cover the Slides #3 and 4 in the presentation we have made available to you for this call. I'm pleased to share with you a strong quarter results as we continue to focus on now a strategy of further diversifying the revenue streams, increase our client base and improve our fee income. You know how the third quarter was impacted by the discussions of tapering by the Federal Reserve Bank, selloff of the emerging market assets, and as I had mentioned in our previous call, we continue to see a slower growth throughout the developed and emerging world. Now, for the last, as I had indicated during our last call as well, we have built a strong pipeline of new deals, which help the Bank to continue to service our clients efficiently during a challenging quarter while allowing us to be more selective about the deals we book to protect our margins as liquidity continues to be readily available and demand for credit and foreign currency was not as strong as the volatility in the currencies throughout the region has favored loans denominated in local currency in the last few months. Notwithstanding, our disbursements totaled $3.3 billion, which brings the accumulated level of disbursements in the first 9 months of this year to $10 billion. We continue to increase our syndications activities. And more recently, we have been awarded 4 new mandates, which are being executed as we speak. Our letters of credit activity has also increased although balances for the end of the period were smaller due to the conversion of confirmed acceptances into discounted acceptances in the last month of the quarter. The combination of a solid syndications activity plus the positive performance of the letters of credit contributed in an important way to increase our fee income. We expect this trend will continue in the fourth quarter. In terms of economic outlook, a discussion about the debt ceiling in the United States, as we all know, could have impacted adversely emerging markets and liquidity could have dried out quickly in the very likely scenario of a possible default by the United States. In this regard, we decided to reinforce our liquidity while the uncertainty remained, so the Bank was prepared to face a more illiquid markets should this event had occurred. As the decision has been made last night by the U.S. Congress to avoid such situation, our liquidity will return to normal levels. On the other hand, we continue to constantly monitor the quality of our portfolio and we do not expect any meaningful impact in our provisions requirements. A not-so-bright note this quarter was the negative impact on our bottom line of $4 million, stemming from the poor performance of our remaining investment in the investment fund we continue to be an important seed investor. Let me assure you that we remain committed to our exit strategy. And although it's difficult to predict how it will perform in the fourth quarter, the negative trend has been reversed in September. Lastly, we've continued to work to improve efficiency throughout the organization. We are rebuilding the core business processes with the feel of providing a better service to our clients. We are using the methodology known as Lean Six Sigma, which will help the organization to streamline the processes, allowing the Bank to achieve the grow of operational excellence. And as a consequence, continue to improve our cost to income ratio. In closing, let me tell you that I'm very pleased with the results of the third quarter. And I remain optimistic about our performance in the fourth quarter. I will now turn to Christopher to guide you through our presentation and to provide you with more color about our performance. Thank you. Christopher, please?

[Christopher Schech:]

Thank you, Rubens. Hello, and good morning, everyone. Thank you for joining us on the call today. In discussing our third 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 for our website, together with the earnings release and which is being webcast as we are speaking. So let's start on Page 5 with a quick rundown of the key financial highlights and drivers that shaped this quarter, which closed with net income to Bladex's shareholders of $22.8 million compared to $21.7 million in the previous quarter, and compared to $13 million in the third quarter of 2012. The bank's net interest income grew quarter-on-quarter by $7.2 million, or 24%, to $36.6 million, as a result of increased interest income from higher average loan balances and lower interest expense. Year-on-year, the increase was $11.5 million, or 46%. Fee and commission income increased 32% quarter-on-quarter to $3.8 million, mainly from our letters of credit business that saw increased levels of activity, as Rubens already mentioned, and also from 2 successfully completed syndications transactions this quarter. This quarter's other income reflected the increased volatility in capital markets compared to prior periods. While the effects of interest rate movements, changes in valuation and foreign exchange variances were very well insulated in our core business, thanks to the appropriate exposure coverage through interest rate and cost currency swaps, they did affect non-core results that were primarily impacted by the performance of our remaining investments in the investment funds, which posted negative results this quarter. The provision for loan loss line for both on-book and off-book contingency exposures reflected the good-quality exposures in our commercial book of business, with $1.2 million in generic reserves related to a slight quarter-on-quarter drop in end-of-period portfolio balances. The credit quality of our portfolio remains solid once more this quarter, with 0 non-performing loan balances. Operating expenses show a headline decrease of 10% quarter-on-quarter and 4% year-on-year. That is mainly attributable to the reversal of cumulated performance fees charged by the investment funds. The core efficiency showed an improvement, however, quarter-on-quarter, from 27% in the second quarter of this year to 26% in the third quarter. So despite this improved -- this improvement is effectively showing in our core performances despite the overall increase of the efficiency ratio, which was a result of declining revenues stemming from our non-core results. Margins and profitability show continued improvement, with increases in net interest margin, net interest spreads and ROE. So this briefly summarizes our performance from continuing operations. The numbers regarding discontinued operations, which relate to the former Bladex asset management units, are not significant as in prior quarters. However, Bladex's reduced participation in the investment funds and the participation of third parties, represents a very meaningful reduction of exposure to non-core activities compared to prior periods, helping to mitigate the adverse non-core results of this quarter. So let's look into this quarter's results in a bit more detail, moving to the next slide, Page 6, which shows the year-on-year and quarter-on-quarter evolution of net income. These net income logs [ph] highlight the main drivers, which have impacted our results. We also depict what we label core net income, which excludes non-recurring items, non-controllable expenses and the results from investments in the investment funds. With that, we aim convey our core profitability, given that the quality of our net earnings has evolved over these periods. And we believe indeed these metrics show that the positive strength in this evolution has accelerated compared to prior quarters. The next page, Page 7, focuses on one of the key elements of our core business, which is net interest income and net interest margins. Both metrics improved compared to previous quarters as average portfolio growth was strong this quarter. And interest expense trended downwards, thanks to the absence of accounting adjustments relating to prior periods, which have affected previous quarters, and thanks to careful management of our mix of financial liabilities, which has brought our average funding costs down. As liquidity flooded back into the region late in the quarter, lending margins came under increased pressure. And as Rubens mentioned, we decided at that point to pursue an origination approach that was more selective, focused on not diluting our margins. Our efforts to optimize our mix of short-term funding through diversified sources of funding through deposits, bilateral agreements and private placements, are not executed at the expense of funding stability, as you can see of the next page, Page 8. We periodically move to renew and extend our portfolio medium-term facilities that provide a stable backbone to our funding structure. And so this quarter, we've successfully completed yet another syndication in Asian markets. The 3-year term facility placed at very competitive terms again underscored Bladex's capacity to effectively access capital markets in a variety of tenders, media goals [ph] and geographies, expanding our network of counterparties as we do that. On the short end of the funding structure, we continue to manage our large deposit base effectively and ramped up placements made under our EMTN, European Medium-Term Notes, program, which allowed us to assess a different group of counterparties to further complement and expand our funding sources. Moving to Page 9. We showed the evolution of revenues, expenses and the efficiency ratio. The overall efficiency ratio, which, as you know, includes the non-core results, does not suggest a reversal of the trend of declining expenses, because when you look at core revenues and controllable expenses, that resulting core efficiency ratio of 26% this quarter continues to trend in the right direction. Next page, Page 10, is to again highlight our prudent balance sheet management, with relatively low leverage and the solid capitalization, which has always characterized our institution. The next few slides center on the dynamics in our Commercial division, the core of our business, starting on Page 11, with a chart showing our loan origination activities as disbursements reached $3.3 billion this quarter, which, as Rubens has alluded to before, represents total accumulated disbursements for the year of $10 billion. The reduction when compared to previous quarter -- to the previous quarter, a reduction of 18%, highlights our focus on higher-margin transactions. But when compared to the third quarter of last year, it represents a significant increase of 23%. As mentioned before, we continue to see market demand, and liquidity remains quite high despite the more volatile markets during the quarter, which put additional pressure on lending spreads and moving the Bank to focus on margins rather than portfolio growth, which, at the end of the day, worked to the benefit of our core results. We move on to Page 12, where we can see the impact at our origination activities in both disbursements and the unfunded contingency business, our letters of credit business, have had on our average Commercial portfolio balances, which accelerated its expansion with growth of 9% quarter-on-quarter and 25% year-on-year, and, evidently, core portfolio balances are a key driver of our net interest income evolution in our net interest income result this quarter. On Page 13, we turn our discussion to commission and fee income. Most of our commission income is still earned in our letters of credit business, which saw increased activity during the third quarter 2013. On the syndication and debt intermediation side of our key business, we've continued to build an ideal track record, successfully completing another 2 more deals, for a total of 5 deals so far this year. That compares to 3 deals that we have completed in all of 2012. And as Rubens mentioned, again before, our pipeline of mandates continues to grow, which will provide for additional revenues in the fourth quarter and the next year. Page 14 is about our non-core income, which is primarily the remaining investment in the investment funds formally owned by Bladex and which were sold earlier in the year. Accounting rules require us to continue to consolidate the Feeder Fund as long as our interest in the fund remains greater than 50%. Our participation in the Feeder was 55% at the end of the third quarter, down from 56% in the previous quarter, and down from 98% prior to the sale. The fund's performance swung from a $2 million gain in the previous quarter to a $4 million loss this quarter, net of fund expenses and third-party interest. Last but not the least, on Page 16, we would like to highlight the decision of our Board of Directors to authorize a quarterly dividend payment of $0.30 a share, which is in line with our approach and policy of rewarding shareholders as we continue to improve our results. I would like to hand it back now to Rubens to sum up our conclusions, which are on Page 16. Thank you very much.

[Rubens V. Amaral:]

Thank you, Christopher. So ladies and gentlemen, we'll continue our focus on strengthening our core for the fourth quarter and we are looking forward also to a very challenging but very productive year in 2014. We had launched the basis to be very successful also in 2014. Although, as we all know, we need to be carefully looking and watching what's going on in the markets as the new normal. It's a lot of volatility and crises here and there, and we need to be paying attention carefully to our liquidity as we continue to strengthen and diversify our liquidity sources, paying attention carefully also to the margins so we can continue to improve the quality of our earnings. So overall, the region is poised to grow also very close to its potential in 2014. So we are looking forward to a fourth quarter that will be challenging, as I mentioned, before, but I remain optimistic about continue to deliver strong results to our shareholders. So with that, we are ready to listen and we hope to have the answers to your questions. So let's start the Q&A session, please.

[Operator:]

[Operator Instructions] Our first question will come from Chris Delgado, JPMorgan.

[Christopher Delgado:]

Just a quick question. GDP growth has been disappointing so far, as you guys mentioned. Could you kind of speak a little bit about how you see loan growth evolving in 2014 as a result?

[Rubens V. Amaral:]

Chris, pleasure talking to you. Thanks for your question. What we have been seeing this year, as you said, very disappointing growth in terms of GDP, because of the volatility we have seen mostly in the developed world, here and in U.S., and the discussions, the current discussions about China. Although we saw in Europe stabilizing and not putting a major role in this slowing down, but the 2 major components were U.S. and the discussions of the tapering and the Chinese growth. It seems that from our perspective, the countries are poised to continue to grow in 2014 as investments in infrastructure resume. One country that we need to watch carefully, what's going to happen, is Brazil, the largest country in the region. Because they have forthcoming elections in 2014. But they have a strong pipeline of infrastructure and we have seen some movements in terms of product position of airports and other initiatives by the government that might incent more investments from the private sector. We see in Mexico, with an agenda of reforms growing in 2014, close to its potential growth, and Peru will be growing also. Seems like it's potential, so we expect that this growth will be stronger in 2014. That is going to be spearheaded also by strong internal markets, and we have seen that in the different markets. And that leads us, of course, to expect growth of our portfolio. We have told you that normally, we'd expect our portfolio to grow 3x or 4x from the underlying GDP. Because that is approximately used for the trade flow growth. This year was disappointing as well because it was not close to that ratio. But we expect the next year to be a little bit better. So our initial approach would be a growth between 7% and 10% minimum for next year.

[Christopher Delgado:]

Okay, great. Just one follow-up question. Kind of given that's a little bit below what you guided for prior year, what are your expectations for ROEs kind of next year?

[Rubens V. Amaral:]

Well, our commitment has to be to achieve a sustainable ROE of 12%. So we said this year that we would like to have sustainable a double digits ROE, which we are delivering. And next year, we expect to have up to 12% on a recurrent basis.

[Operator:]

[Operator Instructions] Our next question will come from David Ross, Chevy Chase Trust.

[David Ross:]

A couple of quick questions. You mentioned getting back to more normal liquidity ratios. How quickly do you expect that to occur?

[Christopher Schech:]

Hopefully, tomorrow. This is Christopher answering your question. No, the -- our liquidity is managed by the use of the LCR, the liquidity coverage ratio mechanism that has been put forward by Basel III guidelines. And so every day, we calculate our LCR, which is -- which projects our liquidity requirements 30 days on. And so our estimation is, given the great news that we've all heard yesterday, which we do expect to have a significant impact on receding the pressures that we've been seeing building up over the last several days, we should be able to respond very quickly in trying to bring down our liquidity -- our liquidity levels. As you know, our portfolio is -- has a certain amount of turnover, which allows us to react very quickly. We have maturities coming in from our lending and, at a similar aspect, is reflecting our funding spreads, so we should have no problem to get back to normalized levels within a few days.

[David Ross:]

Okay. You mentioned that you have had 5 syndicated loan deals this year. Does that include the one that you mentioned for October 1?

[Rubens V. Amaral:]

October 1, are you alluding to the syndication in the funding side?

[David Ross:]

Yes.

[Rubens V. Amaral:]

That was in the funding side. The 5 that we're mentioning is on the asset side. So that does not include the one October 1.

[David Ross:]

Okay. And any guidance on the net interest margin coming up, of what we could expect?

[Christopher Schech:]

Yes, of course. We've been talking about aiming for the 2% level and we still stand by that target. In this quarter, if you look carefully at the numbers, you'll see that the core NIM, which excludes any contribution from -- of interest income coming from the funds, which was positive this quarter. If you exclude that, well, you would see that our core NIM is around -- is stable compared to the previous quarter, around 191, 192 basis points. And when you think that given our focus on prioritizing margin over volume, we should be able to make further headway in reaching our 2% target by the end. We were hopeful that in the fourth quarter, we would see a quarterly NIM around that level, 2%. We still think we can try to get there. But for sure next year, our assumption for the business evolution over the entire year should be based on the 2% NIM expectation.

[David Ross:]

Okay. Terrific. And a final question. Is there a timetable where we could expect the investments funds to be unconsolidated?

[Christopher Schech:]

Well, that depends on...

[David Ross:]

When you bring it under...

[Rubens V. Amaral:]

Well, yes, that depends how fast they can attract good [indiscernible] money. I know that they have been working tirelessly to achieve this goal. And we expect this possibility to be coming at least early next year. So we could have the consolidation over the next year.

[Operator:]

[Operator Instructions] Well, at this time, we have no further questions in the queue. I would like to turn this conference back over to Mr. Amaral.

[Rubens V. Amaral:]

Thank you, Chantal. Thank you, ladies and gentlemen, for taking the time today. We're very satisfied with the quarter results and we'd be working very hard to deliver you on the fourth quarter and another good quarter of results. And as I said, we remain optimistic about the year end, which, as always, it's a very good quarter for the Bank and very hopeful for a successful 2014. Thank you very much. I'm looking forward to talking to you on our next call, summarizing the year 2013. Have a good day, everyone.

[Operator:]

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.