BLX (2021 - Q3)

Hello, everyone, and welcome to Bladex's Third Quarter 2021 Conference call on this the 29th day of October 2021. 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. Jorge Salas, Chief Executive Officer; and Miss. Ana Graciela de Méndez, Chief Financial Officer. Their comments will be based on the earnings release, which was issued earlier today and is available on the corporate website. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. In these communications, we will make certain statements that are forward-looking, such as statements regarding Bladex's future results, plans and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are Bladex's expectations on the day of the initial broadcast of this conference call, and Bladex does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in the bank's press releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. And with that, I'm pleased to turn the call over to Mr. Salas for his presentation. Jorge Sa

Thank you, Stephanie. And good morning everyone, joining us to discuss our third quarter results. I'm here with Annie, our CFO and a few members of my executive team. Before discussing our quarterly performance, let me just give a very high level overview of the region to provide some context. There is no doubt that economic recovery is underway in Latin America and the Caribbean. Having said that the pandemic still casts out shadows on part of the region. The recovery was robust in the first quarter of 2021, but lost some momentum in the second and third quarters, as COVID-19 cases rose again in several countries. According to the IMF, real GDP is projected to grow 6.3% this year, followed by a more moderate rate of 3% in 2022. From an overall perspective, Bladex foresees a mixed recovery across Latin America, with the two biggest economies in the region, Brazil and Mexico, growing at 5.2 and 6.2, respectively this year. There are broadly favorable external conditions. High commodity prices, and pent up demand support certain growth. At the same time, monetary and fiscal policy reversals work on the opposite direction. Remittances are record high for countries like Guatemala, Honduras, El Salvador and the Dominican Republic. But there remain downside risks that need to be mentioned. The emergence of a more transmissible and deadlier COVID-19 variance is one of them, potential tightening of global financial conditions, and also potential social unrest as the year with heavy election scheduled looms, with presidential elections in Chile, Colombia, Brazil, Costa Rica in just the next 12 months. All in all, we remain cautiously optimistic and well positioned to keep growing and taking advantage of the opportunities that keep arising in the region for Bladex. Now on Slide 3, let me share our third quarter highlights. They’re well summarized in the header of this slide, positive trend in quarterly earnings, and credit growth with impeccable asset quality. Our profits grew 12% with respect to the prior quarter, and we're up 2% from last year, continuing the positive growth trend for both our credit portfolio and our investment portfolio. Increased quarterly profits relate to revenues improvements, both from higher interest rate income and higher fee income coming from our syndication business and our letters of credit business that is having a record year. Asset quality remains pristine with close to zero NPLs and expenses remain under control. Also, the share buyback plan announced last May in the open market program continues to be executed as planned. And finally, the board decided once again to maintain the quarterly dividend of $0.25 per share for this quarter. Moving on to Slide 4. This is a typical waterfall graph that we show, solid disbursements of close to $3.6 billion up 8% from an already strong prior quarter. We collected 3.4 billion of scheduled maturities for a net portfolio growth of 3% quarter-on-quarter. During the quarter loans dispersed were on average 17 basis points above the spread of the loan set mature during the quarter. This is an inflection point as it reverts the recent downward pressure in spreads experience since the beginning of the year. Higher spreads for the quarter are explain by two main factors one increase in medium term disbursements up to 800 million this year, some of which are related to the reactivation of our syndication business. And then secondly, the slight quarterly reduction in short-term lending to financial institutions which typically carry lower spreads, but particularly now given the abundance of liquidity in the regions financial sectors in general. Now moving to Slide 5, our portfolio continues to be well diversified by country with quarterly growth focused on investment grade countries now accounting for 46% of total exposure. We increased exposure in Mexico and Uruguay during the quarter mainly in the oil and gas and metal manufacturing sectors closely tied to increased trade volume and prices. On Slide 6, we show the same graph now presented by industry. We see quarterly growth mostly tied to increasing trade flows and prices, particularly in commodities. So in absolute terms metal manufacturing, oil and gas sectors continue to capture most of the growth mainly in investment grade countries. Other sectors with positive trends were agribusiness such as coffee and energy generation. And as I mentioned before, exposure to financial institutions was down 7%, mainly in Brazil and Colombia. In general, LATAM, trade flows continue to perform well and are expected to grow 26% in 2021, and almost 10% in 2022. Moving on to Slide 7, as I mentioned, during last quarter’s call, we continue to build our credit investment portfolio. Cash portfolio increased by 252 million during the quarter more than double, totaling $573 million as of Q3. 43% of it are investment grade companies. This portfolio has an average rating of a double B plus and a duration of 2.5 years. 63% of the portfolio is invested with Latin American Insurance, well known by Bladex and the remaining almost 37% is mostly with US issuers. This portfolio is mostly intended to be kept to maturity, with the main objective of obtaining revenues from yield accrual as a complement to the loan portfolio. In addition, we complement this portfolio with a relatively stable high quality liquid assets portfolio, which is 100% invested in investment grade issuers that qualify as high quality liquid assets according to Basel III definitions and is designed to enhance liquidity yields. Moving on to Slide 8, our assets distribution on the left and our liability mix on the right. On the left side of the slide, you can see how assets continue a positive quarterly growth trend reaching close to $7 billion at quarter end. It is worth mentioning that both the loan book and the investment portfolios have now five quarters of consecutive growth, with a combined total of more than 6 billion surpassing pandemic levels. On the funding side on the right, you see deposits remain 60% of total, with the important participation from our Class A shareholders and institutional clients throughout the region. Together with the success of our Yankee CD program that now totals $550 million. We continue to have ample access to global capital and interbank markets, with plenty available bilateral lines and from an ample base of correspondent banks around the world. With this I will now turn on the call to Annie, who will walk us through our P&L for the quarter. Annie?

Thank you, Jorge. Good morning to everyone. Let's now dive into the third quarter results. Starting on Slide 9. As you can see in the top left table profit for the quarter was up by 12% on a sequential quarter basis and up 2% year-on-year reaching close to $16 million. Driving this results were top line revenues, up 5% quarter-on-quarter and 7% year-on-year with fee income from syndications picking up and a positive quarterly trend on net interest income or NII. In turn NII quarterly growth trend continues to be supported by higher credit portfolio balances, including the bank's loan and investment portfolio. And by higher lending spreads as Jorge just mentioned offsetting the negative impact of lower labor market rates mostly accountable for the 2% annual decrease in quarterly NII. I will further expand on this in a moment. Fees also maintained a positive trend, up 11% quarter-on-quarter and 82% year-on-year as the bank so increase activity in its transaction based structuring and syndications business resuming from practically nil market activity throughout 2020 and the beginning of 2021 during the peak months of the pandemic. Quarterly profits also reflect relatively stable quarter-on-quarter operating expenses, up $2 million from last year's low pandemic levels when the bank took cost savings measures. In addition, the $0.8 million credit provisions for the quarter relate to credit portfolio growth and reflect the bank's sound asset quality with close to 0% in NPLs and the remaining exposure performing well with no loans modified on the account of the pandemic. For the nine months ended September 30, 2021, profits for $43 million were down 11% from the same period of last year, mostly impacted by the downward re-pricing of loans from lower LIBOR market rates, putting pressure on the net interest margin down 15 basis points to 1.28% and reducing NII by 12% in the same period. On Slide 10, we present NII variation segregated by volume and rate effect. Quarter-on-quarter and I was up $1 million, or 5% reflecting both higher lending spreads and lower cost of funds, combined with the contribution of a 37% increase in the bank's average investment portfolio. Wider net lending rates resulted in a six basis point increase of net interest margin to 1.33% for the quarter, reverting prior quarter’s decreasing trend. Year-on-year, NII was down by $0.5 million, or 2%, as increased average credit portfolio volume both in the loan and investment portfolio coupled with reduced low yielding liquidity balances back to normal life level practically compensated the substantial negative rate variation effects mostly attributable to the 53 basis points downward re-pricing on loans, again on the account of lower LIBOR market rates. Slide 11, on the evolution of asset quality and allowances for credit losses, continue to reflect the bank's high quality credit exposure in its commercial and investment portfolios. As I said NPLs remain unchanged from the previous quarter at $11 million, or 0.2% of total loans. IFRS 9 Stage 2 credit representing loans with increased risk since origination only represented 3% of total exposure at quarter end with the remaining 97% categorized as Stage 1 or low risk credits. Moving on to Slide 12, the bank's quarter end Basel III Tier 1 capitalization remained solid at 21%. For this ratio, credit risk capital requirement is calculated on the advanced internal based ratings approach or IRB and resulted in risk weighted assets up by 9% quarter-on-quarter and by 22% year-on-year on higher credit portfolio balances. For the same period, equity levels were down by 2% and 1% respectively, mainly due to the bank's open market stock repurchase program, under which 1.8 million Class E shares were close to $29 million have been repurchase up to September 30, since the program was launched in mid-May of 2021. In addition, our board recently declared a quarterly dividend of $0.25 per share, stable from preceding quarters and representing a 64% payout ratio with respect to quarterly earnings. In the graph to the left we also present our capital adequacy ratio of 17% as mandated by Panama's banking regulator well above the 8% minimum, and for which credit risk weighted assets calculation follow Basel's standardized approach. With this, I would now like to turn the call back to Jorge. Thank you.

Thank you, Annie. Before we open it up for questions, I would like to highlight the best effort ESG issuance that we did earlier this year, together with Goldman Sachs, was completely deployed in a couple of commercial transactions, one in in clean energy sector in Guatemala, and the other one, it was a participation in a Brazilian bank facility supporting women Entrepreneurs, sponsored by the World Bank. As I said, at the beginning of this presentation, we have been operating in Latin America for over 40 years, navigating many crisis. Bladex remains cautiously optimistic, and uniquely well positioned with an agile business model, and a robust balance sheet to take advantage of the opportunities that keep arising in a region that we know very, very well. So with that, I will like now to open it up for questions. Stephanie?

Thank you. Our first question comes from Jim Marrone with Singular Research.

Yes, good morning. I have two questions. The first one is for Jorge. And then the second question, I'll direct it to Annie, if I may. So Jorge, you began your prepared comments, just mentioning some of the headwinds. The COVID variant you mentioned as a headwind, I didn't hear you mentioned anything in regards to the inflationary pressure. And I know with regards to South American – Central America, it has a reputation history with inflation, and particularly hyperinflation. So I'm just trying to get a sense on how inflation may impact Bladex as well, perhaps, are you hearing anything from your borrowers in regards to inflationary pressure, and how it may be affecting their business? I know some of the other companies that are reporting recently, they're providing lower guidance based on inflationary pressure based on supply chain breakdowns. And so I'm just getting a sense if you're hearing from the companies that you lend to, in regards to supply chain issues and inflationary pressure.

So let me answer that question. It’s a very good question. Inflation is rising for several reasons. Commodity price is one of them, demand recovery and then as you mentioned the supply chain disruption. So we are seeing central banks in Latin America, where our shareholders basically are strongly responding to inflationary pressures. We are seeing tighter monetary policy throughout the region. Brazil, Mexico, Chile, Peru, have already adjusted upward interest rates. Now this – in turn, what we're seeing is that is increasing demand for hard currency financing that obviously favors Bladex. As far as trade disruptions, global goods and trade volumes have rebounded sharply this year. Now supply side poses a significant risk, the shortage of the whole semiconductor disruption in supply chain in many industries is a significant risk. Also COVID induced disruption in transport shipping has sent fright rates to record levels. But with that said, we see Latin American trade flows continue to perform well. And expected to grow as I said, 26% this year and nearly 10% next year. Do you want to – I have here Sam Canineu, our Chief Commercial Officer may want to add something.

Yeah. No, thank you Jorge. Just complimenting on what we've been hearing from our clients. I'd say that the inflationary pressures, of course they have – they can – that is also leading to an increase in rates, which favors some of our FI clients. And that is – and that we'll see in their results. I'll say also on the inflation on the – let's say on the freights and even the disruption, another trend that we're seeing is that clients are looking to build inventory to preempt any lack of future or delayed deliveries. And that also triggers a higher demand for working capital, which I would say it's also positive for us. And I mean, by choice, we do work with companies that are well capitalized and prepared to deal with the disruption. And I think net, this could – if this continues to trigger a higher demand for working capital, I think overall, more positive than the negative for us.

I don’t know if that answers your question?

Yeah, excellent. I think just as a recap, what I could take away is that increased interest rates based on monetary policy can actually favor Bladex. And in terms of borrowers, nothing really material as of yet has really hit your balance sheet or income statement. Is that a fair comment that I can make?

That's a fair comment. I mean, as long as inflation – I mean, a little bit of inflation is good. Obviously, out of control inflation will be dangerous, but we don't see a risk of that now.

Okay, thank you. And so my second question is directed to Annie. So Annie, I noticed the operating expenses were above – relatively higher year-over-year, I think you did spell out some of the drivers to the operating expense. But can you just provide a little bit more color in regards to why the sizeable increase in the operating expenses?

Sure, Jeremy. Yeah, I mean, basically, last year, like I said, we took certain cost saving measures that included a decrease in our variable compensation, for instance, and that's why you see some of the decrease in the line item of salaries and other expenses. And at the same time general expenses in – we work from home, practically most of last year. So that had some expense reductions. We paralyzed all travelling. We've started to pick up on that this year. And several other – we also put a hold on certain investments. We really focused last year on business continuity and on the pandemic, which we actually did – resulted very well from it. And basically, what you see now is expense levels that are similar to prior year's levels. That's what we are showing for this quarter.

Okay, so basically, it's attributed to salaries as well as just G&A as a result of work from home and the like, right.

Right, exactly.

Okay, that's all the questions I have then. Thank you.

Thank you, Jeremy.

Thank you. . We do have a question from the web from Michael Gravis with Principal Financial Group. Question is, thanks a lot. Have you identified any specific countries on which you would like to reduce exposure end? And on which are you looking to increase exposure forward?

Sure, let me get that one. Riskier countries where we're looking to reduce exposure, and we've done so and number one will be, of course, Argentina. Government is dealing with an incredibly difficult situation of economic crisis in COVID-19 impact. Deep external liquidity challenges, fiscal deficit, we're monitoring the potential deal with the IMF and its being negotiated now. Also, El Salvador public debt is now 90% of GDP and growing, also need for significant fiscal reform. Also, following up on the potential agreement with the IMF. Bolivia, prolonged deterioration of fiscal and external accounts, tense social and political environment. And then to a lesser extent, I will say, perhaps, Costa Rica, healthier foreign exchange generation. The challenge is, of course, the fiscal side in implementing the IMF agreement that calls for significant fiscal reforms. And also we have general elections in Costa Rica, I think, February next year, so those I would say countries that we're monitoring closely and we're being very cautious. On the, on the other countries in Central America, I would say, the Dominican Republic, Guatemala and Panama. These are all countries favored by the US recovery that have had successful vaccination campaigns. And they're also favored by remittances in the case of Guatemala and the DR. External vulnerability risks are contained in good international research level proven track record of access to the markets even in difficult times as we've had. Of course, we have Chile, Colombia, Brazil, Mexico, and even Peru. I mean, despite the recent political challenges, these are resilient economies with important markets related to foreign trade, our exposure there is mostly short-term related to either financial institutions or top notch exporters and we feel comfortable there. Smaller countries, Paraguay and Uruguay with great performance in macro stability. So that's – I don't know if that was – but that's how we're seeing it. Next question.

Thank you. There are no additional questions at this time.

Alright, then, thank you very much for the opportunity and stay safe.

Thank you.

Thank you.

Thank you. Ladies and gentlemen this concludes today's presentation. You may now disconnect.