BLX (2019 - Q2)

Hello, everyone, and welcome to Bladex's Second Quarter 2019 Conference Call on the 19th day of July, 2019. 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. Gabriel Tolchinsky, Chief Executive Officer; and Ms. Ana Graciela de Mendez, 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.In these communications, we may make certain statements that are forward-looking such as statements regarding Bladex's future results, plans and anticipated trends in the markets affecting end results and financial conditions. 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 the subsequent events or knowledge.Various risks, uncertainties and assumptions are detailed in 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 am pleased to turn the call over to Mr. Tolchinsky for his presentation. Gabriel

Thanks, Travis. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the second quarter, I would like to discuss with you the economic and business environment in Latin America, important developments that took place during the quarter and the impact of these recent developments on our perception of risk and financial results.During our last three quarters conference calls, we mentioned that the credit quality of our portfolio, cost structure and allowances for expected credit losses set the base to improve our earnings generation capacity. Our second quarter 2019 results are another step in that direction. On the economic and business environment front, once again, our diminished expectations for Latin America's economic growth continue to be challenge by the global macroeconomic environment, as well as by Brazil and Mexico, the two largest economies in Latin America, with growth expectations for the region now hovering around 1%.Starting with the global macroeconomic context the U.S. dollar is strong, protectionist rhetoric on trade and tariff from the U.S. is a weekly occurrence and then ambition slow down of economic activity in China, Europe and the U.S. became a reality in the second quarter of 2019.After switching to a neutral mode on the direction of interest rates in the first quarter the Federal Reserve started setting the stage in the second quarter for lowering rates in the second half of the year, while short-term rates remain relatively stable, the prospect of lower rates, lower the yield on the 10 year U.S. treasury to around 2%, thereby inverting the U.S. dollar yield curve. And inverted yield curve is usually a harbinger for an economic slowdown, which usually weakens the U.S. dollar.Nevertheless further economic deceleration in Europe and China continue to make the U.S. dollar attractive reducing fund flows to emerging markets in general in Latin America in particular, with lower fund flows to Latin America, sagging investment in key countries has become a drag on the region's economic growth. Today, our growth estimates for the Brazilian economy for example are below 1%. These estimates are down from expectations of 2% in the first quarter and from above 2.5% at the end of 2018.Mexico is now expected to grow at 1.2%, down from estimates of 1.6% in the first quarter and cross to 2% at the end of 2018. Argentina, the third largest economy in Latin America is still in the midst of a recession that’s exacerbated by restrictive fiscal guidelines under their IMF agreement and the impact of low growth from its neighbor Brazil.Overall, our adjustments to economic growth are driven by lower investment, the prospect of diminishing trade volumes, the weight of lower growth rates from developed market, but also importantly by the uncertainty over the capacity of the current leadership in these countries leaders survive politically as in the case of Argentina follow through with the free market agenda as in the case of Mexico or enact the necessary fiscal reforms in sufficient magnitude to reverse structural deficit as in the case of Brazil.The prospect of passage of the pension reform plan in Brazil have improved after it was approved by the first reading in the lower house. There is a second vote in the lower house of Congress before it moves to the Senate where there is two votes in that house of Congress.Nevertheless, the presence when in popularity may dilute the bill and therefore the magnitude of fiscal savings. On the economic front, as we mentioned in the previous call, we see the engines of growth for the Brazilian economy tied to internal demand and investment not to export industries, primarily because prices for some key export soft commodities such as sugar and soybean are still depressed. Passage of fiscal reform is key to restoring confidence in growth for a pickup in both internal demand and in investment.In Argentina, we are adjusting our exposure down as we get closer to the August primary and the October election. Although both candidates appear to be a thousand premarket positions the uncertainty of a popular backlash against fiscally restrictive policies from the IMF program, and high levels of debt could suede the new administration to restructure existing obligations, always a messy outcome.We continue to believe that the macroeconomic and regional context offers no room for complacency. Furthermore, the combination of slow growth and risk aversion is exacerbating liquidity for the top names in the region compressing their margins not always compensating for the risk these credits represent. Against this backdrop, we continually analyze the risk reward functions at the country level to adjust our portfolio accordingly. As we mentioned in previous calls, with 79% of our commercial portfolio less than one year of remaining life Bladex is in a privileged position to dynamically adjust portfolio exposures.We continue to see opportunities to grow our exposure in some countries of Central America and the Caribbean as well as in Columbia, Peru, Paraguay and Chile. Our book of business is solid. We are identifying new prospects we’re increasing share of wallet with our existing client base, and are structuring value added transactions with key clients.Although our focus on high quality borrowers and persistent U.S. dollar liquidity in key markets put pressure on our origination margins, Bladex continue to originate at stable lending spreads, and with a better asset mix, improving the lending spread over the -- of the overall portfolio.Our pipeline of syndicated and structured transactions tied to Latin American integration is also solid, and should help us get closer to the 40% exposure, we look for in our model portfolio for medium term loans, as well as increasing our fee income.Deposits, particularly from our Class A shareholders now represents 55% of our funding structure. We appreciate the trust and commitment of the region's Central Bank and the impact of these deposits -- that this deposits have on improving our cost of funds.On the cost side, expenses for the quarter continue to be under control. We reiterate our statement from the last two calls that net of restructuring and other non-recurring charges and seasonality, our recurrent expenses continue to decline. As you'll hear from Ana Graciela, our credit impaired loans are unchanged from last quarter, our credit reserve coverage and Tier I capital ratios continue to be very strong, and our book value remains solid above $25 a share. That is why our Board of Directors approved to maintain $0.385 a share dividend. Against this backdrop, the management of Bladex, as well as its Board of Directors is cautiously optimistic for the second half of 2019, and look for a continuation of the profitability path we embarked on, on the last two quarters.With these initial and brief comments, I will now turn the call over to our CFO, Ana Graciela to provide you with more color about our financial performance in Q2 2019.

Thank you, Gabriel. Good morning to everyone and thank you for your participation in our call. I will now review the results for the second quarter and first half of 2019, making reference to the presentation that we have uploaded on our website.So on page four, you can see the continuous improvement in our profitability, both on a quarterly and on a year-to-date basis. This performance was achieved with the contribution of virtually all line items with revenue growth supported by a positive quarterly trend in net interest margins, fees and commercial portfolio balances, lower year-on-year expense levels, stable NPLs and high quality portfolio origination, which in turn resulted in low credit provisioning. And finally, the absence of losses on non-financial assets accounted for in the second quarter of 2018.The banks second quarter 2019 profits of $22.3 million, or $0.56 per share represented a 34% increase with respect to the year before and were up 5% on a quarter-on-quarter basis. For the first half of 2019, profits amounted to $43.5 million, a 40% increase compared to last year. With this result, we were able to achieve a 9% return on average equity, a 1.4% return on average assets and an efficiency ratio of 31%, while maintaining a solid level of capitalization at 20% of Tier 1 Basel III Ratio.Now I will refer to the evolution of net interest income and the impact of financial margins and loan trends on page five. Net interest income for the second quarter of 2019 remained relatively stable at close to $28 million, with respect to both the first quarter of 2019 and the second quarter of 2018. The Bank's loan portfolio the main driver of net interest income remained relatively stable for the quarter, with an average balance up 1% year-on-year and down 2% quarter-on-quarter to $5.4 billion.Loan origination remained solid at $3 billion during the quarter, offsetting maturities by over $90 million, translating into a quarter-on-quarter end of period loan balances increase of 2% to $5.6 billion, a similar level from a year ago.Net interest margin of 1.81% for the second quarter of 2019 represented a 7 basis points increase with respect to the previous quarter and was stable year-on-year. Margins were positively impacted during the quarter by lower average funding costs and the continued decrease of average liquidity to historical level hence improving the mix and yield of financial assets. While lending spreads and average loans remained relatively stable.For the first six months of 2019, the Bank’s net interest income increased by 3% year-on-year to $56 million and the net interest margin increased by 2 basis points to 1.77%, reflecting the Bank’s effective management of its interest rate GAAP position in a period of increasing market rate as the Bank's LIBOR based loan rate reprise at a higher level than the LIBOR based rate of its funding, more than offsetting a decrease in lending spreads on the account of higher quality loan origination, and which has been stabilized in recent quarters.Now moving on to page six, fees and commissions increased to $5.1 million for the second quarter of 2019. Representing a quarter-on-quarter increase of 118% on the account of two syndicated transactions closed during the quarter, compared to none in the previous quarter, reflecting the uneven nature of this transactional business. Fees for the quarter stood at a similar level year-on-year.The Bank continues to be an active and relevant player in the structuring and syndications Latin American market, supporting clients with their growth plans and cross border operations. For the first six months of 2019 fees totaled $7.5 million, an 8% decline over the previous year due to lower letter of credit fees, partly offset by a better performance and fee level from the syndications business.From pages seven through nine, we present the evolution and composition of our commercial portfolio. At June 30, 2019 commercial portfolio totaled $6.2 billion, representing a 3% increase quarter-on-quarter as well as year-on-year. Total commercial portfolio continue to be mostly short-term, with 79% maturing in the next 12 months and an average remaining tenure of close to 10 months. 56% of the Bank's short–term commercial portfolio is specifically trade related.The Bank's high quality origination is evidence by the overall exposure to financial institutions, sovereign and quasi-sovereign, which represented 70% of total commercial portfolio as of June 30, 2019. Financial institutions alone represent the largest industry exposure, with 56% of the total at quarter end.Other relevant industry exposures are the integrated and downstream oil and gas sectors, with 7% and 4%, respectively of total exposure as of June 30, 2019. These sectors exposures represent the Bank's historical participation in credit related to strategic oil and refined product exports and imports to sovereign and quasi-sovereign entities across the region to the issuance and confirmation of letters of credit, as well as financing. The remaining overall exposure is well diversified among several industry sectors, with no other industry exceeding 5% of total exposure.At June 30, 2019, Brazil's exposure decreased to 16% of total portfolio from 18% in the previous quarter on the account of the bank's view of risk not being compensated by the adequate returns in this market. And on the continued effort to a more diversified country exposure.Nonetheless, Brazil remains the largest country exposure. The average remaining tenor of the country's portfolio is lower than 9 months, with 84% maturing in the next 12 months. Our exposure in Mexico remained relatively stable, accounting for 14% of the total portfolio compared to 15% in the previous quarter, and it remains focused on strategic, state enterprises and private sector exporting corporation, with participation in the North American trade flows.We continue to closely monitor the country's evolution in terms of the new government policy, GDP growth and investment the impact of Pemex [ph] proposed restructuring program as well as the pending approval of the USMCA by U.S. Congress among other issue.Given the uncertainty we continue to favor a short tenure origination approach in the country. 72% of Mexico’s portfolio matures in the next 12 months and the average tenure is approximately 11 months. Argentina’s exposure is down to 6% of the total portfolio compared to 9% in the preceding quarters executing on our plan to reduce the country's exposure in view of the uncertain outcome of the coming presidential elections, which are critical to the country's overall risk profile and the needed ongoing availability of external financing.We maintain a short-term approach with strategic state entities and top tier international banks and exporting corporation. 64% of the portfolio in Argentina matures in the next 12 months and the average tenure of the portfolio is approximately 13.5 months. We have successfully increased our portfolio in Chile, where we continue to see good risk reward opportunity. At June 30, 2019 Chile exposure accounted for 8% of total portfolio compared to 4% in the previous quarter.And we also maintain a 30% exposure in the central American and Caribbean region the Bank’s natural market for its geographic proximity, of which 72% is with banks, sovereigns and quasi-sovereigns. 76% of this portfolio in this region matures in the next 12 months and the average tenure of the portfolio is approximately 10 months.On page 10 now we present the evolution of credit impaired loans or NPL and allowances of credit losses. NPL balances remained unchanged during the quarter at $65 million, representing 1.16% of total loans with a reserve coverage of 1.6 times. IFRS 9 Stage 3 individual allowances allocated to this NPL portfolio increased to $57 million during the quarter, representing 88% of NPL balances in view of this credit restructuring evolution.IFRS 9 Stage 2 allocated research decrease during the quarter on the account of reduced credit exposure in this category, related to collections in our watch list exposure, as well as reductions in exposures to countries impacted by internal country ratings such as Argentina. All of the exposure in this categories remains current.Our IFRS 9 Stage 1 exposure and its associated credit allowances increase in the account of higher portfolio origination relative to maturities, reflecting an improved competition of our commercial portfolio. This Stage 1 exposure, which relate to the performing portfolio with credit conditions unchanged origination continued to be the most relevant with 94% of total exposure at quarter end.On page 11, the Bank continue to improve its efficiency with a sustained focus on expense control and process improvement evident by the declining trend in year-to-date expenses and by the improvement on the Bank's efficiency ratio for second quarter and first half of 2019 to 31%. Second quarter 2019 expenses amounted to $10.6 million, representing a 7% decrease year-on-year and a 7% increase quarter-on-quarter. While operating expenses for the first half of the year were down 20% from the year before totaling $20.4 million.The year-over-year expense reduction mostly relate to lower viable compensation and other employee expenses related to the personnel restructuring process that the bank underwent in the first month of 2018 as well as to the resulting lower salary expense base. The quarter-on-quarter increase is mainly attributable to higher business related expenses when compared to a seasonally low first quarter.On page 12, we present the positive ROE evolution, which reached 9% in this past quarter, while the Bank maintain a solid capitalization of over 20%. Like Gabriel mentioned, the Board of Directors kept the dividend payment unchanged at $0.385 per share, which represents a 68% payout over quarterly earnings.I will now turn the call back to Gabriel to open the Q&A session. Thank you.

Thank you, Ana Graciela. Travis, you can now open the call to the Q&A session.

[Operator Instructions] We have no questions in the queue at this time.

Thank you, everybody. I believe that there is a question coming in.

Yes, we do have someone queue up. We have a question for Robert Tate, Global Rational Capital.

Hi, Gabriel, Ana, thank you very much. [Technical Difficulty] well this quarter, again, just want to congratulate you on the good results.

Thank you, Robert. Very much appreciate it.

So, as I mentioned, you've done very well this year despite the headwind [Technical difficulty] track to achieve a 10% or double digit return on equity. And I was just wondering, so and you've been [Technical difficulty]. How, how are you able to do so well, despite the difficult environment, and why are they not more [Technical difficulty] you mentioned, in the first part of your call.

Okay. Thank you for your question. Robert, some of your comments were cut off because of bad communication. But I think I got the gist of the question. And let me start answering by saying that, in this environment, we need to, of course have very sturdy and strict credit underwriting standards. And we do so and also pay good attention to overall portfolio allocation. We are reducing exposure in countries like Argentina, because of the potential for volatility, particularly from the political side. But we're able to increase exposure in Central America and the Caribbean where our margins are very good and we have very good presence in those countries.So from a big picture portfolio allocation, we are able to navigate Latin America based on where the appropriate risk reward is. And from a more micro level, we have been doing very good transactions, as Ana Graciela mentioned, we have done two significant syndicate transactions at good margin levels that is additive to our portfolio. Overall, we are able to still find our good spots within what we consider an overall challenging environment.Challenging doesn't always mean that it will translate to NPLs, it just means that we need to be careful on how we underwrite the bulk of our portfolio is short-term in nature. As we mentioned before, around 79% of our exposure matures within a year, that means that we have the capacity to move around and stay away from difficult situations, very much a product of the derisking that we took on starting in 2017 all the way to 2018. And are able to really have constructed a portfolio that we feel very comfortable with, and able to adjust exposure accordingly based on changing macro and micro wins.

Right. Thank you, Gabriel. And just a question for you both the H2 exposure into [Technical difficulty] that's quite an important category I think, and perhaps one that [Technical difficulty] just wondering if you could just describe the general composition of exposure [Technical difficulty] and country?

Yes, Robert. Thank you. Yes Stage 2 exposure, this is a category under IFRS 9, as I mentioned, and basically the accounting standard what is asked is that in any case, where we see that exposures or the conditions of the exposures changed with respect to when they were originated, it implies that we have to move from allocating credit reserve on a one year basis rather than on lifetime. So when we put exposures from Stage 1 to Stage 2, it means that some conditions have deteriorated to this portfolio since these loans were originated.Now, what does this translate to is that whenever we risk area determines that there has been certain deterioration in a country or an industry, that means that we give an internal downgrade to the country risk, all the exposure that are closely associated to this country exposure is analyzed and then it's put on the Stage 2 category until it matures, because it was originated in different risk conditions. But it -- I emphasize that this exposure is performing and in our perspective, it continues to be with very good clients and it continues to follow very strict credit procedures in terms of the underwriting that Gabriel mentioned. So it's just an accounting rule that we have to follow.We do have a small portion of this portfolio, which we have in our watch list. Like I mentioned, we continue to get paid on that. And it's a very small portion of that. I think it at the end of the quarter totaled $30 million. So in general terms, it's nothing that we particularly worry about in terms of -- it's just an accounting standard that we have to follow. I don't know Gabriel you…

Right. I think that summarizes it very well. Thank you.

Yes. And just in terms of the [Technical difficulty] country at all in that category. I presume, it would be countries like maybe Argentina and industries, perhaps sugar, maybe oil and gas. Is that correct or what industries and countries within that category of exposure?

A significant amount of the exposure there is Argentina and Costa Rica, both countries that were downgraded in the last few months. And that is the bulk of the increase. But the underlying credits are not only performing those are good credits with absolutely no delays and we don't have any concerns as to the capacity of these borrowers to repay their debt.

Okay, okay. Great. Just on the provision for the network [Technical difficulty] in the first three of last year. I think the [Technical difficulty] Stage 3 exposure and from when I [Technical difficulty] particular loan went from 75% in quarter four of last year to [Technical difficulty].

Yes, we kind of losing you Robert.

I am sorry, Robert, we have lost you.

[Technical difficulty]. The impairments of sugar loan, I think it’s at 85% provision, is that about right at the moment?

That is about right.

Yes, that’s correct.

Okay, and then [Technical difficulty].

Robert, I’m so sorry, we’re going to have to maybe pick this up outside the call, because we are unable to hear and probably the rest of the participants in the conference call are unable to hear you. So, we’re happy to entertain your questions directly. Travis, if you want to open up for more questions, or wrap the call, please takeover. Thank you.

Thank you, sir [Operator Instructions]. There is no questions in the queue at this time, I’d like to turn the call back over to you, sir.

Thank you, everybody and we look forward to talking to you in -- after we report numbers for the third quarter and have everyone a very good day. Bye-bye.

Thank you.

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