Banco Latinoamericano de Comercio Exterior, S.A.

Hello, everyone, and welcome to Bodex's fourth quarter and full year 2018 conference call. On this 20th day of February 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. Bodex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.bodex.com. Joining us today are Mr. Gabriel Tolchinsky, Chief Executive Officer, and Ms. Ana Gracilia de Mendez, Chief Financial Officer. Their comments will be based on the earnings release, which was issued earlier today and is available on the Corpus 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 BLODX's future results, plans, and anticipated trends in markets affecting its results and financial conditions. These forward-looking statements are BLODX's expectations on the day of the initial broadcast of this conference call, and BLODX does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties, and assumptions are detailed in our 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. Toleschensky for his presentation.

Thank you, Travis. Good morning. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the fourth 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 events on our perception of risk and financial results. During our third quarter 2018 conference call, we mentioned that the credit quality of our portfolio, cost structure, and allowances for expected credit losses set the pace to improve our earnings generation capacity. Our fourth quarter results are the first steps in that direction. On our last call, we also identified key events that were impacting emerging markets, Latin America, and commodity-related industries, namely, the effect of higher U.S. interest rates and a strong U.S. dollar, protectionist rhetoric on trade and tariffs from the U.S., along with political and macroeconomic uncertainty and overall lower growth prospects for key countries from Latin America. Some of these trends from the third quarter of 2018 continued into the fourth quarter. In December, the Federal Reserve raised interest rates for the fourth time in 2018, responding to strong U.S. growth, low unemployment, and core inflation readings above 2%. Higher interest rates brought about weaker financial market conditions. With 10-year U.S. Treasuries over 3% and LIBOR reaching its highest levels in the last 10 years, equity markets started showing signs of stress. In fact, December 2018 was the worst U.S. stock market performance of any December since the Great Depression. Europe was also showing signs of significant deceleration, which coupled with a stronger U.S. dollar and weakening commodity prices led to lower fund flows to emerging markets in general and Latin America in particular. China was also a source of uncertainty as the government's effort to curtail corporate debt-driven growth are slowing the Chinese economy. Macroeconomic global risks are intensifying. We now need to add the prospects of slowing economies in Europe and China, and maybe also the U.S., to a tense protectionist trade environment. Today we know that the Fed is taking these developments into account, with a more dovish outlook on the potential for future rate increases and a slowdown in the unwinding of its $4 trillion balance sheet. It is our expectation that a more cautious Fed will reduce the strengthening pressures on the U.S. dollar, always a welcome development for emerging markets. We should also acknowledge some positive news out of the region in the fourth quarter. Although a highly controversial candidate, Jair Bolsonaro hit the ground running with several market-friendly announcements to open the Brazilian economy and introduce fiscal adjustments. particularly focused on pension reform. Positive investment in portfolio fund flows ratcheted up growth expectations to close to 3 percent, growth rates Brazil hasn't seen in more than four years. The USMCA was another bright spot in an otherwise grim picture for Mexico, but more about that later in the call. Continuing with the positive news from the fourth quarter, Argentina completed the final agreement with the IMF, and although it significantly tightened monetary policy and established strict fiscal spending controls, it did not lead to the social unrest some feared. Importantly, the budget that was compliant with the provisions of the IMF agreement was approved with the support of moderate members of the opposition Peronist Party, a welcome sign of unity to implement needed reforms. Even Costa Rica, which stretched the patience of the rating agencies, managed to approve in their famous Sala Cuatro a fiscal reform package. Although the package was deemed insufficient by the rating agencies, which proceeded to downgrade its credit rating, the Colón recovered a significant part of its devaluation, and the government managed to repay an extraordinary loan it took from the central bank. All these developments are setting the stage for some growth out of the region for 2019. Although still subpar, growth rates of 2% or slightly higher are now possible for Latin America. That said, problem spots persist. Mexico, for example, seems to be on a path of reversing or at a minimum challenging established macroeconomic policies. Recent developments, such as the cancellation of the new airport project uncertainty over the fate of energy reform, threatening to curtail bank fees, and potential government intervention in the running of its independent entities are a stark departure of what investors have come to expect from Mexico over the last 20 years. Another potential source of volatility is Argentina, with significant political uncertainty as the recession generated by restrictive IMF policies is hitting Argentine purchasing powers. We have elections coming up in October, but the primaries in August will also be important, as these will determine if we'll see a less than market-friendly candidate from the Peronist bloc. What does this all mean for BLADx? A macroeconomic context that offers no room for complacency, as risks of major economy slowing and trade tensions continuing, are partially counterbalanced by a somewhat better macroeconomic picture from some key countries in Latin America. We still see tepid growth in credit demand and sufficient liquidity in most countries in the region. Nevertheless, our book of business is prudently growing. We are identifying new prospects, we are increasing share of wallet with our existing client base, and are structuring value-added transactions with key clients. Although our year-end headline margins were impacted by low-yielding liquidity due to higher-than-expected central bank deposits, Gladex continues to improve its origination. We have a better mix of medium- to short-term loans, lengthening the average life of our portfolio and increasing our origination margins. On the cost side, net of restructuring and other non-recurring charges, our recurrent expenses continue to decline. As you'll hear from Ana Graciela, our MPLs declined significantly due to asset sales, restructuring, and partial write-offs. Our Tier 1 capital ratio remains strong. Our book value remains solid above $25 a share, and that is why our Board of Directors approved to maintain a 38.5 cents a share dividend. Against this backdrop, the management of Blythe, as well as its board of directors, is cautiously optimistic for the first quarter of 2019 and look forward for an improvement in profitability throughout the year. With these initial comments, I will now turn the call over to our CFO, Ana Graciela, to provide you with more color about our financial performance in Q4 2018.

Thank you, Gaby. Good morning, and thank you for joining our conference call on the fourth quarter and full year 2018 results. I will make reference to the presentation uploaded on our website. First, let me highlight on page four, the bank's return to profitability, recording a fourth quarter 2018 profit of 20.7 million, or 52 cents per share. on the improvement of quarter-on-quarter top-line revenues by 13%, mainly on the account of increased loan average portfolio balances and higher fees, as well as the normalization of credit provisioning. These results represent a significant improvement from third quarter 2018 results and an increase in quarterly trend, denoting the absence of non-recurring charges and were relatively stable year on year. For the year 2018, profits of $11.1 million reflect impairment losses on financial instruments and non-financial assets for a total of $68 million. These impairment losses relate to the bank's credit-impaired loans, which we also refer to as non-performing loans, or NPLs. In addition, and to a lesser extent, impairment losses also relate to charges associated to the disposal of obsolete technology in line with the bank's objective to optimize its operating infrastructure. Now I will refer to the evolution of net interest income and financial margins on pages 5 and 6. Net interest income for the fourth quarter of 2018 increased by 2% quarter-in-quarter to $28 million, mainly driven by a 4% increase in average loan balances and the absence of NPL's interest reversals, partly offset by higher low-yielding liquid assets. Year-end liquidity balances were above historical levels as the bank scheduled its funding sources, anticipating a potential temporary decline of its deposit space. Although average deposits declined by 12% quarter-on-quarter, this trend was reverted by the end of the year, resulting in a 7% quarter-on-quarter increase. Consequently, liquid balances represented 22% of total assets at December 31st of 2018. The bank expects to bring back the balance of liquid assets to normalized level during the first quarter of 2019. Our estimation is that this temporary excess liquidity had a negative impact of approximately 17 basis points in net interest margin for the quarter. Hence, The 13 basis points quarter-on-quarter decline in net interest margin to 1.61% is mostly attributable to this effect. Excluding this impact, financial margins for the quarter were supported by a quarterly increasing trend in average lending balances and lending credit spreads, the latter of which started to revert its negative trend during the fourth quarter of 2018. Throughout the year, lending spreads were pressured downward on the account of better quality loan origination as the bank increased its lending share to financial institutions, sovereign and quasi-sovereign entities, while origination in the corporate sector remained focused on top quality exporters with U.S. dollar generation capacity. As a result of this overall decline in average lending spreads, throughout the year 2018, net interest income of $110 million represented a year-on-year decrease of 8%, and annual net interest margin of 1.71% declined by 14 basis points. Narrower lending spreads for the year were partly offset by the net positive effects of an increasing interest rate environment. Throughout the year, the bank's assets and liabilities repriced at a similar pace, given its narrow interest rate gap structure, resulting in a net positive effect on the bank's higher yield on equity invested in financial assets. During the quarter, the bank originated $3.1 billion in loans, exceeding maturities by $54 million. Loan disbursements for the year 2018 totaled $14.3 billion as we continued to perform well on our short-term origination capacity and were also able to deploy longer-tenured transactions with our traditional client base of top-quality financial institutions, exporting corporations, and multi-Latina. As a result, our loan portfolio increased by 1% on a quarter-on-quarter basis and by 5% year-on-year to $5.8 billion as of December 31, 2018. Now moving on to page seven, fees and commissions were relatively stable year-on-year at $17.2 million for 2018. Fee income from letters of credit and contingencies performed well with a quarter-on-quarter increase of 25% to $3.5 million. On an annual basis, fees from this line of business increased by 12% to $12.3 million. Quarterly fees from syndications, the other main component of fee generation for the bank, increased to $1.9 million in the fourth quarter and totaled $4.9 million for the year 2018, a 26% decrease from the previous year, denoting the transaction-based uneven nature of this business. The bank has positioned itself as a relevant player in originating syndicated transactions across the region and was able to close seven transactions during 2018 for a total of $847 million. On pages eight and nine, the commercial portfolio, including loans, letters of credit, and contingencies, remain well diversified across countries and industries. Overall exposure to financial institutions, sovereigns, and quasi-sovereigns represented 67% of total commercial portfolio at year end 2018, from 45% in 2015, denoting a continued improvement in portfolio quality over the last four years. Financial institutions alone, the bank's traditional client base, accounted for a predominant 52% of total exposure in 2018. Integrated oil and gas sector exposure accounted for 10% of total portfolio, as of December 31st, 2018, and is mainly concentrated in quasi-sovereign entities, which constitute longstanding business relationships of the bank. The remaining overall exposure is well diversified among several industry sectors, none of which exceeded 5% of total exposure as of December 31st, 2018. In terms of country exposure, Brazil represented 19%, commensurate with the size and prospects of its economy and its relevance in international trade flows. 86% of Brazil's exposure is with banks, sovereigns and quasi-sovereigns. The average remaining tenor of the country's portfolio is approximately 14.5 months, with 67% maturing in 2019. We are closely monitoring our exposures in Mexico, which constitutes 14% of total exposure, Argentina with 10%, and Costa Rica with 6%, countries in which the bank has identified very good business opportunities, cognizant of relevant uncertainties that should start to unveil throughout 2019, such as possible adverse economic policies and outcomes of the newly established government in the case of Mexico, and presidential elections in Argentina, which are critical to the continuity of recently implemented economic reform and adherence to the IMF Accord. In Costa Rica, we are monitoring the implementation and success of the recently approved fiscal reforms. The bank's tactical approach in these three countries is to focus on short-term tenor origination in winning sectors that should remain resilient even in the case of economic and political downturns. Total commercial portfolio continues to be mostly short-term with an average remaining tenor of close to 11 months and with 74% maturing in 2019. Trade-related loans represented 59 percent of the bank's short-term portfolio at year-end. On to page 10, we present the evolution of NPLs and allowances for credit losses. During the fourth quarter of 2018, the bank was able to reduce its NPL levels by $54 million. As a result of the sale of an NPL, and the restructuring of another. Of the $54 million reduction during the quarter, the bank collected sale proceeds of $12 million, wrote off principal balances for $33 million against individually allocated credit allowances, and recognized a new financial instrument at fair value for $9 million as per restructuring terms. NPLs then totaled $65 million and represented 1.12% of the loan portfolio at December 31, 2018, with ample reserve coverage of 1.6 times. Ninety-six percent of the bank's NPLs constitute a single $62 million loan in the sugar sector in Brazil, which significantly deteriorated during the third quarter of 2018 and and was then classified as NPL. This loan, individually provisioned at 75%, accounted for most of the increase in the allocated reserve for loan losses, categorized as Stage 3 under Accounting Standard IFRS 9. Stage 2 depicts performing exposure showing some credit quality deterioration since origination due to the weakening of financial conditions of a borrower placed on watch list category or to increased level of the exposure's country or industry risk. At December 31, 2018, Stage 2 exposure totaled $389 million, of which $58 million corresponded to seven individual credits on the watch list category, which are performing, but in runoff mode. The remaining exposure represents performing credit in countries that the bank downgraded in its internal country rating review, as was the case of Costa Rica in the fourth quarter of 2018. Stage one exposure which relates to the performing portfolio with credit conditions unchanged since origination, showed an increase in annual trend and represented 93% of total exposure. On page 11, quarterly operating expenses of $12.4 million showed a quarter-and-quarter seasonally high level. Annual expenses totaling $48.9 million for 2018 increased by 4% year-on-year, mainly on non-recurring expenses related to personnel restructuring and optimization of infrastructure platforms. Run rate base of annual operating expenses are estimated at approximately $46 million for 2018. Efficiency ratio of 38% for the year 2018 reflects these non-recruiting expenses as well as lower top line revenues alluded to before. Now on page 12, I would like to summarize the main aspects for fourth quarter and full year 2018 results. In the fourth quarter, the bank got back on a profitable track with a $20.7 million net income on the backdrop of quarter-on-quarter increase in top-line revenues and portfolio average balances, coupled with the normalization of credit provisioning. Annual profits of $11.1 million were mostly impacted by credit impairments and, to a lesser extent, operational charges, all of which totaled $68 million. Annual revenues decreased by 8%, mostly on the account of lower average annual lending spreads, reflecting improved quality of the commercial portfolio, although we saw a stabilization of credit spreads in the last month of the year. Decreasing trends in NPLs at year-end, with proactive management of these few exposures involving sales, restructurings and partial write-offs. Operating expenses for the year include non-recurring restructuring and optimization charges with a decrease in the level of run rate expense base. Capitalization remains solid at 18.1% to one ratio, while our board of directors kept our quarterly dividend unchanged at 38.5 cents per share. 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 Q&A session.

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I'd like to turn the call back over to you, sir.

I guess we were very clear.

Thank you. I did not expect that we were so clear, but thank you very much for joining us today. We look forward to talking to you again in April, and have a good day. Thank you very much, everyone.

Thank you, everyone.