Bladex, Inc. Class E

Hello, everyone, and welcome to BloodX's first quarter 2019 conference call. On the 17th day of April 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. BloodX has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.bloodx.com. Joining us today is Mr. Gabriel Tolchinsky, Chief Executive Officer, and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their comments were based on the earnings release, which is issued earlier today and is available on the corporate website. The following statement is made pursuant to the safe harbor and 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 the markets affecting end results and financial conditions. These forward-looking statements are BLODX's expectations on the day of the initial broadcast of the conference call. And BLODX does not undertake to update these expectations based on the 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 underlining assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. And with that, I am pleased to turn today's call over to Mr. Tolchinsky for the presentation. Please go ahead.

Thanks, Gary. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of earnings results for the first 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 developments on our perception of risk and on our financial results. During the last two quarters' cold first calls, 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 first quarter results are another step in that direction. On the economic and business environment front, we started the year with high expectations for Latin America's economic growth, only to slowly downgrade them as the quarter progressed. The larger context is not very helpful. The events that we identified as key for emerging markets, Latin America, and commodity-related industries, namely the effect of a strong U.S. dollar, protectionist rhetoric on trade and tariffs, and a slowdown of economic activity in China, Europe, and the U.S., were not only prevalent but also intensified during the first quarter of 2019. Additionally, political and macroeconomic uncertainty also impacted overall growth prospects for key countries in Latin America. In terms of the global context, after raising interest rates four times in 2018, responding to strong U.S. growth, low unemployment, and core inflation readings above 2%, the Federal Reserve switched to a neutral mode, saying that The data are not currently sending a signal that we need to move in one direction or another. After a turbulent fourth quarter of 2018, the Fed's more dovish stance stabilized financial market conditions. The yield on the 10-year US Treasury retreated to around 2.5%, and equity markets rebounded. Nevertheless, a significant deceleration in Europe and China continued to make the US dollar attractive, leading to lower fund bond flows into emerging markets in general, and Latin America in particular. The Fed was not alone in downgrading growth prospects. The World Bank and IMF seemed to bring down growth expectations for 2019 and 2020 with every new report, with trade tensions between the US and China front of mind for their part in intensifying macroeconomic, global risk, and diminishing growth expectations. At the beginning of the year, our expectations were for reduced strengthening pressures on the US dollar and improved fund flows to emerging markets, which coupled with some positive news from the region, such as the election of a market-friendly candidate in Brazil, approval of IMS programs in Argentina and Ecuador, passage of the fiscal reform bill in Costa Rica, and the signing of the USMCA, the new NAFTA for Mexico, we believe set the stage for some growth out of the region for 2019. Although still subpar, we saw growth rates of 2% or slightly higher as achievable for Latin America. However, we no longer believe that's possible. Today, our growth expectations for Latin America for 2019 are between 1% and 1.5%. Brazil doesn't seem capable of generating growth rates above 2 percent. Mexico is now expected to grow about 1.6 percent, and Argentina has little hope in 2019 of pulling out of its recession. Brazil, Mexico, and Argentina represent, in aggregate, more than 70 percent of the GDP of the region. We needed to adjust economic growth rates primarily for three reasons. One, the diminished prospects of trade volumes, given the lower growth, the weight of lower growth rates from developed markets, and three, uncertainty over the capacity of the current leadership in these countries to either survive politically in the case of Argentina, implement previously agreed reforms in the case of Mexico, or enact the necessary reforms in the case of Brazil. What does this all mean for us, for Bladix? a macroeconomic context that offers no room for complacency. To summarize the specific risks we see, first, a slowdown in the Latin American economic activity, leading to lower demand for credit. Second, a more challenging political and economic environment for some key countries in the region, increasing credit risk. And third, the prospect of declining trade volumes and other impacts from continuing trade tensions, reducing the need for financing of trade transactions. Against this backdrop, as we analyze the risk-reward function at the country level and see a dynamic picture of how our portfolio construction is evolving, we are actually very optimistic. Over 75% of Gladys' portfolio matures in less than one year. So we are in a privileged position to dynamically adjust exposures. In Brazil, for example, we see fewer opportunities for reward to compensate for the prevailing political and economic risk. On the political front, although Jair Bolsonaro may introduce market-friendly fiscal reforms, Congress's appetite to pass pension legislation appears to be waning. Pension reform is the top priority for the economic team this year, but there's still no clear political strategy to secure approval for it in Congress. We also see the engines of growth for the Brazilian economy tied to internal demand, not to export industries. This is primarily the case because prices are still depressed for some key export soft commodities such as sugar and soybeans. Currently, Brazil has excess U.S. dollar liquidity. There is little demand or good credit risk available for these exporting industries, thus depressing margins. As such, we expect our exposure to Brazil to decline unless we can roll over maturing loans at margins that compensate us for those risks. In Argentina, another example, we see macro risk intensifying as we approach the August primary and October elections. And although we have a solid and profitable portfolio of credit there, we are likely to adjust our exposure down as we get closer to those election dates. And again, we are in a good position to do that with 663% of our Argentina loans maturing in 2019. On the positive front, we are pleased with Panama's upgrade from one of the major credit rating agencies, not only because Panama is our home but also because it is an important exposure in our portfolio, one we intend to grow. We also see growth opportunities in the rest of Central America, in the Caribbean, in Colombia, Peru, and in Chile. The first quarter of the year is seasonally slow for Latin America. Nevertheless, our book of business is solid. We're identifying new prospects, increasing share of wallet with our existing client base, and structuring value-added transactions with key clients. Although our focus on high-quality borrowers and percent U.S. dollar liquidity in key markets puts pressure on our origination margins, Bladix continues to originate medium-term loans at higher lending spreads than mature loans, thereby improving overall margins. On the cost side, expenses for the quarter benefited somewhat from the seasonality effect. That said, we reiterate after our last call that net offer structuring and other non-recurring charges, our current expenses continue to decline. As you'll hear from Ana Graciela, our credit-impaired loans are unchanged from last quarter, and no credits were added to our watch list category. Our credit reserve coverage and Tier 1 capital ratio continues to be very strong, and our book value remains solid above $25 a share. That is why our Board of Directors approved to maintain a $0.385 a share dividend. Against this backdrop, the management of Pladix, as well as its Board of Directors, is cautiously optimistic for the reminder of 2019 and looks for a continuation of the profitability path we embarked on last quarter. With these initial comments, I will now turn the call over to our CFO, Ana Graciela, to provide you with more details about our financial performance in Q1 2019.

Thanks, Gabriel. Good morning, and thank you for joining our conference call on the results for the first quarter of 2019. I will make reference to the presentation uploaded on our website. First, let me highlight on page four, the bank's first quarter 2019 profits for $21.2 million, or 54 cents per share, representing a 47% increase with respect to the year before, due to a 4% increase in revenue, a 31% reduction in appropriating expenses, and lower credit provisions. On a quarter-on-quarter basis, profits for the first quarter of 2019 were up by 2% on the absence of losses of non-financial instruments and on seasonally lower operating expenses, while net interest income remained relatively stable. These effects were partly offset by lower fees and decreased loan balances due to seasonally low first quarter activity and credit provisions for $0.9 million in the first quarter of 2019, compared to reversals in credit allowances for $1.3 million recorded in the fourth quarter of 2018. Quarterly profits continued on the positive trend from the previous quarter and represented the highest profit level in the last eight quarters. Our ROE and ROA were 8.6% and 1.3% respectively, and our efficiency ratio improved to below 31% from 36% in 4QQ 2018 and 47% in 1QQ 2018, while we maintained a solid Tier 1 Basel III capital ratio at 20%. Now I will refer to the evolution of net interest income and financial margin on pages 5 and 6. Net interest income for the first quarter of 2019 increased 5% year-on-year to $28 million, mainly driven by a six basis points increase in net interest margin to 1.74%, as the bank benefited from the net positive effect of higher interest rates. Given the bank's narrow interest rate gap structure, higher rates generally result in a net positive effect on the bank's net interest margin. Net interest spread, which excludes the effect of equity yield, decreased by 10 basis points year-on-year to 1.16% as a result of lower net lending spread due to better quality loan origination, evidenced by increased lending to financial institutions, sovereign and quasi-sovereign entities, and top-tier exporters with U.S. dollar generation capacity. Net interest income remained stable on a quarter-on-quarter basis due to similar average loan balances and decreased lower yielding average liquid assets, which were above historical levels at year-end of 2018 and returned to more normalized levels in this past quarter. This change in asset composition positively impacted yields on financial assets, while net lending spread, which experienced a turning point during the fourth quarter of 2018, continued on a positive trend during the first quarter of 2019. As a result of this combined effect, net interest margin was up by 13 basis points, and net interest spread also increased by eight basis points during the first quarter of 2019 with respect to the fourth quarter of 2018. Loan portfolio average balances reached $5.6 billion, stable year-on-year, but down 3 percent quarter-on-quarter at $2.7 billion in new loans. Origination during the quarter was $300 million short of quarterly loan maturity. Now, moving on to page seven, fees and commissions were $2.4 million for the quarter, a 23% reduction year-on-year and a 56% decrease from 4Q 2018. Lower fees were attributable to seasonally lower letters of credit activity and the absence of syndicated transactions during the first quarter of 2019. Nonetheless, the bank continues to see a good pipeline of transactions in both of these business lines. In the case of letters of credit, we are seeking opportunities in enhancing the bank's participation in the trade supply chain, targeting to increase the bank's intermediation in trade flows between Latin America and Asia, Europe, and North America, as well as intra-regionally. With respect to syndications, the PAC is looking to continue originating this transaction for clients looking to expand their cross-border operations in Latin America, cementing VLADIX as a relevant player in the syndications market in our region. Loan structuring fees from syndication activity on a 12-month rolling basis totaled $5 million, a similar amount recorded in last year, 2018. Due to the uneven nature and transaction base of this business, it's more accurate to evaluate its performance on an annual rather than on a quarterly basis. On pages 8 and 9, we present the composition of our commercial portfolio. Overall exposure to financial institutions, sovereigns and quasi-sovereigns, represented 66% of total commercial portfolio as of March 31st, 2019. Financial institutions alone represent the largest industry exposure with a 55% share at quarter end. The only other industry with a higher than 5% exposure is the integrated oil and gas sector, which accounted for 6% of total exposure as of March 31st, 2019. The bank participates in this sector mostly through sovereign and quasi-sovereign entities across the region. The remaining overall exposure is well diversified among several industry sectors. As Gabby mentioned, in our continued effort to balance risk and return and maintain a diversified portfolio, we saw a quarter-on-quarter decrease in our exposure to Brazil, which remains our largest country exposure at 18%, of which 85% is with banks, sovereigns, and quasi-sovereigns. The average remaining tenor of this country's portfolio is approximately 12 months, with 80% maturing in the next 12 months. We continue to closely monitor our exposure to Argentina and the potential impact from the upcoming presidential elections later this year. which we see as critical to the continuity of recently implemented economic reform and adherence to the IMF Accords. During the quarter, we experienced a quarter-on-quarter decrease in our exposure to Argentina to 9% and maintained a short-term approach with strategic state entities and top-tier international banks and exporting corporations. 69% of the portfolio in Argentina matures in the next 12 months, and the average standard of the portfolio is approximately 11 months. Our exposure in Mexico remains stable on nominal balances, accounting for 15% of the total portfolio, as we see good opportunities that fit into our risk-return framework. While we continue to follow the newly established government's approach to economic and trade policies, and the potential impact on the business of our customer base, our exposure is focused in strategic state enterprises and private sector exporting corporations with participation in North American trade flows. We have successfully increased our portfolio view quarter-on-quarter in markets that we want to expand, such as Colombia, Chile, and Panama, as well as several countries in the Central American and the Caribbean region while remaining cautious on Costa Rica as it starts to implement its long overdue and recently approved fiscal reform. Total commercial portfolio continued to be mostly short-term with an average remaining tenure of close to 10 months and with 77% maturing in the next 12 months. 56% of the bank's short-term commercial portfolio is trade-related. On page 10, we present the evolution of credit impaired loans, or MPLs, and of allowances for credit losses. As Gabrielle mentioned, our MPLs remained unchanged during the quarter at $65 million, representing 1.2% of loans with a reserve coverage of 1.6 times. During the quarter, the evolution of MPL restructuring performed under our most likely scenario, and led to an increase in individually allocated credit allowances categorized as Stage 3 under accounting standard IFRS 9, now representing 83% of NPL balances. While we have no new loans in our watch list categories categorized as Stage 2, we did increase our exposure and allowances under these Stage 2 categories, As a result of internal country reviews and outlooks, all of the exposure in this category remains current. Our Stage 1 exposure and its associated credit allowances decreased on the account of lower portfolio origination relative to maturity, characteristic of the first quarter of the year, and an improved composition of our commercial portfolio as highlighted earlier today. This Stage 1 exposure, which relates to the performing portfolio with credit conditions unchanged since origination, continued to be the most relevant with 91% of total exposure at quarter end. On page 11, quarterly operating expenses of $9.9 million showed a 31% decrease year-on-year mainly on the absence of non-recurrent restructuring charges and on variable compensation expenses incurred last year. Quarter on quarter, due to seasonal effects, operating expenses decreased by 20 percent. Overall expense base continues to see a declining trend, given the bank's focus on improving its efficiency. In fact, the bank's efficiency ratio for the first quarter of 2019 improved to 30.8% on lower expenses and higher revenues year-on-year, in spite of a quarter-on-quarter decline in revenues. Now, on page 12, I would like to summarize the key takeaways of the first quarter 2019 results. Quarterly profits for $21.2 million confirmed positive trend and constitute the highest level in the last eight quarters. Quarterly results were achieved through stable net-in-net interest income on higher financial margin, coupled with improved efficiency on lower expense base, despite seasonally lower fees and portfolio balances. Stable level of MPLs and of credit provision, solid capitalization at 20.1% Tier 1 Basel III ratio, with unchanged quarterly dividends at 38.5 cents per share, representing an attractive yield. I will now turn the call back to Gabriel to open the Q&A session. Thank you.