Banco Latinoamericano de Comercio Exterior, S.A.

Hello, everyone, and welcome to BloodX's third quarter 2019 conference call on this 18th day of October 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.bladex.com. Joining us today are Mr. Gabriel Cholchinski, Chief Executive Officer, and Mrs. Ana Graciela de Mendes, 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 make certain statements that are forward-looking, such as statements regarding BLODX's future results, plans, and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are BLODX's expectations for on the day of the initial broadcast of this conference call, and BLADx 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 some results expressed or implied in these communications. And with that, I am pleased to turn the call over to Mr. Chonchinsky for his presentation.

Thanks, Chantel. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the third quarter, I would like to discuss with you important developments that took place during the quarter and the impact of these recent developments on our perception of risk and financial results. I will address the global microeconomic context, the economic and business environment in Latin America, and relevant country and industry-specific developments affecting our portfolio. During our last four quarters conference calls, we mentioned that the credit quality of our portfolio, cost structure, and allowances for expected credit losses set the pace for our earnings generation capacity. Our third quarter 2019 results are another step in that direction. The global economy in 2019 is on course for its weakest year of growth since the financial crisis. weighed down by tensions that have significantly slowed international trade. Oral growth is now expected to fall 3% this year, according to new estimates from the International Monetary Fund, down from an estimated 3.2% in July. The IMF attributed this slowdown primarily to rising trade barriers that have impacted manufacturing and investment around the world. The IMF now forecasts that world trade volumes will expand by just 1.1% this year, less than half of the growth rate of a July estimate of 2.5%. For 2019, forecasts for U.S. economic growth were cut by 0.2% to 2.4%. Forecasts for the euro area were cut by 0.1% to 1.2%. And China's economic growth was lowered by 0.1% to 6.1% from their last July report. Shockingly, the IMF expects slower economic growth in 90% of the world. Given this macroeconomic context, we are once again downgraded our economic and trade growth expectations for Latin America for 2019. Today, we are expecting only a 0.2% economic growth for the region, down from 0.6% at the end of the second quarter. And trade is expected to grow only 1%, down from 2.6%. This type of growth prospect masks significant disparities in economic performance between countries. Large countries like Mexico and Argentina are experiencing uncertainties and lower foreign investment flows, a key driver of economic growth. On the other hand, countries like Colombia and Brazil are showing a pickup in consumer demand that is supporting their economies despite low commodity prices and weak international trade. In other words, slow or no growth from the developed world and the consequences of protectionist measures on trade and commodity prices are having an uneven impact on the region, with some countries better prepared to withstand the prevailing environment. Brazil, the region's largest economy, is a bright spot amongst the three largest countries, with growth expectations of 0.8%. Mexico is expected to grow only 0.3% and Argentina is in an outright crisis, its economy expected to shrink 2.9%. We will discuss Argentina in more depth later in the call. Although Brazil will grow significantly less than we expected at the beginning of the year, we are seeing some of the economic growth drivers stabilizing and starting to show some improvement. Both consumer demand and investment are showing signs of life. Both categories had sizable declines in 2015 and 2016 and had barely recovered since. With policies aimed at opening up the economy, such as an aggressive privatization program and the passage of pension reform, we are optimistic on Brazilian economic growth and business opportunities there. We see medium-term risks in Mexico resulting from the prospect of potential interference in state-owned entities that for the last 20 years were run independently and professionally. That said, we see three clear short-term priorities from the current administration that should keep Mexico on the relatively good side of the rating agencies. One is maintaining a small primary fiscal surplus. Two, continued support for Pemex in restoring production. And three, keeping a good relationship with the U.S. Our base scenario is that Mexico will not be downgraded to below investment grade until 2021. As such, we maintain a short-term profile of 10 months of average life in our Mexico portfolio. The Andean Corridor stands out with Chile, Peru, and Colombia, all exhibiting good growth prospects. Although growth expectations for both Chile and Peru have been downgraded because of lower commodity prices, expectations for economic growth in Colombia have improved on the basis of macro stability and a regeneration of consumer demand. We are increasing exposure to these countries in our portfolio. Most of Central America and the Caribbean continue to show solid economic growth prospects, although these have also been downgraded recently on the back of lower commodity prices for their exports. We continue to pay close attention to the economic performance of Ecuador and to the political ramifications of the implementation of its IMS program. The current Ecuadorian administration seems to want to follow through with this program But with basically zero economic growth, the contractionary elements of the IMF prescriptions, such as the elimination of fuel subsidies, are encountering strong opposition from political groups. Costa Rica is also in our closely monitoring category. In particular, we're following the impact of the fiscal reform package passed a few months ago. Costa Rica has a sizable fiscal deficit Fiscal reforms, mostly an increase in value-added tax, took many years and several iterations to be finally approved. These were aimed at reducing the primary fiscal deficit, which would then lower financing rates that exacerbate the overall fiscal imbalance. When the package was passed, we spoke about the rating agency's skepticism on the magnitude and potential effectiveness of the reforms. It's too early to tell, and we have a long way to overcome a larger than 6% of GDP deficit, but September was the first month of primary fiscal surplus in years. Argentina. What can I say? Have we seen this movie before? Disappointment over the primary election results, which gave the leftist populist candidate a significant lead going into the general election, resulted in a run on the currency and the reprofiling of some of the country's debt. Argentinians demanded U.S. dollars, preferably in physical notes, at a rate that was fast depleting the central bank's low available reserve levels. After some currency controls, interest rates north of 80%, and a few planes with physical cash from the U.S., the Argentine government managed to temporarily control the situation. But with a debt-to-GDP ratio approaching 90%, very few available reserves, and constant demand for hard currency, Argentina remains in critical condition. We will not make predictions on the outcome of next week's general election, or the economic policies that a Fernandez-Fernandez administration would pursue. What is clear to us is that the country will remain very reliant on the U.S. dollar income it can generate from its main export commodities. Whomever wins the election, they will likely maintain open trade and trade-related currency lines and continue to promote the development of oil and natural gas rich Vaca Muerta shale for the eventual export of hydrocarbons. As you'll hear from Ana Graciela, we have reduced our exposure to Argentina and are very comfortable with our book concentrated in strategic industries and U.S. dollar generators. We continue to believe that the current macroeconomic context offers no room for complacency. Furthermore, the combination of low growth and risk aversion is exacerbating liquidity for the top names in the region, compressing their margin, not always compensating for the risk these credits represent. Against this backdrop, we continue to analyze the risk-reward function at the country level to adjust the portfolio accordingly and maintain a very vigilant credit underwriting posture. As we mentioned in previous calls, 76 of our commercial portfolio has less than one year of remaining life. BLADIX is in a privileged position to dynamically adjust portfolio exposures. We see growth opportunities in Brazil, Central America and the Caribbean, Colombia, Peru, Paraguay, and Chile. This balances out reduction in exposure to Argentina. Bladex is all about consistency in a challenging and changing context. Our book of business is solid. 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 focus on high-quality borrower and persistent U.S. dollar liquidity in key markets puts some pressure on our origination margin, Bladex has been able to maintain relatively stable margins. Our pipeline of syndicated and structured transactions tied to Latin American integration is also solid and should help us continue to increase the exposure we look for in our medium-term loan portfolio, as well as increase our fee income. Deposits, particularly from our Class A shareholders, represent 62% of our funding structure. We appreciate the trust and commitment of the region's central bank and the impact that these deposits have in improving our cost of funds. On the cost side, expenses for the quarter continue to be under control. As you'll hear from Ana Graciela, our credit and payroll loans experienced a slight decrease from last quarter as well as a reduction in our watch list category. Our credit reserve coverage and Tier 1 capital ratio remains 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 for the quarter. Against this backdrop, the management of VLADIX, as well as its Board of Directors, is cautiously optimistic for the reminder of 2019 and look for a continuation of the profitability path we embarked on in the last four quarters. With these 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 the third quarter of 2019.

Thank you, Gabriel. Good morning. I will now go over the third quarter and year-to-date 2019 results into more detail, making reference to the presentation uploaded on our website. So on page four, profit for the third quarter of 2019 totaled $20.4 million, or 52 cents per share, compared to a $40.7 million loss in the third quarter of 2018, when the bank recorded impairment losses on financial and non-financial instruments, totaling $60 million, mostly related to impaired credit. Third quarter 2019 profits were down 8% on a quarter-on-quarter basis on account of decreased structuring and syndication fees and lower net interest income. Profits for the first nine months of 2019 totaled $64 million, compared to a $9.6 million loss a year ago. During the first nine months of 2019, the bank has maintained a relatively stable level of top-line revenues, which increased by 2% with respect to the same period of 2018, improved efficiency with a 20% reduction in operating expenses, achieving a 31% efficiency ratio and sustained high-quality portfolio origination, evidenced by a substantial decrease of credit provisions, which totaled $2.4 million for the period. On page five, net interest income for the third quarter of 2019 was down 2% year-on-year and 5% quarter-on-quarter. On lower average loan portfolio balances, which decreased by 3% quarter-on-quarter and by 5% year-on-year to $5.3 billion. Lower average portfolio balances during the quarter reflect reduced exposure in Argentina, coupled with lower credit demands from certain countries in the Central America and Caribbean regions, partly offset by increased high-quality loan origination in countries like Chile and Colombia toward the end of the quarter. The quarter-on-quarter decrease in net interest income was also impacted by a four basis points decrease in net interest margin to 1.77%, mostly related to the effect of decreasing liable base market rates on the bank's asset and liability interest rate gap position. For the first nine months of 2019, the bank's net interest income increased by 1% year-on-year, to $82.6 million, and the net interest margin increased by three basis points to 1.77%, mostly reflecting the benefits from an increase in market rate environment throughout most of the period compared to the year before. Now moving on to page six. Fees and commissions totaled $2.8 million for the third quarter of 2019, representing a decrease of 24% year-on-year and of 45% quarter-on-quarter, mainly on account of lower fees from closed transactions in the structuring and syndication business. Year-to-date, fees from the business remain stable at close to $3 million, while total fees fell 13% to $10.3 million due to reduced revenues from letters of credit. From pages 7 through 9, we present the evolution and composition of our commercial portfolio. At September 30, 2019, commercial portfolio totaled $6.2 billion, representing a stable level quarter-on-quarter and a 1% decrease year-on-year. Total commercial portfolio continued to be mostly short-term, with 76% maturing in the next 12 months, and an average remaining tenure of close to 11 months. More than half of the bank's short-term commercial portfolio is specifically trade-related. Financial institutions, sovereigns, and quasi-sovereigns represented 71% of total commercial portfolio as of September 30, 2019. Aside from financial institutions, the largest industry exposure, accounting for 55% of the total, The other relevant industry sector in our portfolio is oil and gas, both integrated and downstream, with a combined total of 12% of total commercial portfolio. The remaining exposure is well diversified among several industries, with no sector exceeding 5%. Brazil, Mexico, Colombia, and Chile represented the highest country exposures together totaling 55% of total commercial portfolio. While Brazil and Mexico remained relatively stable at 17% and 14% respectively, we were able to increase our portfolio in Colombia to 13% and Chile to 11% on our continuous effort to optimize risk-reward opportunities in high-quality countries. Exposure in Argentina was reduced to 4% of the total portfolio as we continue to execute on our plan to reduce the exposure in the country in view of the macroeconomic, political, and foreign exchange rate volatility. 84% of our exposure in the country is with exporting state-owned and private corporations with U.S. dollar generation capacity. The remaining 16% is with banks. Central America and the Caribbean remain a relevant regional exposure to the bank at 26% of the total, mostly focused in top-tier banks, sovereigns, and quasi-sovereigns, accounting for 65% of the exposure in that region. The remaining 35% is with top-tier private local corporations, which are leaders in their respective industries, and with regional players or multilatinas. On page 10, credit-impaired loans, or MPLs, totaled $61.8 million, down $2.9 million from the previous quarter, related to the sale of an exposure that was 100% reserved. In this transaction, the bank collected $0.5 million, and the remaining $2.4 million were written off against existing reserves. At September 30, 2019, MPLs represented 1.11% of total loans with a reserve coverage of 1.7 times and accounted for a single client exposure in Brazil with an IFRS 9 Stage 3 individually allocated allowance of 88%, reflecting a book value of around $8 million. Stage 2 exposure decreased by $55 million during the quarter, mostly due to repayments of scheduled maturities on our watch list portfolio. Credit reserves allocated to this Stage 2 exposure increased by $3 million, impacted by downgrades on internal client ratings. All of the exposure in this category remains current. Origination in our Stage 1 portfolio increased by $66 million, while the related credit reserves decreased by $2 million, reflecting improved quality on the increased portfolio origination in countries like Chile and Colombia. This Stage 1 exposure, which relates to the performing portfolio with credit conditions unchanged since origination, continued to be the most relevant, with 95 percent of total exposure at quarter end. On Page 11, Third quarter 2019 expenses amounted to $9 million, representing a decrease of 17% year-on-year and of 15% quarter-on-quarter. During this third quarter, we recorded an expense level somewhat below the wrong rate of expenses recorded in recent quarters, which should partially revert in coming quarters. Nonetheless, the Bank's sustained effort and focus on expense control and process improvement has been affected, evidenced by the decrease in trending expenses and efficiency levels below 31%, both on a quarterly and on a year-to-date basis. For the first nine months of 2019, expenses were down 20% from the year before, totaling $29.4 million. This reduction mostly relates to lower salary base and other employee-related expenses resulting from the personnel restructuring process in the first half of 2018. Reductions in other expenses partly relate to the adoption of IFRS 16 during 2019, whereby the bank's office space lease expenses are now accounted for as depreciation and interest expense. Other expenses were also reduced on the absence of extraordinary charges recorded in 2018 as well as other cost savings across the organization. On page 12, we present our capital returns with a positive trend in ROE, reaching 8% for the quarter and 8.5% year-to-date on a sustained level of capitalization above 21% at quarter end. Total shareholder return was supported, like Gabby mentioned, by the quarterly dividend payment announced today, which the Board kept at 38.5 cents per share, representing a 75% payout ratio over quarterly earnings. I will now turn the call back to Gabriel to open the Q&A session. Thank you.

Thank you, Ana Graciela. Chantal, why don't we open up the Q&A session? Thank you.

Thank you very much. Ladies and gentlemen, at this time, we would like to open the floor for questions. If you would like to ask a question, please press star 1 on your telephone keypad now. Again, that is star 1 on your telephone keypad to ask a question. We'll pause for just a moment while we wait for questions to queue. Thank you. Once again, as a quick reminder, you can press star 1 on your touch-tone phone to ask a question. Our first question will come from Robert Taint, Global Rational Capital.

Hi, Gabrielle and Anna. Thank you very much. I was just wondering if you could... Just elaborate on what factors you think may lead to an improvement in the net interest rate over time.

Yes. Thank you, Robert, for the question. What we see from, and I'm going to go approach this from a top-down perspective, is a very challenging global and regional environment in which we have to be very diligent and careful with respect to our credit underwriting. And we are in a happy position to be able to maintain our credit spreads where they are. We are looking for value-added transactions with key customers, and that is essentially what should be able to make us sustain those credit spreads on a go-forward basis. We are identifying some opportunities as we mentioned in the Andean region, in Chile, in Colombia, in Peru. And I think that we are about to see more opportunities, particularly in Brazil. It's very difficult as of yet to determine the potential there, but we see very good signs starting with the fact that they are opening up their economy with an aggressive privatization program. And very importantly, as it relates to the impact on overall credit demand, is the fact that this administration is not keen on maintaining the subsidy that previous administrations had with respect to the involvement of national development banks in lending to industry as a whole. So as we see the privatization program progressing, we should see credit demand go up, and if the private sector is the one that needs to fulfill this credit demand, that should be a good sign in terms of margin improvements, particularly given that short-term rates in Brazil have come down to very low historical levels. The SELIC rate right now is about 5.5%. And we believe that that should stimulate credit demand growth, and we could see a pickup in margins as the private sector banks start fulfilling that demand for credit. Right.

Thank you very much. And just noting that your Tier 1 presentation Basel III capital ratio is quite high at 21%. Do you see the opportunity to make use of more leverage over time? You mentioned that you're optimistic for business over the remainder of 2019. Do you think that a return on equity of closer to 10% is achievable in the next 12 months in light of your optimism?

12% continues to be our goal on a long-term basis, but we will grow exposure, portfolio, leverage on what we consider to be a prudent and solid credit underwriting strategy. And as such, we will approach it opportunity by opportunity, and as you well know, we don't give projections on how our different ratios will evolve over time, but we are very happy with our portfolio. We're very happy with our capacity to maintain relatively stable margins, and we continue to find good opportunities to deploy our capital. If it's okay, we should open it up for more questions if there are any.

Thank you very much. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad now. Again, that is star 1 to ask a question. Thank you. Our next question will come from Robert Maltney, Singular Research.

Hello, Gabriel. I'm here for Jim Marrone today. Wanted to ask a little bit about the impact of the rate cuts in the U.S. on the short-term Fed funds, et cetera, and the trends there, and how you see that impacting your forward margins.

Thank you, Robert. That is a very good question. And let me start with saying that, of course, lower US dollar interest rates will have an impact on our margins. That said, we believe that we will be able to maintain our margins with incremental origination exposure on a go-forward basis and be able to counteract that. Now, for a more granular perspective, let me turn it over to Ana Graciela to answer.

Thank you, Gabriel. Hi, Robert. Yes, as we have mentioned before, with respect to our interest rate gap position, Like I mentioned, in this particular quarter, we were negatively impacted because of the decreasing rate environment, but that should correct because we are usually able to – I mean, we have a very short-term book both in our asset and liability side. So with respect to the repricing, we don't see a continuous – deterioration there. On the contrary, we should benefit from also lowering rates on our funding side, which eventually what happened in this particular quarter is that because of the way we were positioned, our lending book repriced a little quicker, but that should correct itself in the coming quarter. With that perspective, in the overall, even in increasing or decreasing rate environment, the bank is able to reprice its assets and liabilities within a short period of time. And yes, I mean, the lower rates at the end of the day with the high capital balance that we have obviously has an impact on the return of that capital invested in our assets.

Oh, thank you. A follow-up question on operating expenses. It looks like you've done a very good job reducing your operating expenses. And I'm wondering in terms of that trend over the next 12 months, do you see that ability to continue or remain about even or just a little bit of color on that?

Well, like Abby mentioned, we don't necessarily give, you know, prospects of our figures going forward. What I can tell you is we are seeing the average trend in the recent quarters at about $10.2, $10.5 million, and that is what we call today the run rate of expenses, understanding that during the fourth quarter we may see some cyclical impacts on expenses. But if you see the year overall, we should be around $10.5 million in quarterly expenses on average.

Thank you.

Thank you very much. Once again, as a quick reminder, if you would like to ask a question, please press star 1 on your telephone keypad now. Again, that is star 1 to ask a question. Thank you. At this time, we have no further questions in the queue, so I would like to turn the conference Back over to management for any final remarks.

Thank you very much, Chantal, and thank you, everyone, for joining us today. We look forward to talking to you guys again when we issue results for the fourth quarter and the full year 2019. In the meantime, for any questions, we always remain open and available. Thank you very much, and have a good day.

Thank you very much, ladies and gentlemen. At this time, this now concludes today's conference. You may disconnect your phone lines and have a great rest of the week. Thank you.