Bladex, Inc. Class E

Hello, everyone, and welcome to Vladex's fourth quarter 2019 conference call on this 14th day of February 2020. 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. Vladex has prepared a PowerPoint presentation to accompany their discussion. It is available through their webcast and on the bank's corporate website at www.vladex.com. Joining us today are Mr. Gabriel Tuchinski, Chief Executive Officer, and Ms. Anna Gracilla, the Mendez Chief Financial Officer. Their comments will be based on the earnings released, 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 Security 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 its results and financial condition. 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 the base press release and filings with the security 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 the call over to Mr. Tolchinsky for his presentation.

Thanks, Travis. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the fourth quarter and for full year 2019, I'd like to discuss some important developments that took place this year and their impact on our perception of risk and financial results. I will address the global macroeconomic context, economic and business environment in Latin America, and other specific developments affecting our portfolios. After Ana Graciela's review, I will also address my successor as CEO, reasons for my departure, details of the transition, and what you as shareholders should expect from Jorge Salas' administration of Gladex. During our last five-quarter 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 fourth quarter and all of 2019 results are another step in that direction. In 2019, the global economy experienced its weakest year of growth since the financial crisis, weighed down by tensions that have significantly slowed international trade. According to the IMF, global growth was only 2.9%, significantly below potential, which we estimate at 3.8%. The main drivers for the lackluster performance of the world economy were the trade war between the U.S. and China, negative trade flows that disrupted supply chains, and idiosyncratic risks in countries such as Italy and Turkey that, along with Brexit, affected European growth and, in particular, Germany. The U.S. economy grew by 2.3% in 2019. which did contribute to world growth, but had a limited impact. Trade and investment, which have positive ripple effects throughout the world economy, lagged. Nevertheless, the U.S. was a beacon of light in an otherwise grim world economic picture. Despite historically low unemployment and solid growth, the Fed lowered interest rates to counteract economic weakness elsewhere. With inflation under 2% and inflation expectations under control, the Fed lowered its benchmark federal funds rate three times during the year to a level of 1.75%. Under normal circumstances, the Fed's action would have been a headwind for the U.S. dollar, but in an overall low-growth environment with geopolitical flare-ups around the world, the U.S. dollar strengthened, always a negative development for commodity prices and foreign direct investments into emerging markets. Although forecasts by the IMF see world trade flows expanding by just 3% in 2020 and global economic growth of 3.3%, we believe that these modest estimates, like in 2019, may be revised downwards. Ongoing trade disputes social disturbances in key countries, and climate change were key factors identified as risks to their forecasts. Furthermore, growth expectations are anchored on diminishing trade tensions between the U.S. and China and the resumption of growth in trade flows. We question these expectations. particularly in light of the coronavirus outbreak and the impact it may have on both Chinese and global commerce. To summarize the global context, we see the potential for more noise on the trade front, despite the signing of the first phase of the Chinese-U.S. agreement. Global growth below potential, geopolitical risk coming from the Middle East, Asia, and Latin America and what we call idiosyncratic risks from countries such as Argentina, Italy, and Turkey. 2019 was a difficult year for Latin America. Economic growth came in at 0.1%, significantly below the 1% growth of 2018, and significantly below beginning of year expectations of 2.1%. Other than 2016, when Brazil experienced its sharpest recession in the last 70 years, 2019 was the slowest growth year for Latin America in a decade. Of the largest three economies of Latin America, which represent about 75% of the GDP of the region, Brazil was the only one that showed any signs of life, growing tepidly at 1.2%. Mexico had zero growth, a remarkable decoupling from a strong U.S. economy, and Argentina's GDP shrank by 3.3%. Trade flows for Latin America overall declined 2.1% and are only expected to recover by 1.6% in 2020. We see a similar picture with respect to 2020 economic growth expectations. After a difficult 2019, Estimates are just for 1.5% growth. Despite these modest expectations, we believe there are risks to downward revisions. We regard Brazil as the main potential driver for economic growth in the region. That said, Colombia and Peru should also perform well. But with commodity prices depressed because of trade uncertainties and a strong US dollar, Mexico stuck in low-growth or no-growth mode due to needed fiscal restraint, tight monetary policy to keep portfolio money flowing, and a fundamental lack of investment, the potential for social unrest in Chile, and in smaller countries like Costa Rica, which is mirrored in a fiscal red ink, or Ecuador struggling to comply with the IMF program, we simply do not see other countries as significant contributors to regional growth. Brazil is about 36% of the GDP of Latin America. So while we are cautiously optimistic about its capacity to implement an aggressive privatization program, pension and labor reform, along with other free market friendly measures, we're always watchful for political repercussions and their consequences. Our current expectations for economic growth are 2.4% for Brazil. We are looking to increase exposure there to the extent that we can identify growth in credit demand and can profitably lend to companies that meet our credit underwriting parameters. As mentioned in our last call, we continue to see medium-term risks in Mexico because of the prospect of political interference in state-owned entities that for the last 20 years were run independently and professionally. Although the current administration has shown a willingness to keep Mexico on the good side of the rating agencies, maintaining a small primary fiscal surplus, continued support for Pemex in restoring production, and a good relationship with the U.S., challenges remain even after the signing of the USMCA. Our base scenario remains that Mexico will not be downgraded to below investment rate until 2021. As such, we maintain a short-term profile of 10 months of Irish life in our Mexico portfolio. A portion of the Andar corridor stands out, with Peru and Colombia exhibiting good growth prospects. Although lower commodity prices will temper growth expectations, Improved macro stability and a regeneration of consumer demand should power the Peruvian and Colombian economies forward to the tune of 3.2 and 3% respectively for 2020. We are increasing exposure to these countries in our portfolio. In Chile, we expect very subdued growth of 1.3% in 2020, after the economy came to a halt in late 2019 because of social disruptions that call for a new constitution and a more equitable pension system. The Chilean economy is sound and should be able to withstand ongoing flare-ups of social disturbances while maintaining a solid credit profile. We will use these periods of uncertainty to maintain or increase our exposure at profitable levels. Most of Central America and the Caribbean continue to have solid economic growth prospects, despite lower commodity prices for their exports and subdued demand from the developed world. We are paying close attention to developments in Costa Rica, as fiscal reforms seem to be having little impact in improving the fiscal deficit. It may be too early to judge the effectiveness of the reforms But we wanted to see by now some improvement in fixed fiscal accounts from the higher and broader VAT, and what we got was nearly a 7% deficit in 2019. Therefore, we keep our exposure in Costa Rica to short terms with companies that have a significant presence in other countries in Latin America, what we call multi-Latina. We continue to pay close attention to Ecuador. its implementation or lack of the IMS program, and its capacity to raise the $9 billion it needs for 2020. So far, the country may be able to count with only $4 billion from multilateral organizations, while the capital markets may not be forthcoming given its inability to implement agreed-to reforms. The contractionary elements of the IMF prescriptions, such as elimination of fuel subsidies, have encountered strong opposition from political groups. Argentina is in suspended animation. The new government refuses to submit an economic plan until it has clarity on debt negotiations. Well, needless to say, foreign debt holders are reluctant to agree to a debt restructuring without an economic program that underpins the sustainability of future debt obligations. It is unclear what comes next. In the meantime, the Argentine Treasuries having trouble selling local debt, having declared the last two options deserted, raising the prospect of a further closing of the economy to prevent pesos that nobody seems to be willing to hold from being converted into dollars and leaving the country. As you'll hear from Ana Graciela, we have reduced our exposure to Argentina significantly and are very comfortable with what remains 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, adjusting our portfolio accordingly, and maintaining a vigilant credit underwriting posture. At 73% of our commercial portfolio, has less than one year of remaining life, Bladex is in a privileged position to dynamically adjust exposures. Our book of business is solid. We're adding new clients and identifying new prospects. We're increasing share of wallet with our existing client base, and we're structuring value-added transactions. Our focus on high-quality borrowers and percent U.S. dollar liquidity in key markets puts some pressure on the regeneration margins. That said, Bladex has been able to maintain a relatively stable margin level. In 2019, our syndicated and structured transactions tied to Latin American integration have had solid performances, with a strong finish in the fourth quarter, increasing our fee income. Deposits, particularly from our Class A shareholders, represent 52% of our funding sources. We appreciate the trust and commitment of the Region Central Bank and the impact that these deposits have in improving our cost of funds. That said, we continue to diversify our funding sources. We started a new Yankee CD program that will complement our short-term funding structure. On the cost side, expenses for the quarter continue to be under control and have been mostly impacted by the seasonal effects of the fourth quarter. As you'll hear from Ana Graciela, Our credit-impaired 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, about $25 a share. That is why our Board of Directors approved to maintain a 38.5 cents a share dividend. Against this backdrop, the management of Blalix, as well as its Board of Directors, is cautiously optimistic for 2020 and look for a continuation of the profitability path we embarked on in the last five quarters. With these initial comments, I will now turn the call over to our CFO, Ana Graciela, to provide you with more detail about our 2019 performance.

Good morning to everyone. Thank you, Gabriel. Let me first say that it has been an honor having accompanied you in driving the bank to the strong position it is today. under your stewardship, the bank has reinforced its business fundamentals on which to continue building and creating value. I will now go through the results for the fourth quarter and full year 2019 into more detail, making reference to the presentation uploaded on our website. First, on page four, let me highlight the bank's 2019 annual performance, recording a profit of $86 million, or $2.17 per share, on five consecutive quarters of sustained profitability. This results compared to an $11 million profit in 2018 when the bank recorded impairment losses on financial instruments and non-financial assets, totaling $67.5 million, mostly related to impaired credit. 2019 results were based on steady top-line revenues year-on-year as the bank was able to maintain nearly stable net lending margins with average commercial portfolio volumes slightly up while shifting its credit underwriting toward lower-risk countries. This is particularly quite an achievement in a context of virtually no economic growth and decreased trade activity across the Latin American region coupled with a declining interest rate environment during the second half of the year. During 2019, the bank improved its efficiency, reaching a cost-to-income ratio of 32% on the account of a 17% reduction in its operating expenses, evidencing its effective cost-control management and overall enhanced structural and operational efficiency. Also during 2019, the bank improved its risk profile, not only by reshifting its portfolio origination towards lower-risk countries, but also evidenced by the decrease in its watch list exposures and the fact that no new credits have been classified as NPL since the third quarter of 2018. As a result, credit provision charges recorded as impermanent loss on financial instruments, decreased substantially year-on-year to $430,000, compared to a $57.5 million charge in 2018. Now onto quarterly results. Profit for the fourth quarter of 2019 totaled $22 million, or 56 cents per share, representing a quarter-on-quarter increase of 8% and an annual increase of 7%. On page 5, net interest income, the bank's main revenue pool accounting for about 86% of total revenue, was stable year-on-year at $110 million for 2019. Net interest margin, which represents the net yield of productive assets, that is, net interest income to average interest-ending assets was 1.74% for 2019, an increase of three basis points year-on-year, positively impacted by the net effect of increasing LIBOR-based market rates during 2018, which remained high through the first half of 2019. Net interest rates, which reflect the difference in average rates between assets and liabilities, are indicative of the trend in net lending spread and remained nearly stable throughout the year, at 1.19% for 2019, down two basis points year-on-year, while average lending volumes decreased slightly by 2% year-on-year. For the fourth quarter of 2019, net interest income of $27 million was up by 1% quarter-on-quarter and down 4% year-on-year. The quarter-on-quarter increase relates to a 6% growth in average lending volume, offsetting a 12 basis points decrease in net interest margin to 1.65%, mostly related to lower lending spreads on increased origination in top-quality countries. The year-on-year quarterly net interest income decline is mostly attributable to a decline in lending spreads together with the net negative effect of decrease in market rate and an inverted yield curve during the second half of the year. These were partly compensated by a decrease in low yielding average liquidity and its proportion to total interest earning assets. Now moving on to page six, fees and commissions totaled $15.6 million in 2019, down 9% year-on-year due to a 12% decline in fees from the letters of credit business, partly compensated by a 14% increase in loan syndication fees as the bank successfully closed six structured transactions during 2019. During the fourth quarter of 2019, fees totaled $5.4 million, up 90% quarter-on-quarter, and stable year-on-year. The quarterly increase is related to two closed transactions in the structuring and syndication business in the fourth quarter, while fees from letters of credit have experienced a positive quarterly trend throughout 2019. From pages 7 through 9, we present the evolution and composition of our commercial portfolio, which includes loans and off-balance sheet exposures, such as letters of credit and guarantees. Our commercial portfolio totaled $6.5 billion at year-end 2019, up 5% quarter-on-quarter and up 3% year-on-year, as we experienced a pickup in credit demand and good risk-reward opportunities during the fourth quarter. Our commercial portfolio remained short-term in nature, with 73% maturing in the next 12 months, and an average remaining tenor of about 12 months, while trade exposures constituted 53% of our short-term origination. Financial institutions continue to be the largest industry exposure, representing 56% of the total. The remaining exposure is well diversified among several industry sectors throughout the region, none of which exceeded 7% at year-end. Throughout 2019, the bank improved the country risk profile of its portfolio, being able to reduce its exposure to Argentina by $385 million, down to 3% of the total portfolio at year-end 2019 from 10% the year before, after successfully collecting maturities as planned. At the same time, the bank increased exposure to top-rated countries such as Chile, representing 11% of the total portfolio, compared to 3% the year before, and to Colombia, up 4 points to 15% of total portfolio at December 31, 2019. The bank also increased exposures to non-LATAM top-rated countries in Europe and North America, which at year-end 2019 accounted for 7% of total portfolio. These exposures are related to transactions carried out in Latin America, mostly with multinationals operating in the region. Other country exposure annual variations, such as reductions in Brazil, Panama, Mexico, and Costa Rica, relate to the bank's continued focus on optimizing its risk-reward equations. On to page 10, credit-impaired loans, or MPLs, totaled $62 million at December 31, 2019, stable quarter-on-quarter and down $3 million from the previous year. The annual reduction is related to the sales and exposure back in the third quarter of 2019, which resulted in a half-a-million-dollar collection and a $2.5 million write-off against existing individually allocated reserves. As mentioned before, no loans have been classified as NPLs or credit impaired under the IFRS 9 Stage 3 category since September of 2018. NPLs represented 1% 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. IFRS 9 Stage 2 exposure experienced a net decrease of over $130 million during 2019, mostly due to repayments of scheduled maturities. This category incorporates exposures that have undergone some credit deterioration since their origination, some of which are related to internal country risk downgrade or to their incorporation in our watch list. All of the exposure in this category remains current. Origination in our Stage 1 portfolio, which relates to the performing portfolio with credit conditions unchanged since origination, increased by close to $350 million during 2019 and accounted for 95% of total exposure at year-end 2019. Stage 1 collective credit reserves decreased by $2 million during 2019, reflecting the improved country risk profile. On to page 11. operating expenses for the year 2019 decreased by 17% to $41 million, which led to an improved efficiency level of 32% compared to 38% in the previous year. The annual expense reduction was mostly related to a 14% decrease in personnel-related expenses mainly associated to a restructuring back in 2018. Reduction in other expenses partly relate to the adoption of new accounting standard IFRS 16 in 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 one-time charges recorded in 2018, as well as other cost savings across the organization, which reflect the bank's continued effort and focus on expense controls and process improvement. Fourth quarter 2019 expenses amounted to $11 million, down 9% year-on-year and up 26% quarter-on-quarter, the latter mostly related to higher employee-related expenses and other seasonally higher expenses related to year-end activities. Finally, on page 12, we present the positive trend in ROE reaching 8.7% for the fourth quarter and 8.6% for the year 2019 on a sustained solid capitalization of 19.8% at year-end 2019. Total shareholder return above 7% was supported by the 38.5 quarterly dividend payment announced today, representing a 69% payout ratio over quarterly earnings. I would now like to turn the call back to Gabriel. Thank you.