Banco Latinoamericano de Comercio Exterior, S.A.

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.

Thank you, Ani. It's been a true pleasure and privilege to have worked with you and the rest of the team. Thanks. After five years of working at Bladix, from consultant to chief operating officer, and finally for the last two years as CEO, I will be leaving the bank so I can be closer to my family in New York. This was a consensual decision with the board of directors that gave us ample time to find the right candidate for the CEO position and to ensure a smooth transition. When I took the chief operating officer job almost three years ago, my wife and I were becoming empty nesters as our youngest child was leaving for college. The plan was that both of us would move to Panama, but unfortunately and for family reasons, That couldn't happen, and we have had to live apart for the last three years. I thought becoming Blacks' CEO would be a job that would last a lifetime. I have loved every day working at the helm. When I took over two years ago, there were significant challenges that I needed to take on. I had with me an A-plus team, and together we accomplished so much. In the last two years, we took the bank from one of the most difficult credit cycles in Latin America to solid and sustainable earnings, tightened our credit underwriting standards to withstand challenging macroeconomic and industry environments, designed and implemented an active portfolio management structure to optimize our exposure along the efficient frontier, worked with our stakeholders with transparency and clarity as to what we were doing and why we were doing it. Governance structure, everything from board and management committees to key management roles, data and compliance. Strengthen our operating model, reviewed our processes and procedures and control structure. Road off obsolete operational and technology assets and instill the culture of risk management and control. I am pleased to say today that Bladix's balance sheet is pristine. The bank has been able to return to ROEs between 8.5% and 9% despite a very challenging environment. Over the past two years, macroeconomic risks, slow regional economic growth, tepid trade flows, and idiosyncratic country and industry risks have been the norm. And all those risks were coupled with overwhelming liquidity chasing the same credit-worthy client. If Pladex can deliver 8.6% ROE with these headwinds, we should be very well positioned to deliver more sizable returns in more benign environments that will surely come. We are keenly aware of the risks in the region and the industries we finance, and with confidence I can say that our team knows how to spot opportunities and deliver results. I've been working on transitioning Jorge Salas for a few weeks and strongly believe that Blydex is fortunate to have him. He is a highly qualified professional who has been working in the financial sector for over 20 years in different countries and with diverse mandates, including CEO for the past 10 years. Jorge recognizes that he's getting a well-functioning bank with a strong presence and reputation in our region, and he's cognizant of Bladix's need for continuity. I look forward to following Bladix under his leadership. Finally, I want to thank our board of directors and our shareholders for the trust you instilled in me these years, and I'm very grateful to the team and employees of Bladix. I now open the call for the Q&A session.

If you would like to ask a question, please press the star key followed by the 1 key on your touchstone phone now. Questions will be taken in order in which they are received. If at any time you would like to remove yourself from the queue, you can press star 2. Again, to ask a question, please press star 1 now. Our first question comes from Yuri Fernandez, JP Morgan.

Thank you, gentlemen. First of all, I'd like to wish best luck to Gab and also to Jorge Salas, the new CEO, so all the best luck. My first question, I guess, is more to Ana Graciela. Regarding the asset quality, it was very good this quarter, but if she can provide more color on the Brazilian exposure, I think it's a sugar industry-related issue. If you believe this may continue on the stage three or this may evolve, how this loan is evolving, given it's a big exposure. And I have a second one to Gary regarding, I know he's leaving, but what's his expectations for growth for 2022? Essentially, he's optimistic, Brazil is doing better. But we also have China now, and I don't know, like, if you can provide any color on long growth for 2020, like, what is Black's expectation for this year? Thank you.

Thank you, Yuri. Thanks for your question. Yeah, first on the NPL exposure in Brazil, that exposure hasn't changed since we recorded it as NPL back in September of 2018. And back then, we also allocated a large amount of individually allocated reserves to that particular exposure, which now accounts for 88%. So even though in terms of nominal values, the exposure is $62 million, and yes, it's related to the sugar exposure. Our book value, when you take into account the allocated reserve, it's close to $8 million. So that particular exposure, it's undergone a long period of restructuring, which is still in process. And we do expect that during this year, 2020, the restructuring process should finalize, and then we would be able to you know, record in our books the end result of that restructuring. But I would like to stress that the book value of the exposure is about $8 million, and we definitely think it's adequate at this point in time and under the restructuring that we are undergoing.

Sorry, Gary, just a follow-up to finalize Ana Graciela's point. Do you think this should be a reversal at this point, like it's more likely to be a reversal, or maybe you'll need more provisions here? Or hard to say.

No. Accounting-wise, there's very strict methodology, and what we record in our books is precisely the value that we see in terms of recovery of that credit. And if that changes, well, we will take the necessary provisions or reversals as they may happen. But As of today, that is the value of the recovery that we are foreseeing. Good.

Thank you. Well, first of all, Yuri, thank you for your well wishes and question. Let me just add a tiny bit to what Ana Graciela was saying. At this point in time, beyond the exposure that Ana Graciela was mentioning, we don't have any sugar exposure to Brazil. The remaining sugar exposure that we have, which totals about 150 million, is in countries let's say, very little or no exposure to international markets, that it's exposure of a different dynamic than the one in Brazil, which is completely exposed to the sugar price fluctuation. So that's just to add a little bit more color on that particular exposure. Beyond that,

um i um i if you can repeat your question because um your line was not very clear and and i just want to make sure that i address it correctly no it's just how you're seeing long growth and how you think it was a good acceleration quarter over quarter and now if you're seeing i don't know like more a better dynamics for 2020 or if china noise maybe maybe a headwind, like how are we seeing your potential for growth for 2020?

Well, we usually discuss objective parameters that kind of underpin the growth of our business. And we don't give specific guidance on a, you know, for our performance. But we will say that we have been able to navigate a very challenging low-growth environment now for the past two years. And we believe that we have, again, very good penetration with our existing client base. have been able to source new clients and gain larger share of wallet with our existing client base. So we are, as I said, cautiously optimistic. The bank historically has grown some multiple of overall trade flows in the region being focused on trade finance. But as I said, we don't give specific guidance. as to the growth in our balance sheet.

Super clear, Gab. Thank you, and thank you, Gabriel, for the next three years, the last three years in this show and the partnership.

Thank you.

Thank you, Yuri.

Our next question comes from Jim Marone, Singler Research.

Yes, thank you for taking my question. And first of all, I just want to wish Gabriel well. It sounds like you did a very fine job over the past few years, and I wish you continued health and happiness going forward. My question is in regards to... Thank you so much. Yeah, you're welcome. My question is in regards to basically the interest environment and maybe interest expectations going for 2020. Okay. I believe in the last conference call, you mentioned, I believe Anna mentioned that the low interest environment actually negatively impacted results. And it doesn't seem like interest rates are going to be going up. In fact, they're going to continue to stay low in regards to coronavirus exposure and global trade. However, I believe you mentioned that the results were going to be reversed. And I was just hoping you'd comment on that, if that expectation still exists, and if there was a reversal, when you would anticipate that reversal to happen.

Okay, I'll take that, Jim. Thank you. Yes, as you know, our interest rate gap profile is very short in tenor. Both our assets and liabilities reprise in a very short tenor. Having said that, our liabilities, because of the deposit base that is 60% of total liabilities, are very, very short tenor, usually also reprise a little quicker. So when the interest rates are going down, depending on the position that we have in our assets and liabilities, we may have a short period of repricing that may be favorable or not. In this last particular case, since the interest rate decline was also accompanied with an inverted yield curve, that ended up causing a negative impact in the last couple of quarters. But that is very temporary, so you should see now going forward, and we have already started to see a reversal in that trend, and basically the repricing almost on between assets and liabilities, and at the end of the day that the net effect is pretty much neutral going forward. On the other hand, due to the fact that we have over a billion dollar in equity, which somehow provide financing for interest-earning assets or a portion of. As rates go down, our meme gets pressured also because of the lower yield in the assets in general. What we see going forward is with stable rates, we also see that for now, for the time being, the rates seem to drop. that are gonna be remaining stable throughout 2020. And so, business as usual for us in terms of maintaining our net interest spread more driven on the credit spread that we are able to get from lending in the region basically.

In terms of net interest spread for 2020, are we anticipating any to stay the same or any uptick? I believe in the last quarter it was 1.8 and the quarter before that was 1.9. Are we anticipating to see the same type of spread going forward for 2020?

Like Ariel said, we don't provide for, SMS going forward, but you can see the trend having to do with our incredible shift in country rates profile. That speaks for itself. In terms of loan portfolio, the stress went down in the fourth quarter of 2018 from 197 to 192 in this past quarter. in you know that the the change was not uh was not uh dramatically high so we actually are seeing pretty stable uh trends and um perhaps just as a follow-up question um the profitability so it was a nice year-over-year

in 2018. Can you just provide a little bit of color in regards to why those impairments occurred in 2018 and what we can expect in 2020? I know it's very hard to estimate impairment losses, but if you could just provide a little bit of color in that regard, that would be great.

Thank you, Jim. I will take that question. I think that what we can say is that we've done a significant shift in the composition of our asset base to lower risk exposure. That is reflected if you see, for example, our overall Stage 2 has been declining. Our Stage 3 exposure has been completely stable. And those are the trends that we've seen throughout 2019, and those are the trends that we intend to keep on a go-forward basis. So, yes, there were some changes. individually allocated reserves that needed to be allocated to problem credits in 2018. That was done. the bank right now is in a very good position from a risk profile to continue with the path it embarked on for the past five quarters. And the exposure in the portfolio and the exposure in the watch list categories show that. So, I'm not sure if that answers your question, but stability is part of what we expect. And primarily, we think that that is the right approach to what we believe is a challenging macroeconomic context. and that is how the bank is planning to confront these environments. Now, obviously, these environments don't last forever, and our expectation is that our returns can get better, maybe even significantly better, if instead of having headwinds, we start having a little tailwinds and see a more certain growth picture from Latin America and trade flows overall. liquidity that seems to be sloshing around, chasing the same name, gets better distributed throughout the economy and margins start reflecting that overall increase in credit demand that really we have not seen in the last two years.

Great. That provides a lot more clarity. Thank you. You're welcome.

Our next question comes from Robert Tate, Global Rational Capital.

Good day, Gabrielle and Anna. Gabrielle, thank you very much for being the CEO and for providing a good performance over the period that you've been CEO as well as providing useful information in the presentation on a quarterly basis. Thank you. Thank you, Robert. I just have two questions. The first question is related to the credit risk in the portfolio, and the second question is related to the sources of funding. So just on the first question in the portfolio, the credit risk, which I think has been talked about quite a bit already, but just the previous CEO – Mr. Amaro, he resigned, I think, in the second quarter of 2018, and then a quarter later, there was the massive write-off of that sugar loan, which caused quite a substantial drop in shareholder value. I'm pretty sure that was just a coincidence, and I wouldn't expect that to happen again. But nevertheless, I just want to ask some questions on the credit risk in the portfolio, specifically relating to the watch list. and stage two credit loans. I was just wondering if you could just, you or Anna, expand on the nature of the loans in the watch list and in stage two, sort of what industries they are, what countries, and whether you're seeing any increased risk there or not. I know that the stage two loans have come down. But if you could just give us a bit more color on that, that would be great. Thank you.

Sure. Thank you, Robert. Let me just say that in our watch list category, our single largest exposure is $10.5 million. So that should give you a sense of the risk. As you've seen, it's a category that has been constantly shrinking. Yes.

Yes, and the total has – so in the Stage 2 category, we may have exposures that on an individual basis have not – we have not seen a deterioration in their indicators that we follow. But they are in countries which the bank has decided to downgrade because of credit and risks that have increased. And so the exposures that are originated in these countries are automatically put on our Stage 2 category, and those are not part of our watch list. But part of the reduction we have seen in that category relates to the maturity of exposures in Argentina and Costa Rica, for example, that underwent credit downgrade, internal downgrade, country risk downgrade. And so that exposure has been maturing, and we have been collecting it. And then the other part of the Stage 2 exposure relates to this watch list category, which has also decreased significantly, and that accounts for, like Gabriel mentioned, the highest is $10 million, and really the total is less than even $25 million as of December 31st. So it has been decreasing significantly also. And these are exposures that we do assess individually. And because of the trends that we see, not necessarily, and actually they have not failed in the repayment schedule that they have with us. But we see in the individual analysis that there is some deterioration in their indicators. And so our credit risk area puts them in a watch list and pretty much on runoff mode. And so that has also decreased significantly over this past year.

Thank you, Annie. And just as a point of comparison, 2018, the watch list category was about $53 million. So that is also an indication of the overall improved quality of our portfolio. What was your second question, Robert, please?

Yes, so the second question is just on the financing. Thank you, by the way, for the first question. So you mentioned that you continue to diversify your funding sources beyond your typical central bank deposits, and the central bank deposits obviously make up the bulk of your funding at a really good interest rate. But do you foresee any difficulties in obtaining access to the central bank deposits going forward? And do you foresee any pressure on the net interest spreads as a result of increases in the cost of interest-bearing liabilities?

No, Robert. We actually are very confident, and we do analysis on the historical trends of central bank deposits, and they are – characterized for their stability over time, even though they're very short-term and cost-effective for the bank. So we do not foresee that line of funding source being reduced. On the contrary, they also represent our Class A shareholders, and there is a historical relationship there. But the bank is also on a continuous search to diversify in our funding sources. And that's why, as Gabrielle mentioned, we launched a new program, a Yankee TV program that, you know, we see actually as an alternative low-cost funding source that, you know, we expect to start to build up.

Okay, thank you. Diversifying our funding sources. We have here with us Eduardo Ribone, who's our treasurer and head of the portfolio management area. So he can provide you with more specific color about our funding sources.

Yes, I mean... In a few words, the bank is always committed to diversify its funding base. We are active in many economic capital markets. Last year we issued in Japan, we issued in Mexico. We also participated in that. We also issued significant loans to comprise Asian and European investors. And we also work with a very wide range of multinational institutions from different continents and also depositors from different continents that complement that the deposit base of the central bank provides. So, I mean, when we say we are looking for diversification, we look for diversification for the complementary funding base to the deposit that the central bank provides, because that allows us to always keep an efficient and very competitive funding cost.

Thank you.

Okay. Thank you. Thank you very much. Yeah. Do you have time for just one more question?

Sure.

Okay, thank you. Just back onto the portfolio, the exposure to financial institutions has grown in the last three years from 39% in 2016 to 56% in 2019. I was just wondering, what's caused this trend? Why are you so confident in financial institutions? And in which industries do you see the most risk?

Thank you, Robert. Let me just give you a little bit of an historical perspective. Vladek started as a bank of banks, and the reason for Vladek's founding was to be a conduit between the local financial sector and the international capital market. For us financial institutions, It's a core market segment that's a client base that we know and understand very well. We finance underlying trade transactions that these local banks do in their respective countries. So for us, this is a very known exposure and exposure that we understand and like quite a bit. We have a significant amount of financial institution clients throughout the region with a deep and longstanding relationship with them. So from our perspective, this is exposure we like. and we understand. it's very much part and parcel of the core of Gladys' business. So it may fluctuate when we see opportunities in the corporate sector down to 39% or 40%. It may go up to exposure in the 60s as we see less opportunity in the corporate sector and more opportunity in the financial sector. But We're very, very comfortable with that exposure. And as far as industry risk category, we really have done a significant amount of de-risking from industry categories that we consider not safe, like the sugar industry in Brazil. So what you're seeing right now is a portfolio that we believe meets our risk-reward parameters and that reflects the risk appetite of every single industry sector. Obviously right now with sugar prices closer to 15 cents a pound, the Brazilian sugar industry becomes a bit more viable, but we know that these things are highly volatile. We have countries like India and Thailand that overproduce, and the price of sugar can go down to the single digits again. So we decided as part of our tightening of our credit underwriting parameters that we will not take what we call naked commodity exposure, which was never used. as such, simply that we didn't follow the prevailing wisdom of the rule of thumb for lending to the commodity industry, which is you lend to the top quartile of efficiency, and you think that that's going to protect you from the fluctuations of the underlying commodity prices. as we've been able to see with the price of sugar, it can trade significantly below the marginal cost of production, even for the most efficient producing country in the world, which is Brazil. So what we look for when we lend to the commodity industry are more risk mitigations like vertical integration, control over margins, control over end markets where our companies sell. So those are the type of credit underwriting standards that we follow right now and, as such, are very comfortable with the resulting exposure.

Okay, excellent. Thank you. That was very useful, Gabriel. Thank you so much, Gabriel and Anna, and good luck, Gabriel, on your next venture. Thank you. Thank you.

Thank you, Robert. There are no further questions in the queue at this time.

Thank you, Travis, and thanks, everyone, for participating in the call. I want to wish everybody a continued success, and we really want to thank you for your support of Bladix and for being shareholders and interested parties. And that is all I have to say. Thank you. Annie? Thank you. Thank you. Thanks, everybody. Bye-bye.

Thank you, ladies and gentlemen. This concludes the day for the conference. You may now disconnect. Thanks.