Bladex, Inc. Class E

Hello, everyone, and welcome to Blodex's second quarter 2020 conference call. On the 28th day of July 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. Blodex has prepared a PowerPoint presentation to accompany their discussion today. It is available through the webcast and on the bank's corporate website at www.blodex.com. Joining us today... is Mr. Jorge Salas, Chief Executive Officer, and Ms. Ana Graciela D. Mendez, Chief Financial Officer. These 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 and the Section 21E of the Security Act. Exchange Act of 1934. 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 market 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 bank's press release and filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize, or should any of the underlining assumptions prove incorrect, actual results may differ significantly from the results expressed or implied in these communications. And with that, I am pleased to turn the call over to Mr. Salas. Please go ahead.

Thank you, Carrie. And good morning, everyone joining us today to discuss our second quarter results. Today, I'm joined by Ana Graciela Mendez, our CFO, and a few members of the team. This morning, I will be talking about our balance sheet management during the quarter then Annie will discuss the P&L implications of it. After Annie's remarks, I will make some closing comments and then I will open it up for questions. Before we dive into the balance sheet, I want to update you on our business continuity plan. The fact is that close to 95% of our staff is still working from home and our BCP remains in place. We continue to serve our customers without any interruptions while keeping our employees safe and very engaged. I'd like to start my comments today by referring to the main message we conveyed a little over three months ago in our last call when discussing our first quarter results. As some of you may recall back in April, we emphasized that beyond the bank's historically solid capital levels, our business model allowed for the unique ability, and I want to stress the unique ability to rapidly adapt to change in marketing conditions. I'm going to take it a step further now and argue that our business model becomes a comparative advantage that is especially relevant in the current context. Let me elaborate a little bit more on this. We all know that caring exclusively to corporate clients significantly reduces the credit risk in the portfolio. Approximately half of our portfolio is comprised of financial institutions, and the other half are basically top-tier corporations in the region. Glavix has zero exposure to the retail or small and medium business segments, which have been impacted the most by the crisis. Unlike most banks operating in the region, our loan portfolio is essentially short-term. The short-term nature of our portfolio not only becomes an effective liquidity buffer, but also when combined with the regional footprint, allows the bank to swiftly relocate the portfolio in resilient sectors and lower-risk countries across Latin America. As we anticipated in our previous earnings calls, and as you will see now, successfully handling the different levers embedded in our business model has proven to be incredibly valuable in managing our balance sheet during the second quarter. As you can see in slide three, we started the quarter with roughly $5.8 billion in commercial portfolio, including almost half a billion dollars In contingencies, essentially trade letters of credit. The average yield in our portfolio back three months ago was 194. In slide four, you can see that we have almost $2 billion maturing during the quarter. I'm happy to report today that we were able to collect over 99% of all scheduled maturities for $2 billion and even had some free payments of approximately $222 million. We only had roughly $20 million in loans that were successfully restructured during the quarter and are now current. This, we believe, is a clear demonstration of the sound credit quality of our loan portfolio. As you may see in slide five, we disbursed over a billion dollars during the quarter at wider spreads, averaging LIBOR plus 365 basis points. This billion dollars in disbursements were done after contacting every single client reassessing the industry risk under COVID-19 for the entire portfolio and tightening our underwriting standards. The math is very simple. Two billion dollars mature. and were almost all essentially collected on time while disbursements were a billion dollars at almost twice the spread. The result on slide six, a billion dollar decrease in the commercial portfolio equivalent to 16% done by design to further strengthen our liquidity position in times of uncertainty. Slide seven shows our asset size remain basically unchanged. Obviously, however, the reduction from the loan portfolio balances 16% coupled with the increase in liquidity that went from roughly 20% at the end of 2021 to almost 30% of total assets or $2 billion by June 30th have impacted the results for the quarter. Annie will explain the effect on the P&L later in the presentation. The end result is a lower risk profile of the portfolio. As shown in slide eight, we ended the quarter with three percentage points increase in exposure to investment-grade countries, now accounting for 58% of the total portfolio, and continued important stake of 52% in top-tier financial institutions, which we consider among the most offensive due to the regulated nature of the sector. The remaining exposure is well diversified among sectors and countries. Slide 9 portrays the change on the liability side of the balance sheet compared to last quarter. A deposit base which has historically represented a stable cost-effective funding source increased by $417 million or 17% quarter-on-quarter, with an increase in the relevant participation from our central bank shareholders, now representing 52% of total deposits. Again, a clear demonstration of their continued support during uncertain times. On the other hand, the NICE also was able to tap on the debt capital market and bilateral funding sources throughout the world, increasing the tenor of our borrowing and debt from 10 to 16 months and benefiting from the decreasing interest rate environment. It's also worth mentioning that after the repayment of a 144 bond for $350 million last May, we successfully issued a long-term local bond in the Mexican market to which we were able to raise the US dollar equivalent to approximately $230 million. This was our fifth issuance in the Mexican market and one that marked a significant milestone being the first issuer to relevant top-down market since the pandemic started. I'm going to leave it there for now and hand the call over to Lange or CFO to comment on the financial results for the quarter.

Thank you, Jorge, and good morning to all. So let's move on to slide number 10 on the second quarter results of operations. Net income for the quarter was $14 million, representing a 23% decrease quarter on quarter and a 37% year on year, mainly on lower interest and fee revenues down a combined total of $5.3 million, impacted by the bank's decision to increase its liquidity position and to lower loan balances in view of the current market environment, as Jorge mentioned. Fees were also down on the absence of transactional structuring and syndication activity for the quarter in the current context. In addition, the combination of losses on financial instruments for $3.9 million, mostly related to an unrealized loss of a debt instrument measured at fair value through profit or loss, and the release of $2.6 million in credit provisions resulted in a net charge of $1.3 million in overall as a deterioration for the quarter. All of these were compensated by a $2.3 million or 22% reduction in operating expenses. Profits for the first half of 2020 totaled $32.4 million, down 26% year-on-year, respecting similar trends as those mentioned for the quarterly results. Lower profits on a stable and solid level of equity of over $1 billion resulted in decreased returns, recording close to 6% ROEs both for the second quarter and the first half of the year. As of June 30, 2020, Tier 1 capital ratio under Basel III methodology increased 4.5 percentage points from the previous quarter to 24.8%, reflecting lower risk weighted assets on the account of decreased loan portfolio balances, while asset quality remained down. Net interest income, or NII, presented on slide 11 decreased to $21.7 million in the second quarter, and net interest margin, or NIM, of 1.28% was down 31 basis points quarter on quarter, mainly due to the change in asset composition, whereby low yielding average liquidity increased by 144% to an average of $1.9 billion during the quarter, representing 28% of total average assets from 12% in the previous quarter. Meanwhile, average loan portfolio decreased by 15% quarter-on-quarter to $4.8 billion, representing 70% of average assets from 86% in the previous quarter. As a result of this change in asset composition and also considering a 5% increase in average interest-bearing liabilities, the net change in volumes resulted in a net negative impact of $6.6 million in NII. This was partly compensated by the rate net positive effect on NII amounting to $2.5 million as the bank's interest rate gap was favorably positioned in a decreasing market rate environment so that liabilities repriced at a faster pace than loans during the quarter. In addition, the bank was also able to increase net lending spreads, taking advantage of new lending opportunities at risk-adjusted price levels. So excluding the liquidity component, the differential between loans and funding rates widened 46 basis points during the quarter, reaching 1.99% in the second quarter of 2020, compared to an average of around 1.5% in previous quarters. When the six months ended June 30, 2020, net interest income totaled $47.5 million, down 15% from the year before, while net interest margin of 1.43% decreased 34 basis points on the same period. This is explained by the change in asset mix alluded to before, as well as by lower market rates impacting the overall yield of assets financed by our ample capital base. Onto slide 12. During the second quarter of 2020, the bank recorded credit provision reversals totaling $2.6 million, mostly related to the sale of its single remaining credit impaired loan, or NPL, in the sugar sector of Brazil for 19 cents on the dollar, compared to a previously allocated individual Stage 3 reserve of 86%. This sale resulted in a $52.1 million write-off and a $2.7 million Stage 3 credit provision reversal, bringing NPL balance to zero at June 30, 2020. The bank's combined total of Stage 1 and Stage 2 allowances for credit losses was relatively unchanged with respect to March 31, 2020 balance. This was the result of lower reserve requirements on decreased end-of-period credit portfolio balances reflected in the $974 million reduction in Stage 1 exposure. This was offset by the increase of $136 million in Stage 2 exposure as the bank made a downward revision in the outlook for certain countries, mainly Argentina, and for certain clients impacted by the current environment. Having said this, exposure that we have assessed as high risk under the current context was reduced by $185 million to 11.1% of the portfolio during the second quarter, highlighting the collection of maturities and prepayments amounting to $79 million in the airline industry. Other sectors in this high-risk category are oil and gas upstream and its supply chain, sugar, retail, and auto industry, among others. None of these sectors represent more than 2% of total portfolio, aside from oil and gas upstream, which accounted for 2.9% of the portfolio at June 30, and is mostly with a quasi-sovereign entity with explicit sovereign support in an investment-grade country. Overall, the bank's total allowance for credit losses represented nearly 1% of total credit portfolio at June 30, 2020, 100% of which remained current. Credit provision reversals were offset by a $3.9 million loss on financial instruments, most of which was related to the decrease in fair value of a debt instrument recorded as part of a loan restructuring back in 2018. Continuing on to slide 13, operating expenses for the second quarter of 2020 decreased by 22% quarter-on-quarter to $8.3 million, mainly due to decreased salary and other employee expenses on the account of reduced performance-based variable compensation provision. Year-to-date, expenses were down 8% to $18.8 million, also on lower personnel expenses, as well as on cost savings in other expenses. Efficiency ratio stood at 41.5% for the quarter and 38.7% year-to-date, despite these expense reductions, mainly on lower revenues. I will now turn the call back to Jorge for his final remarks. Thank you.