Banco Latinoamericano de Comercio Exterior, S.A.

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.

Thank you, Annie. So, to put this all together, I will say that The high quality of our client base and the levers embedded in our business model have allowed us to successfully navigate this crisis up until now. Significantly increasing liquidity in a matter of weeks and collecting over 99% of maturities close to $2 billion across all industries, all countries in a timely matter is perhaps the clearest demonstration of that. Having said that, we're cognizant of the significant challenges that lie ahead. 2020 GDP estimates for the region are close to negative 9.5% now. Moreover, most of the countries in Latin America have limited fiscal room and are still trying to figure out how to gradually reopen their economies while keeping the spread of the virus under control. In this context, after more than 40 years conducting business in Latin America in several negative cycles in the region, Slavic has a good understanding of the changing circumstances and the macroeconomic dynamics of the different countries in the region. Moreover, being a longstanding ally of our clients throughout many of these crises gives us a good grasp of their strengths and their challenges. We believe that in general, our clients, mostly industry leaders in their respective markets with ample liquidity and funding sources, will not only be able to navigate the crisis, but are well positioned to take advantage of the opportunities that will arise for them in their sectors. DIACS will continue to be there supporting them. I will now open up for questions. Thank you.

At this time, we'd like to open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone now. Questions will be taken in which the order they are received. If at any time you'd like to remove yourself from the questioning queue, please press star two. Again, that's star one to ask an audio question. Looks like our first question will be from Jim Moraney from Singular Research. Yes.

Yes, thank you for taking my question. So I guess my first question, it would be in regards to slide number 11. So it's just looking at the favorable interest rate gap position in the decreasing market rate environment and the widening of lending spreads. So I think I also heard the comment that you've increased some of the loan capacity to certain sectors. Perhaps if you can just... comment again perhaps on the sectors and which sectors are seen as more favorable and which ones are going forward. And maybe if you can discuss again the country exposures and what your position in the future. And then I have a follow-up question after that.

Okay, so thank you for your questions. That's several questions and one if I understood correctly. Annie, why don't you start with the interest rate and spreads question and then I'll tap into the sectors questions.

Sure, so as I mentioned, You know, the net interest margin in general has been impacted due to the absence of position, the changing mix, because we did increase our average liquidity and decrease average loans. And, of course, liquidity yielding close to 19 basis points has had an impact in the net interest margin. But I also mentioned that we have seen a widening of net lending spread, and that you can see, you know, in the graph in that page 11 that you mentioned. that we increased the differential between lending and funding rates by about 46 basis points to 199%. So, you know, at the end of the day, the combination of both the impact of lowering interest rates in our balance sheet, which I also mentioned was favorable during the second quarter because the liabilities were priced faster. And then on the other hand, you know, our lending did decrease, so this widening of spread did not fully impact the net interest margins, at least not yet. So I don't know if that is clear enough or if you want to follow-up question or maybe Jorge you can address then the country and sector question.

Yeah, that's fine. The next question could be answered, yes.

So regarding the sectors, so we see demand in top tier banks, so the lower risk. Those are systemically important banks. In lowest countries with a central bank with a lot of higher power, then we have the food industry. We have the utilities, I mean, power generation, distribution, telecommunications. Those are oil and gas imports. I mean, those are all sectors where we're seeing a lot of demand now.

Okay, very good. And just one other question in regards to governments in the countries that you operate. So there seems to be a a growing concern in regards to the large amount of deficit and debt that governments are taking on in order to stimulate the economy and kind of ride through this pandemic. So can you just maybe provide just some brief comments on how the rising government debt and deficits could impact the operations of Gladex?

I mean, certainly it's very difficult times for most countries in Latin America. Also, it seems like the epicenter of the pandemic has moved to Latin America, so that places even more challenges. Now, the most vulnerable countries we see are Argentina and Ecuador due to their weaknesses, you know, and their fundamentals. and the need to restructure, you know, their debt, we've been reducing exposure in both countries even before the pandemic started, you know, more in accordance to our historically, you know, conservative approach. But I mean, we live in today in 17 different countries. I mean, they're all different realities. And as we mentioned before, the shift on our lending strategy has been more towards investing in great countries, which is almost 60% of the portfolio today. But yes, certainly important challenges in most countries. We've seen also devaluations of their currency, you know, protecting their international reserves. And we've also seen, you know, very active multilateral aid, especially from the IMF, very recently.

I don't know if that answers your question. Yes, that's great. Thank you for the comments.

Thank you. It does look like we have a web question. And it says, I understand the need for liquidity, but with $2 billion in cash earning less than two-tenths of the 1% and with only $450 million in the market cap, trading at 57% discount to book, has there been any consideration of any stock repurchases, considering it would result in 9% return from dividends and increased net book value per share? Thank you.

Why don't you answer that?

Okay. First of all, on the liquidity, of course, we do see the liquidity position obviously temporary while this crisis particularly during the second quarter, there was a short visibility of the impact going forward. We have or our funding structure even more, and we continue to maintain a very diversified funding structure. We are also seeing new lending opportunities, which we still tend to get or go into new lending or increase lending under still prudent credit underwriting standards. but we do expect that the liquidity that you saw of over $2 billion should be, you know, a top that should start to reduce, and we should start to see increasing in lending going forward at a slow place, I might add. So, you know, just to point out that the liquidity position is pretty much temporary. That on one side, and then on the other side, you know, in capital management overall, We do discuss this on a quarterly basis with our board, both capital management in general and dividends as we just saw in particular. The bank has historically and in recent years maintained a very solid capital position. That's pretty much a characteristic due to the fact that we do operate in a very volatile region. and more so in the current context. As I said before, as we increase our assets, our lending, our risk-weighted assets should adapt to more recent past levels and we should decrease our capitalization in terms of the capital ratio somehow. But still, we will still continue to have and manage the bank very conservatively in terms of our capital position. And as it has been our recent history, as an indication, I can tell you that in the last five years, our tier one capital ratio has been 19% on average. So that gives you an indication of how we have managed the bank and the importance that we give to our solid capital position. I know it's bad. answers the question.

Thank you. Our next audio question will come from Pavel. Olivia from Rock Hill Global.

Hi. Good morning. I wanted to follow up on that question. You reduced the dividend I think a quarter or two quarters ago and given you know, how well you manage the asset quality and liquidity, and where the share price is, you know, what would it take to, you know, restore the dividend back, one, and two, you know, have you at least discussed with the board the buyback possibility because, you know, from a shareholder standpoint, you know, it's probably the best investment you can make at this point. Thank you.

Yeah, I mean, it's a very good question. You know, first of all, as you all know, the dividend policy is up to the board, and it's a quarterly decision based on the results for the quarter, so I prefer not to speculate on future dividends. You know, we did maintain the dividend from last quarter, but moreover, the historically high levels of capitalization of the bank are a reflection of the volatile nature of the region we operate in. And I can tell you, though, that capital preservation will continue to be a priority for sure during this time, at least until we have some more visibility on how this whole situation is going to evolve. And we have, yes, ongoing conversations with the board on obviously the future of the bank. I want to stress though that we do have a very, you know, robust and are ready to go about it.

Great. Thank you.

Thank you. Our next question will be from Jose from MetLife.

Yes. Hi. Thank you for taking my question. Do you hear me?

We do. Hello?

Oh, yeah. I just want to do a follow-up on your country concentration, specifically on Argentina. Does that increase in exposure have more to do with the loan shrinking or is there more lending in the country? And if it's the latter, could you please give some detail on where you're lending, just given the fact that you downwardly revised the outlook for the country? Thank you.

Sure. So, in Argentina, it's more shrinkage than, I mean, in absolute terms, We decreased. I mean, Argentina, at the end of June, we had $180 million, but supposed to $226 million at the end of December 2019. And we have previously, by the end of 2018, we have above $600 million. So the main part of it is explained by the largest integrated oil company in the country, state-owned, that has a history of no default even under sovereign default in the past. So, with oil prices picking up now, we feel fairly comfortable with that exposure. Thank you.

Thank you. Our next question will be from Robert Tate from Global Rational Capital.

Hi there. Can you hear me?

Yes. Hi, Robert.

Hi, Jorge. Hi, Jorge. Hi, Anna. Yeah, I just have two questions and then one request. So, firstly, I would just like to congratulate you on the conservative loan portfolio. It seems that the past work you've done to reduce the risk has paid off with very low impairments. and also your presentation is quite nicely set out and informative, so thank you for that. So, Hoei, I just have a question for you and maybe Anna can comment as well. Please would you elaborate on the magnitude and recoverability of the airline loans and please could you comment on the impairment indicators and to what extent provisions have been raised for these loans? You know, for example, In latinfinance.com news, it was reported that Bladex made a small $30 million loan to LATAM Airlines in January 2020, and I presume there are impairment indicators for this loan because the airline filed for Chapter 11 credit protection. So obviously, I don't expect to go into any detail in any particular loan, but just generally, if you just comment on the on the magnitude and recoverability of the airline loans and impairment indicators and whether there's any provisions raised so far.

Yes, thank you, Robert. That's a very relevant question. The good news, we've been successfully reducing our exposure in the airlines industry as much as 54% quarter on quarter. So we do have exposure with two of the main airlines in the region, one headquartered in Panama and the other one in Chile. And yes, there is obvious impairments on the one in Chile. And I can tell you that we are actively monitoring the Chapter 11 process on LATAM, but we feel comfortable with the Okay, thank you.

The second question is, you know, just based on your comments on the loan portfolio and the conservative nature of your balance sheet at the moment, it appears to me that the likelihood of BEDEX having a surprising large loan impairment at this point is fairly low, you know, despite the magnitude of this crisis. Would you agree with this assessment or is that too difficult to say even at this point?

I would agree. Obviously, we cannot rule that out. I mean, it's very uncertain times. We are monitoring our portfolio very, very closely. We're talking to our clients on a regular basis. We believe we have... But, I mean, the truth is that, I mean, nobody knows when this is going to end. So, you know, aggregate demand is a concern going forward. But we do feel very comfortable with the health of the loan portfolio today. Okay.

Thank you. Yes, I just want to add that, as you know, we follow IFRS 9 accounting norms. So we already incorporate forward-looking expected credit losses in our reserve model. So in the allowance of credit losses that we have as of June 30, 2020, we have already incorporated this forward-looking expectation in our reserve as it pertains to the current portfolio. So I can also add that Stage 1 and 2, excluding the NPL that we got rid of during the quarter, Stage 1 and 2 reserves coverage has gone up by 30% since the beginning of the year or 22 basis points. So we have been incorporating, you know, forward-looking expectations of our portfolio in the analysis of countries and sectors and client specifics. So I just wanted to add that.

Okay. Thank you, Annie. Great. And then just one last request. I just want to mirror the comments made by the other callers in regards to dividends and share buybacks. In particular, the share buybacks and the comment that it would be difficult to find a better investment at this point in time. So, I mean, if it's possible even just to have a discussion with the board on those points, it would obviously the dividends discussed constantly, but share buybacks, I don't think that Bladex has done a share buyback before, and I suspect part of the reason is also just because of the liquidity of the shares. But if it's possible to have a discussion with the board, I think the shareholders would probably appreciate that.

I'm sure. We do have open discussions with the board about this topic and other relevant topics. Until today, the focus is to keep navigating the storm the way we're doing it, but certainly that discussion takes place. Sorry, but I can elaborate more on that.

Thank you.

Thank you. And once again, that's star one to ask an audio question. I'm showing no further questions in the queue at this time. I'd like to turn it back over to our speakers for closing remarks.

Yes, sir. There are no more questions. I want to thank you for joining the call. Thank you for the support and please Stay safe and healthy. Thank you very much, everybody.

Thank you. Good morning.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.