Banco Latinoamericano de Comercio Exterior, S.A.

Hello, everyone, and welcome to Bladex's third quarter 2020 conference call on this 27th day of October 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. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.bladex.com. Joining us today are Mr. Jorge Salas, Chief Executive Officer at and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on their 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 Section 21E of the Securities Exchange Act of 1934. In these communications, we may make certain statements that are forward-looking, such as statements regarding Bladix's future results, plans, and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are Bladix's expectations on the day of the initial broadcast of this conference call, and Bladix does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties, and assumptions are detailed in the bank's press releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. And with that, I am pleased to turn the call over to Mr. Salas for his presentation.

Thank you, Nick. And good morning, everyone joining us today to discuss our third quarter results. Today, I'm here with Ana Graciela Hernandez, our CFO, and a few members of my executive team. This morning, I will be going through the presentation and talking about our balance sheet management during the quarter. And then Annie will discuss the P&L implications of it. After Annie's remarks, I'll make some closing comments and then I will open it up for questions. Let me start by saying that overall for the quarter, we're still in a very uncertain environment the underlying business fundamentals of Vlade performed quite well. The unique flexibility of our business model and the quality of our customer base continue to be key. Going to the presentation on slide three, as you probably recall, during the second quarter, our loan portfolio shrank by as much as 16%, close to a billion dollars. While we're in the process of reassessing credit risk, and favoring liquidity during the first few weeks of the storm. So after very solid collections in Q2, we entered the third quarter with a very healthy portfolio, close to $5 billion, mostly short-term, focused on top-tier banks and top-tier corporations. In slide four, you can see that we had over $2 billion in the trade during the third quarter. More than 40% of our portfolio matured during Q3. Again, just like we did in Q2, we collected virtually 100% of all maturities across all industries in all the 18 countries we operated. Moving on to slide five, in Q3, we managed to grow our portfolio by 3%. We continued working closely with our clients and disbursed over $2.2 billion two times the volume this was in the previous quarter. As usual, these were mostly short-term, rate-related loans. The average standard was 108 days, and the average rate was fly-worth plus 227. That is, on average, 32 basis points higher than the maturing loans for the quarter. The resulting loan portfolio for Q3 in slide six was slightly above $5 billion, fully performing with zero NPL. 73% of this portfolio is maturing in less than a year with an average rate that is 14 basis points higher quarter-on-quarter. Slide seven highlights the fact that our credit exposure remains very conservative, both in terms of countries and sectors. 59% of our loan book is now in indefinite-grade countries, And similarly, 55% to 53% of our book is placed in sub-tier financial institutions across the region. You can see in both graphs, the remaining exposure is well diversified among countries and sectors. In slide seven, highlights the fact that our credit exposure remains very conservative, both in terms of countries and sectors. It's worth mentioning that as our portfolio matures, we keep strategically reducing our exposures in high-risk countries like Argentina, Ecuador, and Costa Rica. Likewise, our exposure to riskier sectors has also been declining. As an example, our exposure in the airline industry continues to follow a downward trend since Q1. It has come down by almost $100 million, 67%, and today represents less than 1% of the portfolio. So moving on to slide eight, we show how our asset composition has varied throughout the year.

Our asset mix by quartering is $5 billion, but always making sure we maintain a robust level.

Also, as an effort to increase the profitability of our cash position, our relatively small investment portfolio increased by $138 million, 144%, and reached $234 million. Of this total, $107 million was invested in high-quality liquid assets in accordance to the specifications of the Basel Committee. Moving on to the Liability Series. side of our balance sheet in slide nine, we show how our funding structure has varied over the years. Several points should be highlighted. One, our deposit base continues to grow as much as 6% quarter on quarter. A couple of things here. One, BLADEC's new Yankee CD program has observed a very positive evolution. Over 70% growth quarter-on-quarter and reached $329 million. These certificates are proving to be an efficient tool to further diversify our funding base and attract new investors. Also, on the deposit side, non-American central banks, our top eight shareholders, continue to comprise more than half of total deposits. As we have said before, these deposits represent not only a stable, cost-effective funding source, but also a clear demonstration of the support that central banks across the region continue to play in life during uncertain times. The other thing worth mentioning is our bond issuance. As you probably saw, in early September, the banks successfully placed on the 144A Reg S market for $400 million. The bonds have a five-year term and pay a fixed rate of 2.375. The placement was four times oversubscribed. The robustness of the demand allowed this transaction to be completed with the lowest coupon of all 144A issues carried out by Blythe so far. Also, the bank closed a new syndicated facility for $150 million, which was successfully paid among investors in Asia, Europe, and the Americas. The bank entered into these transactions with the dual objective of further reinforcing the structure of its funding base by increasing the rectification and extending the residual time to maturity of its financial liability. Moreover, with the purpose of generating efficient financial resources to capture new medium-term lending opportunities that have been identified by our commercial team. I will now turn the call to Annie so she can walk us through the P&L indications of all this.

Thank you, Jorge, and good morning to all. So let's move on to slide number 10, where we present the results for the third quarter 2020 with a net income of $15.4 million, representing a 9% increase quarter-on-quarter. And this is mainly due to increased revenues from interest, fees, and other income, up a combined total of $1.8 million, or 7%, due to higher net interest margin and spread, and to a better performance in fees from the healthy business, which has already recovered to pre-COVID levels. In addition, the combined impact of credit provision charges and of changes in fair value financial instruments total $1.9 million for the third quarter, a $0.6 million increase compared to the previous quarter, thus denoting a relatively stable trend in provision charges in line with historical levels. This is a reflection of the overall good performance and sound asset quality of the credit portfolio on the account of close to 100% collections, as Jorge mentioned, and of no NPLs, as I will go into with more detail later. Year on year, quarterly profits decreased by 24%, mostly on lower net interest income on margin, due to the change in asset composition since March of 2020, when the bank decided to increase its cash position and lower loan balances in view of the impact of COVID-19 and the market uncertainty it triggered that Jorge alluded to before. Lower profits on stable and solid level of equity of over $1 billion has resulted in decreased quarterly returns for 2020, with a 6% ROE for the third quarter denoting nonetheless an improvement of 0.5 percentage points quarter-on-quarter. On slide 11, we present the drivers for quarterly net interest income evolution, which represents the main revenue pool for the banks at approximately 90% of total revenue. Quarterly net interest income, or NII, increased 4% quarter-on-quarter to $22.6 million, while net interest margin, or NIM, of 1.42% was up by 14 basis points. The main driver of quarterly increases in income and margins was the continuous widening in net lending rate differential denoted by the 2.05% difference between loan and overall funding rate, which increased by another six basis points during the third quarter. This, in turn, reflects higher lending spreads, as Jorge referred to before, given that Bladix continues to take advantage of new loan origination at higher risk-adjusted pricing with respect to pre-COVID levels, greatly compensating loan repricing on lower market LIBOR-based rates, which also positively impacted liabilities repricing. On the other hand, average volume effect continued to put pressure on NII due to asset mix composition, as I just mentioned, with average cash still representing about 27% of total assets for the third quarter and average loans at 70%. Even though end of period loan balances started to show a positive growth trend during the third quarter with a 2% increase and accounted for 74% of total assets at the end of the quarter, while ending cash balances decreased by 31% during the quarter, representing now 22%. Year-on-year, the quarterly NII decreased of 15%, and the 35 basis points dropped in the net income interest margin are mostly attributed to the change in average asset composition that I just commented on, as well as the lower market rates impacting the overall yield of assets financed by our ample equity base. On to slide number 12, we present the evolution of allowances for credit losses, which under accounting norm IFRS 9, incorporate forward-looking expected losses, so that BLAIS' best estimation of the impact of the current economic environment is already accounted for. No new deteriorated credits were recorded during the quarter, so NPL balance remained at zero as of September 30, 2020. Moreover, during the third quarter, Stage 2 exposure assessed by the bank as having increased risk was reduced by $178 million, now representing 6% of total credit exposure, mainly reflecting the reduction of credit balances in countries that have been downgraded by the bank during this year. In this respect, during the third quarter, and given the recent developments in Argentina, thanks to allowances, allocated to exposures in that country, mainly in that country, increased by $4.5 million, which combined with lower Stage 1 requirements on low-risk origination explains the overall $1.5 million charge in credit provisions for the third quarter. Stage 2 exposure reduction also reflects collections on the bank's watch list exposures. including the sale of a $17.5 million loan to a South American company in the airline sector, reducing that company's exposure to zero, down from $46.5 million in March of 2020. This transaction led to a $4.4 million write-up against previously established credit allowances, denoting an overall recovery rate in excess of 90% of this client's exposure since the beginning of the current crisis. Stage 1 exposure, categorized as low risk, increased by $487 million during the quarter to 94% of total exposure. Overall, the bank's total allowance for credit losses represented 84 basis points of total credit portfolio at September 30, 2020, all of which remain current. Continuing on to slide number 13, operating expenses for the third quarter of 2020 remained relatively stable quarter-on-quarter at decreased levels year-on-year, mainly due to lower salary and other employee expenses on the account of reduced performance-based variable compensation provision, while non-personnel expense levels remained relatively stable. Efficiency ratio stood at 33.1% for the third quarter, an improvement of more than 8 percentage points with respect to the previous quarter on higher revenues. I would now like to turn the call back to Jorge. Thank you.

Thank you, Ayane. As I said in my opening comments, the third quarter results are once again a good reflection of our conservative approach and the flexibility of our business model. The fact that we deal exclusively with top tier corporations and banks has allowed us to keep collecting virtually 100% of all maturity on time and disperse new loans in resilient countries and sectors. Having said this, there is no doubt that there is still a great deal of uncertainty in the months to come, and therefore, priorities will continue to be the quality of our loan portfolio and keeping ample liquidity. I am very proud of the way our team has come together to navigate this storm so far. There is no doubt that opportunities will keep arising As the economies reopen throughout the region, MRISE will continue to be there to support our clients during this uncertain time. That's it on our side. I'll open it up for questions now.

Thank you. And at this time, we will 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 the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star two. And our first question comes from Avara Lewis. Please go ahead. Afar, your line is now open. Please proceed with your question.

Sorry, can you hear me? I was on mute.

Yes, go ahead.

Perfect. Thank you. Well, thank you for the update and for taking that question. I have two questions. I'll start with one. So during the quarter, the bank resumed its portfolio growth, and I just wanted to see if you could elaborate on the sustainability of this growth. going forward considering the current economic conditions in the region and also if there's any particular sector in which you anticipate to focus this growth on.

Thank you for your question. It's a very good question related to opportunities going forward in the sustainability. We do see opportunities going forward as the apartments reopen. We're seeing increased demand from our client base, both corporate clients and banking clients that are obviously seeing an uptake in their demand with their own clients. Also, some of our corporate clients are looking to take advantage of the situation to grow. organically and inorganically. So we have some demand there. There's also an interesting thing going on with our letters of credit. And there's some, you know, to the extent that sometimes as you keep switching, you know, suppliers, there's some, you know, opportunities there as well. I would say that we do think that demand will be there, in short, as economies reopen. As far as sectors, we do have a very clear understanding of what sectors are, you know, more resilient and we have a lot of demand in those sectors as well.

Perfect. Thank you so much. And is there time for another question?

Yes, sure.

Perfect. The other question is in regards to liquidity. The bank has gradually reduced its liquidity position during the last quarter. It stood at around $1.5 billion at the end of that quarter. So I just wanted to see what are your plans to optimize your liquidity at this point?

Yes. Liquidity has been coming down, as I mentioned, because we're positioning liquidity for commercial portfolio growth. I cannot give you a specific target on liquidity. I can say, though, that as opportunities arise, we could see liquidity calming down. And also, you know, to increase the profitability of our, you know, cash position, we're also increasing our bond portfolio, as I mentioned, with highly liquid and low-risk assets, but that's a way to, you know, increase profitability on that, you know, cash position.

Perfect. Well, thank you so much for the update and for the feedback on this question.

Sure. Thank you.

Thank you. And our next question comes from Robert Tate. Please go ahead, sir.

Hi. Good afternoon. Morning. Can you hear me? Yes, we can hear you. Great. Thank you. Congratulations on the good results. Very solid. I just have three questions, if that's okay. The first one is on the loans in the airline industry. The second one is in loans in other high-risk industries. And the third one is just on dividends. So the first one, I just wanted to ask, what is the remaining average number of months to maturity for the remaining airline loan balance of 48 million? And is it due to just one borrower or more than one borrower? That's the first question.

Thank you, Robert. So it's just one borrower and it's We feel very comfortable with the exposure. The airline has over a billion dollars in cash, and that exposure is for two more years.

Okay.

Thank you. And so the second question is just on other high-risk industries. loans in other high-risk industries. And earlier in the year, you spoke about and reported on a number of them, including the others of particular interest, I think, are automotive, retail, and upstream oil and gas. So I was wondering if you could just give us just talk about those industries and give us a bit more background as to what is happening in terms of the loans of those industries. That would be great. Thanks.

Sure. So oil and gas upstream and supply chain and also to a lesser extent we have car industry including car dealers and then sugar and ethanol among others. We've been able to reduce our exposure to this higher risk industry by about $230 million. That's 31% compared to Q1 numbers. So with a major contraction in car trade, airlines, and then sugar and retail as well. You know, oil and gas, our exposure is today 85% focused in the oil industry, mainly in Trinidad and Tobago. Our main exposure is with a trade company, with a big company there. And, you know, we believe that the sovereign, you know, plays a key role under stress and ice. would feel comfortable there. In the sugar and ethanol, we cut our exposure to the industry by 46% since the onset of the crisis after we sold the NPL case in Brazil. Right.

I don't know if you need more time on that. That's what I can say. Yes, I think that, yeah, that's fine. Thank you. And then the final question, the third question is just on the dividend and in assessing the dividend and whether to raise it back to its previous levels. What are the things that you tend to, I guess, place the most emphasis on in making that decision?

I'm going to say again, as you all know, the dividend policy is up to the board. It's a quarterly decision. So it considers the results for the quarter, but also the situation going forward. I prefer not to speculate on future dividends. I cannot tell you This is the new normal. I cannot tell you otherwise. The historically high levels of our capital are a reflection of the nature of the region we operate in. Capital presentation is a priority, and I don't see that changing until we have more visibility on how this whole situation is going to evolve.

Okay, thank you very much. Congratulations on the solid result. Thank you, Robert. Thank you, Robert.

Thank you. And as a reminder to our audience, you may ask a question by pressing star 1 now. And it appears we have no additional questions at this time.

All right, then. Thank you, everybody, for joining the call, and please stay safe. Goodbye now.

Thank you all for your attention. This concludes today's conference. All participants may now disconnect.