Banco Latinoamericano de Comercio Exterior, S.A.

Ladies and gentlemen, hello and welcome to Bladex's fourth quarter 2020 conference call on this, the 12th day of February 2021. 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, and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their 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 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 BloodX's future results, plans, and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are BloodX's expectations on the day of the initial broadcast of this conference call, and BloodX does not undertake to update these expectations based on subsequent events or knowledge. Various risks associated 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, David. And good morning to everyone joining us today to discuss our fourth quarter results. Today I'm here once again with our CFO, Annie Mendez, and a few members of the executive team. This morning I'll be talking about our balance sheet management during the quarter and an overview for the whole year. And then Annie will discuss the P&L implications of it all. After Annie's comments, I will make some closing remarks, and then, as customary, I will open it up for questions. So there is no doubt that Latin America was one of the most impacted regions in 2020. The world's GDP decreased by 3.5 percent compared to that of Latin America that decreased more than twice as much, 7.4 percent. Moreover, as the pandemic evolved, GDP contraction estimates for the last year were constantly revised and varied drastically in most countries. I'd like to highlight once again what I have been noting in previous quarters, and that is the importance of our business model in the current context. Having the ability to diversify our portfolio in more than 20 countries, lending exclusively to top-notch customers, including banks, and, above all, having primarily a short-term portfolio is, and it will continue to be in 2021, a significant comparative advantage in this continuously changing environment. Why? Simply because it allows us to diligently manage our exposures towards defensive sectors in the different countries as their outlook changes, as it did during the last three quarters. Let me now talk about what happened during the fourth quarter on both sides of the balance sheet. Beginning with the asset side and moving to slide three, we grew our commercial portfolio by 9% with respect to the previous quarter, reaching $5.6 billion by the end of the year. low, with mostly short-term lending, and focused on defensive sectors and countries. I will address this topic in more detail further on in the presentation. In slide four, you can see that roughly 2.1 billion loans matured during the quarter, and over 2.6 billion, nearly half of the entire portfolio, was disbursed during the fourth quarter. That was 17% more than in the previous quarter. Also, the average tenor of new disbursement was, again, short-term, approximately nine months, and the average rate was LIBOR versus 182 basis points, down 33 basis points from the rate of the maturing portfolio for the quarter. As loans closed at the peak of the crisis, mature, and then were replaced with relatively normalized pricing levels in the context of high market liquidity. It is worth mentioning that the bank continues to collect virtually 100% of all scheduled maturities quarter after quarter. The quality of our portfolio today is pristine. Our NPLs at year-end are just $11 million, 0.2% of the loan portfolio. In slide number five, we note how the portfolio remains focused with almost 60% on lower risk countries. Q4 growth was mainly concentrated in Peru, oil and gas, and then followed by Brazil and Colombia, primarily short-term lending to financial institutions in both countries. On the other hand, we continue to systematically reduce our exposure in Argentina, down 64 million since the beginning of the crisis, and now representing less than 2% of the portfolio. Similarly, in slide six, you can see that origination in Q4 is prudently managed and focused in terms of sectors. Loan growth was mainly concentrated, as I said, in financial institutions, which at the end of the year represented 54% of total portfolios. and on the oil and gas downstream sector, representing 7% of the portfolio, with a relatively important participation as well in the food and beverage and electric power industries, each at 6% of those, against all resilient sectors. The following slide, slide seven, shows the quarterly evolution of our asset composition. It portrays how we took prudent measures at the onset of the crisis favoring higher liquidity levels by taking advantage of the short-term nature of our portfolio that served as an effective liquidity buffer. This defensive strategy, of course, impacted our net interest income, which Annie will explain further later in the call. It is clear in this graph that the third quarter marked an inflection point in our asset composition. During the second half of the year, we not only resumed portfolio growth, but also started to build a corporate bond portfolio, allowing us to reduce our cash position and improve the overall yield on assets. Switching to slide A, you may see how the investment portfolio has been built during the second semester, reaching $400 million dollars. By year-end, it was evenly split between a high-quality liquid asset portfolio aimed at enhancing the return on liquid assets, otherwise mostly invested with the Fed, and a credit portfolio of Latin American name conceived as a complement to the bank's commercial portfolio. In sum, we take pride in having improved our asset composition in terms of both mix and quality, despite all the challenges faced throughout a very complex year. Moving on to the other side of the balance sheet in slide nine, we show now how our funding mix evolved during the year. A few things are worth mentioning. First, deposit growth. Deposits, our lowest cost source of funding, grew 9% year-on-year and substantially increased their share in the bank's total funding base, exceeding 60%. This is in part attributable to our Yankee CD program, which has been consistently gaining traction, reaching $452 million by the end of last year. But also thanks to our Class A shareholders, mostly central banks across the region, who continue to support the bank through their investment, which amounts to approximately 50 percent of total deposits. Moreover, during 2020, the bank further reinforced the stability of its funding base through new medium-term funding transactions. Bond issuance, both public and private, and syndications attracted investors from the U.S., Europe, Asia, and Latin America. By year end, long-term funding represented 31% of total funding, up 6% year-on-year. Finally, we reduced our reliance on funding from correspondent banks, which at the end of 2020 amounted to less than 8% of total funding, down from 30% in March. Having said this, the banks has access to a wide network of correspondent banks in the U.S., Europe, and Asia, in line in excess of $2 billion. I'll leave my comments on liabilities there. As you can see, 2020 was a very dynamic year on both sides of the balance sheet. Funding structure changed. Profit mix changed. Country mix changed. and industry needs changed as well. Overall, this was a clear indication of the resiliency of the business model and its versatility to adapt to the challenges of the pandemic, as well as the bank's ability to take advantage of this flexibility to effectively protect the quality and soundness of its active portfolio. I'll now turn the call to Annie so she can walk you through the P&L implications of all of this.

Thank you, Jorge, and good morning to all. So let's continue on to slide number 10, the following slide, where you can see the evolution of our P&L, recording a profit for the fourth quarter 2020 of $15.7 million, up 2% from the preceding quarter, on relatively stable revenues and lower provisions for credit losses reflecting high-quality origination during the quarter as well as the ongoing collection rate of loan maturities of close to 100%, as Jorge mentioned, including the continued reduction in high-risk countries and sectors. These were partly offset by a generally seasonal increase in quarterly expenses up 22% quarter-on-quarter. Net income for the year 2020 was $63.6 million, a 26% reduction from the previous year, mainly reflecting low revenues, which were down by 22%, on the account of the bank's defensive approach since the onset of COVID-19 to preserve liquidity and lower loan balances, coupled with the negative impact of lower market rates on the overall yield of assets financed by the bank's equity base, as I will explain in further detail further ahead. As a result, annual net interest income was down 16%, or $17.1 million, while fee income was down another $5.2 million, or 33 percent, the latter relating mostly to the absence of new executed structuring transactions during the year, reflecting very low market activity in that line of business throughout the year, although a new pipeline of transactions started to build up towards the last month of the year and is currently ongoing. Fees from the letter of credit business performed well in the second half of the year, returning to pre-COVID level, after a second quarter impacted by decreased activity. Overall letter of credit fees for the year decreased by 5% when compared to 2019. Annual revenues were also impacted by a $4.8 million loss on financial instruments mostly related to the fair value adjustment in the second quarter of 2020 of a debt instrument received as part of a loan destructuring back in 2018, and to a lesser extent, attributed to devaluation of hedging derivatives during 2020. Lower revenues for the year 2020 were partly compensated by a $1.5 million reversal of provisions for credit losses, which I will refer to in more detail ahead. They were also compensated by an 8% year-on-year reduction in operating expenses due to decreased performance-based employee variable compensation, as well as other cost savings derived from operational measures implemented under the current context. Lower profits resulted in decreased quarterly and annual returns for 2020, recording 6% ROE and a 1% ROA for the fourth quarter and full year, down from close to 9% and 1.3% and 1.4%, respectively, in the previous year. Moving on to slide 11, We presented drivers for net interest income evolution, which represents the main revenue pool for the bank at approximately 90% of total revenue. Net interest income for the fourth quarter was down 1% from the previous quarter to $22.3 million. Increased average lending balances, up 3% from the previous quarter, as well as higher participation from the liquid bond portfolio replacing cash balances were able to largely offset lower net interest margin down five basis points to a level of 1.37% on the continued downward repricing of loans from decreased market libel rates. During the last three quarters of 2020, the bank maintained a widened net lending rate differential denoted by the 193 basis points difference between loan and overall funding rate in 4Q20, up 43 basis points when compared to 4Q2019. This is the result of higher lending spreads that the bank was able to charge during the first month of the crisis, together with a favorable liability-sensitive interest rate gap position in a decreasing market rate environment so that liabilities have been repricing at a faster pace than loans during most parts of the year, an impact that started to level during the fourth quarter. Net interest income for the year 2020 of $92.5 million was down $17 million or 16% from the year before, mostly due to lower market rates and the change in average asset composition. For the year 2020, the weighted average asset rate, including liquidity, investment securities, and loans, was down by 157 basis points from the previous year to 2.72%. In turn, loan portfolios' average base rate alone, which is LIBOR-based, was down 151 basis points. So, a very high-level estimation of the impact in net interest income of base rate repricing at lower market rates, set risk variables, amounts to a decrease of about $15 million, considering $1 billion equity invested in productive assets. The net effect in NII was also negatively impacted by the changing asset mix, whereas during 2020, average low yield in cash balances increased from 12% in 2019 to 23% of total assets, while loans decreased from 87% to 75% on average. All of these effects were partly compensated by a positive impact of the increased net lending rate differential that I mentioned before as weighted average funding rate was also down by 151 basis points to 1.59%. Now moving on to slide 12, we present the evolution of allowances for credit losses, which under accounting standard IFRS 9 incorporate forward-looking expected losses. so that BLADIS' best estimation of the impact of the current economic environment is already accounted for. In fact, as required by IFRS guidelines, we evaluated our reserve model to ensure that the impact of the new macroeconomic realities in the market we operate were accounted for and concluded that our reserve methodology adequately incorporates the effects of COVID-19 in our forward-looking estimation of expected losses. IFRS 9 Stage 1 exposure, categorized as low risk, increased by $625 million to $5.6 billion, or 94% of the total, during the fourth quarter of 2020, and included the rise in high-quality liquid bond portfolio as well as increased origination in lower-risk countries and sectors, such as Chile and Peru, as well as financial institutions in Brazil and Colombia, all of which generally have a relatively lower collective reserve requirement. In addition, Stage 2 portfolio, including loans in our watch list, as well as exposures in countries and sectors assessed by the bank, as having increased risk since their origination, remained at 6% of total exposure, amounting to $331 million at December 31, 2020. In addition, during the fourth quarter of 2020, loans amounting to $11 million were classified as Stage 3 or credit impaired, as Jorge commented before, from Stage 2 in previous quarters. so that the NPL to total loan ratio stood at 0.2% at year end 2020. The net result for the fourth quarter 2020 was a provision reversal of $0.3 million. In the same manner, the overall impact of credit provisions for the year 2020 was a reversal of $1.5 million, reflecting again the successful collection of higher risk exposures throughout the year, coupled with increased origination in higher quality countries, sectors, and counterparties. During the year 2020, a total of $56.5 million in loans were written off against previously individually allocated reserves, of which $52.1 million was related to the sale during the second quarter of 2020 of Accredited Impaired Loan, or MPL, in the sugar sector of Brazil that remained from the previous credit cycle, which ranged from 2009 through 2016. The remaining $4.4 million write-off relates to the sale of a $17.5 million loan to a South American company in the airline sector during the third quarter of 2020, reducing that company's exposure to zero. down from $46.5 million in March of 2020. Overall, the bank's total allowance for credit losses represented 75 basis points of the total credit portfolio at December 31st, 2020, all of which remains current. With this, I will now like to turn the call back to Jorge. Thank you.

Thank you, Arne. I truly believe that given the circumstances, this has been a very good year for Bladix. I'm very proud of the Bladix team that has managed to disperse over $6 billion since the pandemic started and collected virtually all maturities in time throughout the year. We have acted swiftly, taking advantage of the levers of our business model to protect the quality of our assets and making the best of the current low rate environment on the liability side. We find ourselves well prepared to navigate 2021. As I mentioned at the beginning, Latin America has been one of the most impacted regions in the world. Several countries apply very stringent lockdown measures from the onset of the pandemic that are still causing severe damage to their economy and unfortunately have not yielded the expected results with respect to the slowing of the spread of the virus. Public policies in most countries continue to be erratic in a region that in general has limited fiscal room and fragile public health systems. Having said that, we estimate that the region will grow between 4% and 4.5% in 2021, mostly in the second half of the year, and will reach pre-pandemic levels of GDP by the end of 2023. We are seeing some positive signs. Consumer confidence indicators are generally improving. And then the increase in commodity prices, external liquidity, and the distribution of the vaccine, although it may face some challenges, should also contribute to foster growth. But the different countries, however, have their own set of challenges, so the speed of recovery will vary largely by country. In any case, we at Blarex will continue to work closely with our clients, to whom we have offered continued support through the crisis and who have shown financial resilience during these unprecedented circumstances. Those are our comments for today. And now I will open it up for questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask a question, you may do so now by pressing star one on your touchtone phones. If you're using a speakerphone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, if you would like to ask a question, please press star one now. And our first question comes from Jim Wiggins with Phronesis Partners.

Yes, sir. I've owned the stock for much of the last 12 years or so, and I'm curious if you could explain could you sort of evaluate how you feel the bank has done over that period of time and what your goals are going forward? I have been very impressed with your ability to minimize loan losses, but just wondered what you hope to do in a more positive vein.

How do we see growth going forward?

Yes.

Yes. Okay, so let me – So we are seeing increased demands as the economies reopen, especially in the resilient sectors, oil and gas, utilities, food and beverage. We've also started to see some of our clients working on their strategic plans to either expand organically or inorganically or acquire some other company. Our clients turn to us to provide financial solutions. So we're seeing some traction there. We're also seeing companies and financial institutions trying to improve their funding structure in this context and their debt maturity profile. So we are exploring those medium-term facilities as well through a combination of the right structure and the right pricing. I cannot give you specific guidance on size. But I can tell you that, you know, our commercial portfolio has, you know, grew 13% in the second half of a year. And we continue to see moderate growth going forward. I don't know if that answers your question. We'll not sacrifice credit quality for growth.

I understand. So I recall, I think it was the first or second quarter that you mentioned that your loan spreads had widened appreciably. Do you see any positive trends in terms of loan spreads now?

Yeah, we're seeing definitely, and we saw that in the graph. In the last quarter, we started to see a more normalized level of spreads close to what we used to have before the COVID, and that also has to do with the fact that we are obviously working with the top-notch, the top tier of the pyramid in terms of credit quality clients, which are particularly, you know, very liquid in general and highly offered, I mean, highly a target of lending. So, in short, we did start to see a reversion of the spreads that we were able to charge at the beginning of the crisis.

Okay.

Thank you. You're welcome. Thank you. Again, if you would like to ask a question, press star 1 now. And Mr. Riggins with Phronesis Partners has a follow-up.

Sorry, I didn't mean to take up too much time. I wasn't sure if there were any other questions, but I just wondered, when you started, you came in during a very difficult time, and I don't recall you ever articulating any longer-term goals for your tenure at the bank. I just wondered if you had any sort of longer-term goals. The bank's assets are still about the same as they were 10 years ago. Is there a target with respect to – equity to assets that you hope to reach or anything of a quantitative nature that you hope to get to over the next some odd years?

So you're asking about our vision of long-term returns for the bank, right?

Yeah. I mean, it's you've done a great job of managing through this difficult period. I'm just sort of trying to get a sense of what you're trying to accomplish beyond that.

First, we have to go through the crisis, right? I mean, this bank has had, I mean, we are at the lowest loan portfolio in the last decade. But this portfolio has been close to $8 billion in the past. And back then, I think it was 2015, returns were double digits. And that was basically doing exactly the same thing that the bank is doing now, just at a bigger scale. We are now working on several initiatives that I can not share for obvious reasons, but part of it is just taking advantage of this time to work on internal processes and making sure that our digital capabilities are there when we can grow the bank back in a different environment and make sure that we can have the economies of scale to do that operationally. That's what I can share for now.

Thank you.

We do have a very solid client base, and we have a lot of space. We have a very limited share of wallet with our clients. So just, you know, cross-selling more products to our client base will be some important source of new income.

Thanks. Thank you. Again, if you would like to ask a question, please do so by pressing star 1 now. At this time, we have no other questioners in the queue, so I'll turn it back to our speakers for closing comments.

If there are no further questions, I would like to thank everybody, and please Stay safe.

Thank you. Thank you, ladies and gentlemen. That concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.