Banco Latinoamericano de Comercio Exterior, S.A.

Ladies and gentlemen, hello everyone and welcome to Blodex's first quarter 2021 conference call on this fifth day of May 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. Blodex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.blodex.com. Joining us today are Mr. Jorge Salas, Chief Executive Officer at and Mrs. Ana Graciela de Mendes, 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 uptake 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, David, and good morning to everyone joining us today to discuss our first four results. I'm here once again with Annie Mendes, a CFO, and a few members of our team. It's been just over a year since the start of this painful pandemic. The success in containing the virus and the severity of the economic impact vary significantly across the different countries in the region. With this in mind, I would like to take this opportunity to acknowledge the commitment of our employees, our clients, our corresponding banks, and all of who have helped us navigate this difficult time. To all of you, we express our most sincere gratitude. Let's begin with slide three. This morning, I would like to provide some context around our results for the first quarter after a year that has been unlike any other. I joined LADC a little more than a year ago. I joined a bank with a clean balance sheet, an incredibly competent and committed team, and a mandate from the board of directors to explore different avenues to grow the bank and to return more value to shareholders. No sooner had I started the job, the world has been hit with a global pandemic. Not surprisingly, priorities immediately changed. Like most companies at that time, the immediate steps for Blythe was to adopt a defensive approach to ensure the bank's stability, to serve capital, to maintain continuity of operations, and to protect the wellness of our employees. As I have mentioned in previous calls, to achieve this goal, Blythe newly used the different levels in the business model, including immediate and significant reduction by design of our credit portfolio in the second quarter of 2013. That allowed us to steer through what was perhaps the most difficult global environment since our founding more than 40 years ago. The results speak for themselves. We entered 2021 with a standard credit portfolio with almost zero NTLs, a robust funding structure, and a comfortable liquidity position. This is our third consecutive quarter of growth without relaxing credit underwriting standards. The level of our commercial portfolios of March 2021 was close to that of March 2020, more than 800 million below the level of December 2019. On the other hand, despite the uncertainty generated by the delayed vaccination campaign in some of the countries in the region, we are starting to see clear signs of recovery for all the regions. Recently, the IMS device is 2021 growth estimates for Latin America. from 3% to 4.6%. What is even more relevant for Bladis, the growth estimates for trade have also been revised upwards from 8.2% to, twice as much, 16.2%, mainly driven by higher volume and higher commodity prices. We will address this topic further into the presentation. The first quarter results do not yet reflect this recovery, but we are confident that this will happen as the region's economy continues on its upward path. This morning's announcement regarding the Board's decision to carry out a stock repurchase for up to $60 million on the open market program is a testament to our conviction. but at the same time providing us with the flexibility to respond to both opportunities and challenges in the region. Our board also maintains the bank's quarterly dividend of 25 cents per share, which also reflects life's financial strength and earnings quality. Today, as is customary, I will talk about the salient points of a balance sheet, And Annie will provide more details regarding the first quarter results, which I want to note, continue to reflect the impact of historically low labor rates and spreads returning to peak pandemic levels. We will then open it up for questions. Let's please move to slide four. As I said before, we continue to grow our loan portfolio for the third quarter in a row without relaxing underwriting standards. As of the end of March, our commercial portfolio grew 3% quarter-on-quarter. Disbursements were up 5%, and all maturities were again collected on time. As you can see in the graph, the average rate of new disbursements was Viber Plus 141 basis points. 46 basis points from the rate of the maturing portfolio for the quarter, as lending spreads continue to return to pre-pandemic levels. On slide five, I would like to highlight three main points. One, most of our growth for the quarter was concentrated in Brazil, Chile, and Uruguay, and we continue to decrease our exposure in Argentina with all residual exposures remaining current and performing. So almost 60% of our commercial portfolio, as you can see, continues to be deployed in investing-grade countries. And also, after our 3% growth for the quarter, we are almost at the same level of our commercial portfolio of March 2020, only 2% below. Moving on to slide six, this is just the same graph, but broken down by industry. As you can see, most of the growth for the quarter is commodity-related. Oil and gas was up 49%, mostly in investment-grade countries. And our metal and manufacturing portfolio was up 37%, also mostly in investment-grade countries. The recent increase in commodity prices and trading volumes is starting to have a positive impact on our loan growth. The basket of commodities has seen its 2021 projected growth revised from 9.1% at the end of last year to 27.1% by the IMF recently. As we all know, commodities have a significant relevance for Latin American economy, both on the export and on the import side. Latter stuff gives this with some of the strongest commodity players in the region, ranging from strategically important state-owned entities that import oil or oil derivatives to large local grain exporters, steel importers and exporters to the local subsidiaries of all major global commodity houses. We are seeing an increase of demand from these types of clients of at least 30% on average. I would like to highlight that our commodity exposure is of short-term, regulated nature that closely follows the cycle. This means that our indirect risk to commodity price volatility is non-existent. We expect this commodity driven growth to continue as the region recovers. Moving on to slide 17. I want to draw your attention to the chart on the left, first related to our asset-making side. In this respect, it is important to point out that even though we have been growing our loan portfolio for three quarters and building up our investment portfolio since June 2020, we're still close to 800 million, 14% below 2019 year-end levels as I said before. What this means is that live, has considerable room to grow our slum portfolio, along with the gradual reserving of the region. The chart on the right provides an overview of the funding structure, where you can see that our most efficient funding source, deposits, have grown steadily for over a year, both in relative and in absolute terms. Class A shareholders continues to have a minimum participation and the success of the bank's Yankee CD program has also contributed to the growth of our deposit base. LABIC continues to be an active, very active in the debt capital market with private placements in different countries, further enhancing its diversification of its funding force. With that, I will now turn the call over to Annie, who will walk us through the P&L implications for this quarter. Annie?

Thank you, Jorge, and good morning to all. Let's move on to slide number eight, please, on the bank's quarterly reports of operations. So, profit for the first quarter of 2021 was $12.8 million, down 19% on a sequential quarter basis, and 30% year-on-year, mainly driven by lower net interest income. This relates to the impact of a sharp decrease in LIBOR-based rates in the bank's assets and liabilities, coupled with loan average volumes still behind pre-COVID levels, even though the bank has shown a steady loan growth trend for three consecutive quarters, as Jorge just mentioned. I will be addressing the NII variation in more detail in a few minutes. Results for the quarter also reflect stable commission income, mainly from the letters of credit business with an important participation in the LC confirmations for the import of refined oil. With respect to fees from the structuring and syndications activity, for the first time since the onset of the crisis, we are starting to see traction in a pipeline of value-added transactions. We just announced one in late April, a $300 million facility for CMAE Energia, a leading player in renewable energy generation in Central America, in which Flavix acted as joint lead arranger. We expect to see more of this kind of activity in the coming quarters. Expenses remained closely controlled, down 10% on a sequential quarter basis due to the usual seasonality of the third quarter of the year. Year on year, expenses were down by 13%, mainly on lower personal expenses, mostly related to decreased performance-based variable compensation provision. In addition, the bank recorded no credit provisions during the quarter, as origination remains focused on high quality countries and sectors, while the bank continues to downsize riskier exposures, being able to collect virtually 100% of schedule maturity. So let's move on to slide nine, where we present the trend in annual rates and volumes, which explain lower net interest income of $18.9 million for the quarter, down $6.9 million or 27% year-on-year. Even with the same net lending spread differential of about 150 basis points when compared to the same period of 2020 and of 2019, net interest income was down $4.2 million year-on-year, mainly on lower LIBOR base rates, which decreased 76% or about 153 basis points year-on-year and by 83% or around 239 basis points when compared to a normalized 2019. Since the bank runs a mostly floating rate book, it's obvious that in a changing market rate environment, both sides of the balance sheet reside within a short period of time. In this manner, the portion of assets financed by liabilities is generally naturally hedged. This is why net lending spread remains relatively unchanged at 150 basis points. But the major impact relates to the portion of assets financed by the bank's equity, as the overall asset yield decreases on lower market rates, with the impact resulting in lower net interest margin and net interest income. In addition, as a consequence of the bank's defensive measures implemented last year, During the first half of 2020, loan portfolio went down by as much as $1.4 billion, or 24%, from 2019 year-end balances to $4.5 billion at June 30, 2020. We then started to resume loan growth and have kept a positive trend, reaching close to $5.1 billion at March 31, 2021, although still short of pre-COVID levels. As such, average loan portfolio balance for the first quarter of 2021 was still 16% lower than the same period of 2020, negatively impacting net interest income. This was partly upset by the increase of the investment portfolio to close to $400 million, 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. Overall, the net change in average volume resulted in an additional negative impact of 2.7 million on NII when compared to the first quarter of last year. With respect to the sequential quarterly trend in slide 10, The reduction of $3.4 million in NII is mostly explained by the bank reaching pre-COVID levels in terms of lending spreads. Thanks to ample U.S. dollar liquidity availability, particularly to our financial institution clients throughout the region, representing more than half of our exposure. In addition, during the first quarter of 2021, LIBOR-based lending rates continued its downward-trip pricing While in the case of liabilities, this repricing was faster and mostly took place in 2020, as the bank's interest rate gap was favorably positioned for a decrease in market rate back in March of 2020. The negative rate effect of $4.4 million was partly offset by the 3% quarter-on-quarter increase in average loan portfolio, coupled with lower funding to finance a decreased cash position, with a combined net positive volume effect of $1 million on NII. On to slide 11, we present the evolution of allowances for credit losses, which reflects the bank's high-quality credit exposure, having 57% of its commercial portfolio and 84% of its investment portfolio in investment-grade countries. so that 95% or $5.8 billion of all credits are classified as low risk or stage one under IFRS 9. This includes increased origination in lower risk countries, such as Chile and Uruguay, as well as financial institutions in Brazil, all of which generally have a relatively lower collective reserve requirement. Exposure with increased risk or IFRS 9 Page 2 represents 5% of the total exposure and includes loans in our watch list totaling $9.3 million, as well as exposures in countries and sectors assessed by the bank as having increased risk since their origination, amounting to an additional $280 million, down $42 million from the previous quarter. As the bank continues to collect exposures to higher-risk countries, such as Argentina on a timely basis. Non-performing stage three loans remain unchanged from the previous quarter at $11 million, representing 0.2% of total loans. As a result of all these, there was virtually no impact in credit provisions during the first quarter of 2021. Overall, the bank's total allowance for credit losses which incorporates forward-looking expected losses under IFRS 9, represented 73 basis points of the total credit portfolio at March 31, 2020. And all of the bank's exposure remains current. With this, let me turn the call back to Jorge.

Thank you. Thank you, Annie. As I said at the beginning of our call, I joined a bank with a clean balance sheet, an incredibly competent and committed team, and a mandate from the Board of Directors to explore different avenues to grow the bank and return more value to shareholders. Today, a year later, although the pandemic continues to pose significant challenges for the region, we have an even cleaner biology, an even more committed team, and the Board mandate remains unchanged. We believe that the bank has many opportunities to grow and to increase its product and service offering. Gladys is well-positioned to navigate 2021 and we look forward to reporting our progress to you in the future course.

David, we can now 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 by pressing star 1 on your touch-tone phones now. If you are using a speakerphone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, to ask a question, please press star 1, and we'll give it just a moment to give everyone an opportunity to signal for questions. And our first question comes from Al Marcus with PushTree Investments.

Thank you, operator, and good morning. I have two questions. First, can you give us any insight into the thought process behind the board's decision to announce a share repurchase? And second, Jorge, you mentioned that you were hired with a mandate from the board. implement new growth opportunities? And of course, during the past year, it's been impossible to implement anything. But can you give us some color now on what kinds of opportunities you're thinking about?

Thank you for your question. Let me start on the shared buyback. to really start by saying that we are convinced that the market price of the stock today trading at 55% book value, it's simply too low, it's simply too low. VLANEX, unlike most banks in the region, has a 15 team portfolio. This is important, obviously, in and of itself, but also because it gives management the ability to focus on growth. Laddix operates in a region that overall is showing very positive signs, particularly in the segments that we operate, the trade, the trade band segment. Furthermore, as most banks in the world, we have ample liquidity, but more importantly, in this context, Laddix has an ample capital base. to grow, you know, with our capitalization level today being so high. So, given all that, we view this share by, since there's another way to return value to our shareholders in a tax efficient manner right away. So, keep in mind that as the region recovers, we will be able to lend to a wider client base and further diversify our portfolio. And yes, we do plan to reach pre-COVID portfolio levels. The second question was related to... Can you repeat the second question again, please?

Sure. You mentioned that you were hired with a mandate to implement new growth opportunities, and it's been impossible, but What are your thoughts today on what those opportunities might be?

Thank you for that question. And, yes, you know, after a year in Blare, not necessarily in the office most of the time for obvious reasons, some things have become more and more evident. Blare's model has proven to be resilient under self-economic conditions, that's And we've proven that even without deviating from the current target customers, large corporations and banks, nor changing our risk profile, the bank has many opportunities to grow and to increase our product offering. We have a longstanding and very close relationship with the best names in the region. And at the same time, we have a small share of wallets, and we have an important upside there. Aside of our current products offering, you know, bilateral, Claim Manila, trade finance, loan sophistication, the letters of credit, we see Gladys increasingly offering more structured trade finance value-added type products and solutions for our clients. Now, while the board and management revisit large business strategy for the future, we will continue to grow. And we, you know, the commodity boom is helping fuel part of that growth. Our syndication team is seeing more and more traction, as Annie mentioned before. Feeds generating from our Letters of credit are already up to pre-COVID levels. So once again, we see many avenues for growth as the board and management revisions the strategy. And I think we've proven also that we don't need to relax underwriting standards to do that. I think that's what I have to say in that respect.

Thank you. Okay. Thank you. Our next question comes from Jim Moroney with Singular Research.

Yes, good morning. Maybe if you could just touch upon a little bit about the increased exposures, both by country as well as industry. So, you know, I see that the exposure to Brazil has been increased, and I believe Brazil is still the hardest hit from the pandemic. So just to get your thoughts on the increased exposure to Brazil with respect to the pandemic and as well in terms of the industry, increasing your exposure to commodities, given the volatile nature of that industry and maybe just the thought process of increasing that exposure and maybe some risk management techniques or... other strategies you have in regards to industry?

Okay, so two things. Yes, Brazil has been hit hard on the health side, but the economy is growing. Most of our exposure in Brazil are financial institutions. We don't see, in top tier clients, we don't see, we feel very comfortable with our exposures In Brazil, we don't see any material risk in the financial systems. We have some also exposure on commodity-related green clients in Brazil. On the commodity risk and price volatility, as I mentioned during my remarks, we're thinking of this short-term saving it. So the price volatility of commodities, it's already hedged by the tenor and we don't see, we're not financing long-term and treating this as a super cycle. We're treating this as an inflation in prices and an increase in volumes, and we're treating it that way. So we are taking advantage of that. That is going to trickle down many economies, and that's what we're doing there. But I think more importantly also, in one of our slides, you saw the but graph broken down by industry and also by country. We do not expect major changes in that list major.

Okay, great. Thank you. Just one follow-up question, just in regards to the net interest margin. So it seems like interest rates are going to be held low for the remainder of 2021. So I imagine it would have a negative impact on the net interest margin and the net interest income for a full year. So perhaps you can just discuss some ways in which you are managing that margin and perhaps in some way take advantage of the low rates to put it to more of in your favor, and then maybe discuss maybe if there is going to be a raise in rates in 2022, perhaps to combat higher inflation and an overheating economy, what would you anticipate in terms of margins and income?

Sure. Great question. Yeah, as Annie mentioned, there's no doubt that the historically low sliver rates, you know, are impacting revenues. It is certainly a challenge. We're tackling it two ways. One is volume, and we have increased volume, and we're trying to keep increasing it. You know, we have traction. We have a good pipeline. We have a region that's good. And then the other thing is is obviously, you know, fee-generating transactions. So where I said letters of credit and value-added transactions, like the communications we just announced and more that are going to come in the future, you know, meeting terms, lending, that's going to help for sure in that respect. Okay, thank you.

Thank you. Our next question comes from Mike Hutchins with Brandis Investment Partners.

Hello, Jorge and Anna. Thanks for the call. I've got a question on the evolution of spreads in the coming quarter. So on page four of the presentation, it points out that there's a meaningful difference between the front book and the back book in terms of spreads. But on the other hand, it seems like looking at the, you know, the cost of your interest earning liabilities, there might be some room on that side. So, my first question is just, you know, how would you expect the loan to deposit spread or loans or the overall spread to act in the coming quarters? Do you think it can remain stable at current levels? And two, you're running with $820 million of cash due from banks. Is there an opportunity to deploy some of that into the securities portfolio, or are you holding excess liquidity for loan growth? And third, I'd just be interested in a little more detail on how you expect to utilize the share or purchase program. Will it be a gradual and consistent buyback or more opportunistic? Thank you.

Okay, so regarding the cash, as you can see, we've been growing the investment portfolio. We plan to keep growing it. Of course, we're monitoring our ability to lend as well, but the idea is to use that cash in a more profitable way. away with a world that is flooded with cash everywhere. So, you can expect to see continued growth in our investment portfolio. Spread chart sizing, as I said before, is going to be a challenge during 2021. The future, you know, that's actually 2021. It's a little, you know, it's higher than the big. We are seeing, you know, some inflation. Obviously, that can help us in the future on our top line. But certainly, short-term, it's going to be a challenge. I think there was another question.

I don't know if I... About the use of the speed or... Of the share buy.

I prefer not to comment on that. It will depend on market conditions. What I can tell you is we can certainly buy that and it's not going to affect our capital ratios that are important to maintain in forward.

Thank you. Thank you. Our next question comes from Brad Golden with Christopherson, Rob and Company.

Hi, everyone. Thanks. Thank you for taking my call. It's good to chat again. I want to focus a little bit more on just loan growth because it seems like, you know, while there are challenges in some of your target countries, there are also tremendous opportunities now. And whether you want to call it a commodity super cycle or just increasing commodity prices, clearly there's going to be large benefits to credit. a need for working trade capital. Can you just talk about what is encouraging you and how you think you can get the loan book, you know, back up, you know, let's say, you know, pre-COVID and beyond?

Sure. As I said, the region GDP growth estimate, you know, have been revised upward. We are, uh, uh, sensing that, you know, in our pipeline, we are sensing, uh, way more demand of financial institutions, which is part of our portfolio as the economy is recovered. We are, uh, uh, we're looking in the corporate side. We're, we're looking at a lot of companies, uh, uh, uh, asking us to help them with their liability, uh, uh, management, uh, And then we have obviously the commodities, direct commodity related companies. So we have been growing for three quarters and April's numbers are also showing growth. And if things keep going this way, I don't see why not. We cannot reach eventually 2019 levels. How fast? Well, it would depend on the recovery of the region.

Okay. I just see a lot of opportunities here. And you guys have been great stewards of capital. You've been, you know, fantastic on – fantastically disciplined on your lending book. And, you know, from the outside looking in, it looks very much like there's tremendous growth opportunity there.

We see it the same way.

Fantastic. And there are a number of other things I'd love to talk about. We'll do that offline. Thank you very much. Sure.

Thank you, Grant.

Thank you. Ladies and gentlemen, again, if you would like to ask a question, you may do so by pressing star 1 now. Now we have a question submitted via webcast from Banco Atlantida who asks, what is your assessment of the current situation in Central America, and is it considered as a market where that expected growth can be attained?

That's a good question. Central America has many realities. So you have political challenges obviously now in El Salvador. You have fiscal pressures in Costa Rica. Guatemala doing a little better. You still have inflow of remittances in almost every country. So Central America is a different reality. Central America is a significant part of our portfolio and a significant part also of our of our profits and bottom line. So we know the region, we know the players, we are in contact with the central bank as our shareholders constantly. And yes, you know, depending on the country, we do see a lot of potential. Actually, the recent, you know, syndication loan that we did, the qualified, by the way, at ESG, it's a top name in Central America. And we have others coming.

Thank you. At this time, we have no other questioners in the queue, so I'll turn it back to our speakers for closing comments.

Well, thank you for your questions. And I have no further comments. See you on the next call, and feel free to call us if you have any further comments or doubts.

Thank you very much.

Thank you, ladies and gentlemen. That concludes this morning's presentation. Thank you for your participation. You may now disconnect.