Banco Latinoamericano de Comercio Exterior, S.A.

Hello, everyone, and welcome to Bladex's second quarter 2021 conference call on this 28th day of July 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 at and Mrs. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on their earnings relief, 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 to discuss our second quarter results. As usual, I'm here with our CFO, Annie Mendez, and a few members of my executive team. So let's begin with slide three, and let's dive right into the main messages that we would like to convey today. The title of the slide provides a good summary. Improved results, consistent growth, and pristine asset quality. Growth in Latin America is starting to regain traction as the economies reopen, commodity prices hit record levels, And remittances are also at record highs. As a matter of fact, just yesterday, the IMF revised for the second time this year its growth projections for 2021 for Latin America, from 4.6 in April to 5.8%, with the two biggest economies in the region, Mexico and Brazil, growing at 6.3% and 5.3% respectively. Having said that, daily new infections peaked only a month ago since the vaccine rollout has been, in general, very slow in most countries without the exception of Chile and Uruguay. So, we remain cautiously optimistic and well-positioned to keep growing and taking advantage of the opportunities that keep arising every day. In this context, we grew our loan portfolio and our investment portfolio for the fourth quarter in a row while keeping asset quality sound with only 0.2% of NPL's digital loans. Second quarter results improved. Revenue increased 17% and also our net profit increased 10% quarter on quarter. Annie will share the details of our PMAL later on in the presentation. Also, during the second quarter, we created a new executive position, EVP of Strategy and PMO, to further align our organizational structure and enhance our execution capabilities. A couple of new value-added structure services that were driven by this unit are now in place. Finally, the shared buyback plan announced in May is executed as planned. And the board decided to maintain the quarterly dividend at 25 cents per share. So let's move on to the next slide, slide four. So after collecting 100% of all scheduled maturities of over $3 billion for the quarter, we managed to disperse over $3.3 billion in the quarter. That's 21% compared to 21% more compared to the previous quarter for a net portfolio growth of 5% quarter on quarter. It's worth mentioning that new loans for the quarter were disbursed on average eight basis points below loans that mature and that were collected for the quarter as a result of the unprecedented liquidity that we see across the region. As Andy will note later on in the presentation when analyzing the net interest income, the increased volume for the quarter more than compensated the decrease in spread. Moving on to the following slide, slide five. Our portfolio continues to be well diversified by country and has increased 22% year-on-year. The reduction in exposure to investment-grade countries by 14% is explained by the recent downgrades for Colombia by two of the three main credit rating agencies. Our growth for the quarter was focused on the Dominican Republic, Guatemala, and Mexico, and mainly on resilient sectors like electric power generation, quasi-sovereign corporations, and top tier financial institutions. Moving on to slide six. Again, this is the same graph broken down by industry. Just to give some context, world growth, especially in the US and China, is fueling trade flows. Last time trade flows are expected to roll 21% in 2021 and an additional 8% for 2022. As we can see, most of our growth for the quarter was just like in the past quarter, related to the recent commodity boom, which is associated to both prices and volumes. So our oil and gas portfolio was up 71%, and our metals and manufacturing portfolio was up 40%, mostly in industrial-grade countries. Also, as the economies reopened, our food and beverage exposure increased by almost $100 million, or 32%, in companies based in Mexico, Panama, Peru, and Chile. Moving on to slide seven. The bar graph on the left shows the credit investment portfolio grew $134 million last quarter, in addition to a stable high quality liquid portfolio designed to enhance liquid yields. Both investment portfolios that add up to $523 million by the end of the quarter are well diversified and predominantly investment-grade ratings. As I mentioned in the last call, you can expect further growth of our investment portfolio going forward. Slide 8 shows our liabilities mix on the left and our asset mix on the right. It is clear that our most efficient funding source, deposits, keep growing in nominal terms and are now at $3.3 billion, while still representing 61% of our funding. Class A shareholders continue to have a meaningful participation, and the success of our GenQCD program has also contributed to the growth of our deposit base. As you can see in the chart on the right, our credit portfolio, loan plus investment, have finally surpassed pre-pandemic levels of Q1 2020 by almost $340 million. We believe that this consistent trend is very relevant, and we are confident that there is considerable room and opportunity to keep growing as the region continues to recover. In this sense, and moving on to slide nine, I want to show you just a couple of examples of value-added structure solutions that are now in place. The first one at the top of the graph is a supply chain finance receivable discounting mechanism through an established Latin American fintech platform that enables slides to leverage its vendor finance product and pick and choose to finance short-term receivables from targets The second one is a tailor-made cash and invoice management proprietary solution interconnected with the Panama Canal Authority, specifically designed for major freight companies whose ships go through the Panama Canal. These and other similar projects in the future will be supervised by our new strategic planning unit that contains a PMO office, to ensure efficiency and accurate time to market. With that, I will turn the call to Annie, who will walk us through the P&L implications, and then I will take it back. Annie?

Thanks, Jorge, and good morning to everyone. Let me now comment on Black's quarterly results of operations on slide 10. So, profit for the second quarter of 2021, was up by 10% on a sequential quarter basis and stable year on year at $14 million. Top line revenue growth was the most relevant aspect, positively impacting profits, having increased by a solid 17% with respect to the prior quarter and 29% compared to a year ago. Quarter on quarter, net interest income or NII was up by 11%, driven by higher average loan portfolio and lower funding costs, offsetting the negative impact of a continued downward trend in market rate, the latter mostly responsible for the 3% annual decrease in NII, as I will discuss into more detail in a moment. Keys continue to perform well, with a positive trend in the bank's traditional letters of credit business and a pickup in the loan syndications activity. So the $4.3 million total fee income for the quarter denoted a sequential quarterly increase of 41% and more than twice the figure from the second quarter of last year. Other non-fee income includes net results on financial instruments mostly associated with the valuation of currency positions and hedging derivatives. This line item displayed a gain of $234,000 in the second quarter of 2021, a $4 million improvement with respect to the second quarter of last year, when the bank recorded a $3.9 million loss, mostly related to the fair value adjustment of a debt instrument received as part of a loan restructuring that took place back in 2018. Quarterly profits also reflect expenses back to historical levels at about $10 million, up 11% from a seasonally low first quarter of the year, and up 22% from a year ago, when cost-saving measures were implemented at the onset of the pandemic. On a year-to-date basis, expenses remain at a similar level of $19 million, up 2% from a year ago. As we will see ahead, credit provisions of $1.4 million for the quarter reflect strong credit origination, while the bank reserves its sound asset quality with only 0.2% in NPL, as Jorge just mentioned. Year-to-date, Profits reached $27 million, down 17% from last year, mostly impacted by the net effect of lower LIBOR-based market rates on the bank's assets and liabilities, reducing NII by 16% in the same period. On slide 11, we present a more detailed information on the quarter-on-quarter net interest income variation, up 11%, as I just indicated. The 12% increase in average loans, along with higher average investments and lower cash position offsetting higher funding, resulted in a net positive volume effect on NII of $3.7 million. In turn, lower funding costs by 17 basis points were more than offset by lower lending rates down 23 basis points as a result of both the continued downward repricing of LIBOR-based lending rates and tighter lending spreads returning to pre-COVID levels, the latter reflecting sustained credit quality and ample market liquidity, particularly in the banking sector. Overall, the net rate effect was a negative $1.6 million for a total NII quarter-on-quarter increase of $2.1 million. On page 12, we present the same quarterly NII variation analysis, this time comparing it to the second quarter of last year. Here again, the bank recorded a strong volume effect, positively impacting NII by $6.7 million, having improved its average interest earning assets net with higher loans and investments and lower cash levels. Nonetheless, This positive effect was wiped out by the impact of 105 basis points or 73% decrease in average lending LIBOR base rate, coupled by lending spreads returning to pre-pandemic levels, as I just commented on. A combined volume rate effect resulted in a $0.7 million or 3% decrease in NII year on year. On slide 13, represent the evolution of allowances for credit losses, which continue to reflect the bank's high-quality credit exposure in its commercial and investment portfolios. NPLs remain unchanged from the previous quarter at $11 million, or 0.2% of total loans, while IFRS 9 Stage 2 credits, representing loans with increased risk since origination, mostly related to downgrades in internal control ratings and credits in watch lists, went down to 4% from 10% a year ago. The bank has been very successful in decreasing high-risk exposures in sectors most impacted by the pandemic. Stage 1 low-risk credits, representing 96% of the total exposure, increased by $464 million, or 8%, on robust credit origination and accounted for most of the $1.4 million in credit provisions for the second quarter of 2021. Overall, the bank's total allowance for credit losses, which incorporates forward-looking expected losses under IFRS 9, represented 71 basis points of the total credit portfolio at June 30th, 2021. Finally, on slide 14, you can see how credit growth starts to lower our Basel III CO1 capitalization, although still strong at 23.6%, for which credit risk-weighted assets increased by 11% quarter-on-quarter and are calculated under the Advanced Internal-Based Ratings Approach, or IRB, clearly reflecting the low risk of our exposures and our business focus on short-term trade lending to prime banks and corporations. In the graph to the left, we also present regulatory capital adequacy ratio of 18.2%, as mandated by the superintendents of banks of Panama, with the main difference from the internal approach consisting of credit risk-weighted assets being calculated under Basel's standardized approach. As a reference, The average regulatory capital ratio for the Panamanian International Banking Center is around 16%, denoting the industry's approach to manage a conservative capital position in a country with no lender of last resort. With respect to Glauco's stock repurchase program of up to $60 million announced in early May, up to now, the bank has repurchased a total of 728,000 Class E common shares for a total of approximately $11.2 million. In addition, as Jorge mentioned, the board recently declared an unchanged quarterly dividend of 25 cents per share, containing an attractive dividend yield of around 6.5% at current stock price. Let me now turn the call back to Jorge. Thank you.

Thank you, Annie. So summarizing, The second quarter of the year is, we think, a clear demonstration that life continues to trend in the right direction, keeping sound asset quality on a book of business that continues to grow, serving top-notch corporations, taking advantage of our unique competitive position in a region where we have operated for over 40 years, and that it's clearly showing strong tailwinds. I will now ask the operator to open it up for questions. Thank you.

Thank you. And at this time, we will open the floor for questions. If you would like to ask a question, please press star followed by 1 on your telephone keypad. 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 2. Again, to ask a question, please press star 1 now. Our first question comes from Jim Maroney with Singular Research. Please go ahead.

Yes, thank you for taking my question. I guess maybe the first question that I have is just in regards to going forward with respect to interest rates. So it's widely known that central banks will start raising interest rates to address the current inflationary environment. So I'm just looking at how Bladex is looking to capitalize on the increase in interest rates going forward. And maybe if you can just provide some color both on the asset side as well as on the liability side of your balance sheet.

Yes, you're sure. Excellent question. There's clearly inflation pressure. in many regions of the world for a couple of reasons. One is the disruption in supply chains because of logistical reasons, planetary reasons, and even climate reasons. The truth is that supply chain disruption is putting pressure on costs, and in order to protect margins, the pressure is being translated through divided change to consumer prices. Also, there's a demand shock, basically because of the growth in the U.S. and China, which is also being translated into, you know, inflationary pressures. Now, in Latin America, most countries are facing inflationary pressures for both internal and external, that is to say, commodities prices. Interest rates have been recently adjusted upward in Brazil, in Mexico, and in Chile. And we expect the same for the rest of the region in the second half of the year. This is obviously, to the extent that we don't have, we don't assume FX risk, this is obviously positive for Blythe's business model, as long as it, obviously, as long as we have moderate, moderate inflation. So, on the asset side, I think, It's very clear that we can potentially increase our margins as rates go up in local currency, and we're already seeing that happening in most of the countries in the regions where we have exposure. Brazil, we have 20% of our portfolio. Chile, we have 10% of our portfolio. So that's obviously going to be beneficial for our profitability.

Yeah, I may add on the fact, as you asked for, you know, the impact on both assets and liabilities, as you know, we do keep a, you know, mostly floating rate books.

So, you know, as U.S. dollar rates go up, we should be able to benefit, obviously, from a repricing on both sides of the balance sheet with a net positive effect in many interesting common drives.

Yeah. Okay, great. Thank you. And just in regards to your credit quality, so you say it's very good and your MPLs have remained stable. I'm just curious, just as far as that credit quality, is it mainly concentrated on large enterprises or is there a significant exposure to small business? I'm just seeing going forward, you know, how is that going to impact, you know, as we come out of this recovery, you know, With the, you know, shakeout of small businesses, the reopening, just can you provide some color on your credit quality as far as the next and where you see it going forward?

Yeah, that's also a very good question. And I'm going to try to take a step back so you understand where you know, a bit of a historical context of our risk appetite in our performance. Short answer is it's basically the big corporations and banks. So very little, actually no small and medium businesses because we exited that market back in 2008. in 2018. But after this big loss in 2018, the banks started de-risking. And that meant reducing exposures in countries like Argentina, reducing exposure to smaller corporates, and also not engaging in long-term transactions that involve naked commodity risk. 2019, ended with a clean book, an ROE of almost 9%. Then when I came in in March, the pandemic hit. And we decided for obvious reasons to de-risk even further, shortening the center even more, increasing our liquidity at the expense of the size of the book. And that was huge. That was $1.5 billion in two months, 25% of the book. And we shifted to more FI and exited riskier sectors like mining and retailing and airline. And then as the pandemic has evolved and the uncertainty has slowly dissipated, we have, as you saw in the presentation, increased the size of our loan portfolio, reduced the excess liquidity to normalized levels, and increased the size of the investment portfolio. Now, going forward, and as the region shows, you know, stronger signs of recovery, we are now in a position to take additional control risks in two main ways. One is rather returning to our historical mix of FI and corporate, and also return to our historical level of corporate, as opposed to... I mean, long term versus shorter term. Now, this is all big corporations that normally have sales over $300 million that have access to local and international capital markets. We are not venturing into small and medium business. We will continue to complement this strategy with value-added parts like the one I showed before on the presentation. I don't know if that answers your question.

No, that's great. Thank you for that, Culler. I appreciate that.

Thank you. Our next question was submitted by Tim Dunn from Elm Ridge. Could you provide some information on what makes up the $4.4 million charge to other comprehensive loss on the balance sheet?

Yes, sure. Thank you for the question. Yes, we do keep some derivatives, in particular, cross-currency swaps to cover certain liabilities that we have in Mexican pesos. And they are accounted for as cash flow hedges. So the valuation of these derivatives is recorded in other comprehensive income in our equity, and that basically explains the change. It's a change in valuation of these derivatives, which tend to, as you know, as we – they are actually economically very well covered, but in the interim, during the life of this in derivatives and the underlying exposures, they may have certain volatility that is reflected in LCI. I don't know if that answers the question. Due to temporary ineffectiveness. Yeah, due to temporary ineffectiveness, but they tend to correct over time, and since they are economically matched, at the end, they should go close to zero at maturity.

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

Okay. If there are no further questions, Thank you for your participation. Stay safe and have a great day. Thank you. Thank you.

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