Foreign Trade Bank Of Latin America, Inc. Q1 FY2021 Earnings Call

Ladies and gentlemen, hello, everyone, and welcome to Bladex's First Quarter 2021 conference call on this 5th day of May 2021. This call is being recorded and is for investors and analysts 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.

Thank you, David, and good morning to everyone joining us today to discuss our first quarter results. I'm here once again with Ana Mendez, our CFO, and a few members of our team. It's really just over a year since the start of this painful pandemic. The success in containing the virus and the severity of the economic impacts 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 correspondent banks and all who have helped us navigate this difficult time. To all of you, we express our most sincere gratitude. Let's begin with Slide 3. 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 Bladex a little more than a year ago. I joined a bank with a clean balance sheet and 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 than the world was hit with the global pandemic. Not surprisingly, priorities immediately changed. Like most companies at that time, the immediate step we utilized was to adopt a defensive approach to ensure the bank's stability, reserve 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, Bladex mainly used the different levers in this business model, including an immediate and significant reduction by design of our credit portfolio in the second quarter of 2020. 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 sound credit portfolio with almost zero non-performing loans, a robust funding structure and a comfortable liquidity position.

Thank you, Jorge, and good morning to all. Now let's move on to Slide 8 on the bank's quarterly reports of operations. Profit for the first quarter 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 volume still behind pre-COVID level, 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 imports of refined oil. With respect to fees from restructuring 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 CMI Energía, a leading player in renewable energy generation in Central America, in which Bladex 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 first quarter of the year. Year-on-year, expenses were down by 13%, mainly on lower personnel expenses mostly related to decreased performance-based variable compensation provision. In addition, the bank recorded no credit provisions during the quarter as originations remain focused on high-quality countries and sectors, while the bank continues to downsize riskier exposures, being able to collect virtually 100% of scheduled maturities. So let's move on to Slide 9, where we present the trends 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-based 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 reprice 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 resulting impact in lower net interest margin and net interest income.

Thank you, Ana. As I said at the beginning of our call, I joined a bank with a clean balance sheet and 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 balance sheet and 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 offerings. Bladex is well positioned to navigate 2021, and we look forward to reporting our progress to you in future quarters. David, we can now open it up for questions.

And our first question comes from an analyst in the queue.

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 to 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 share buyback. We are convinced that the market price of the stock is trading at 55% of book value. It's simply too low. Bladex, unlike most banks in the region, has a pretty clean portfolio. This is important, obviously, in and of itself, but also because it gives management the ability to focus on growth. Bladex operates in a region that overall is showing very positive signs, particularly in the segments that we operate in, the trade and trade finance segment. Furthermore, as with most banks in the world, we have ample liquidity, but more importantly, in this context, Bladex has an ample capital base to grow, with our capital allocation level today being so high. So given all that, we view this share buyback as another way to return value to our shareholders in a tactical manner. 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. Could you repeat the second question, please?

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

Thank you for that question. After a year in this role, not necessarily in the office most of the time for obvious reasons, some things have become more evident. The Bladex model has proven to be resilient under such economic conditions. Even without deviating from the current target customers—large corporations and banks, no change in our risk profile—the bank has many opportunities to grow and to increase our product offering. We have long-standing and very close relationships with the best management teams in the region. At the same time, we have a small share of wallet with an important upside. Aside from our current product offering—bilateral trade finance loans, syndications, letters of credit—we see Bladex increasingly offering more structured trade finance, value-added type products and solutions for clients. While the Board and management revisit the larger business strategy for the future, we will continue to grow. The commodity boom is helping fuel part of that growth. Our syndication team is seeing more traction, as Ana mentioned before. Fees generated 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 revisit the strategy. I also think we've proven that we don't need to relax underwriting standards to do that.

Our next question comes from Jim Marrone with Singular Research.

Yes. Maybe if you could just touch upon a little bit about the increased exposures, both by country as well as industry. So 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?

Two things. Yes, Brazil has been hit hard on the health side, but the economy is growing. Most of our exposures in Brazil are to financial institutions. These are top-tier clients and we feel very comfortable with our exposures. In Brazil, we don't see any material risk in the financial system. We also have some exposure to commodity-related green clients in Brazil. Regarding your question on commodity risk and price volatility, as I mentioned during my remarks, we are thinking of this as short-term, trade-related activity. The price volatility of commodities is already hedged by the tenor of the transactions, and we are not financing long term treating this as a super cycle. We're seeing this as an increase in prices and volumes, and we're treating it that way. We are taking advantage of that because it is going to trickle down into many economies. More importantly, in one of our slides, you saw the graph broken down by industry and also by countries. We do not expect major changes in that risk profile.

Just one follow-up question, in regards to the net interest margin. 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 the full year. Perhaps you can discuss some ways in which you are managing that margin and perhaps take advantage of the low rates to put it more in your favor. And then maybe discuss 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?

Great question. As Ana mentioned, there is no doubt that historically low LIBOR rates are impacting revenues. It is certainly a challenge. We're tackling it two ways. One is volume: we have increased volume and plan to keep increasing it. We have traction and a good pipeline as the region improves. The other is fee-generating products: letters of credit, value-added transactions like the syndications we just announced, and more that will come in the future, and medium-term lending. Those will help to offset the pressure on NII. Regarding a potential rate increase in 2022, it's harder to predict, but if inflationary pressures lead to higher rates, that could help our top line over time as asset yields adjust. For now, volume and fee income are the primary levers.

Our next question comes from Mike Hutchens with Brandes Investment Partners.

I've got a question on the evolution of spreads in the coming quarter. On Page 4 of the presentation, it points out that there's a meaningful difference between the front book and the back book in terms of spread. But on the other hand, looking at the cost of your interest-earning liabilities, there might be some room on that side. My first question is how would you expect the loan-to-deposit spread or the overall spread to act in the coming quarters? Do you think it can remain stable at current levels? Second, you're running with $820 million of cash in 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? Third, how do you expect to utilize the share repurchase program? Will it be gradual and consistent or more opportunistic?

Regarding the cash, as you can see, we've been growing the investment portfolio and we plan to keep growing it. Of course, we're monitoring our ability to lend as well. The idea is to use that cash in a more profitable way in a world that is flooded with cash everywhere. So you can expect to see continued growth in our investment portfolio. Spreads are tightening and that will be a challenge during 2021. The future after 2021 is harder to predict. We are seeing some inflation, which can help us in the future on our top line, but certainly, in the short term, it will be a challenge. On the use of the share buyback, I would prefer not to comment on the exact timing. It will depend on market conditions. What I can tell you is we can certainly buy about $60 million and it's not going to affect our capital ratios, which are important to maintain going forward.

Regarding the use of the share repurchase, we will consider market conditions and our capital position. As Jorge mentioned, repurchases would be executed in a manner that preserves our capital ratios and supports our strategic objectives.

Our next question comes from Brad Golding with Christofferson, Robb & Company.

I want to focus a little bit more on loan growth because it seems like, while there are challenges in some of your target countries, there are also tremendous opportunities now, 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 and need for working trade capital. Can you talk about what is encouraging you and how you think you can get the loan book back up to pre-COVID levels and beyond?

As I said, the region's GDP growth estimates have been revised upwards and we are factoring that into our pipeline. We are sensing much more demand from financial institutions, which is half of our portfolio, as economies recover. On the corporate side, many companies are asking us to help them with liability management. We also have direct commodity-related companies that need financing. We have been growing for three quarters, and April's numbers also show growth. If things keep going this way, I don't see why we cannot eventually reach 2019 levels. How fast we get there depends on the recovery of the region.

I just see a lot of opportunities here. You have been great stewards of capital and fantastically disciplined on your lending book. From the outside looking in, it looks very much like there's tremendous growth opportunity.

We see it the same way.

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 a market where that expected growth can be attained?

What is your assessment of the current situation in Central America? And is it considered a market where expected growth can be attained?

Central America has many realities. You have political challenges in some countries; for example, El Salvador is under pressure fiscally and Costa Rica has fiscal pressures, while Guatemala is doing a little better. You still have inflow of remittances into almost every country. Central America is a significant part of our portfolio and a significant part of our profits and bottom line. We know the region and the players well. We are in contact with central banks and shareholders constantly. Depending on the country, we see a lot of potential. I think the recent syndication loan that we did—which qualified as ESG—is a top name in Central America, and we have others coming.

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

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

Thank you very much.

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