Foreign Trade Bank Of Latin America, Inc. Q2 FY2021 Earnings Call

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; and Mrs. Ana Graciela de Méndez, 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, Nick. And good morning, everyone, joining us to discuss our second quarter results. As usual, I'm here with our CFO, Ana Méndez and a few members of my executive team. Let's begin with Slide 3 and let's dive right into the main messages that we would like to convey today. The title of this 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, with 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 NPLs to total loans. Second quarter results improved: revenue increased 17% and also our net profit increased 10% quarter-on-quarter. Ana will share the details of our P&L 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 structured services that were driven by this unit are now in place.

Thanks, Jorge, and good morning to everyone. Let me now comment on record quarterly results of operations on Slide 10. 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 a higher average loan portfolio and lower funding costs, offsetting the negative impact of a continued downward trend in market rates. The latter was mostly responsible for the 3% annual decrease in NII, as I will discuss in more detail in a moment. Fees 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 showed a sequential quarterly increase of 41% and was more than twice the figure from the second quarter of last year. Other non-fee income includes net results from financial instruments, mostly associated with the valuation of currency positions and hedging derivatives.

Thank you, Ana. So summarizing, the second quarter of the year is, we think, a clear demonstration that life continues to trend in the right direction. We are 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 is clearly showing strong tailwinds.

And at this time, we will open the floor for questions. Our first question comes from Jim Marrone with Singular Research. Please go ahead.

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

Yes, sure. Excellent question. There's clearly inflationary pressure in many regions of the world for a couple of reasons. One is the disruption in supply chains because of logistical reasons, sanitary 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 the value chain and 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 inflationary pressures. Now in Latin America, most countries are facing inflationary pressures both internal and external, that is to say, due to 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 positive for Bladex's business model to the extent that we do not assume foreign exchange risk and inflation remains moderate. 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 have already seen that happening in most of the countries in the regions where we have exposure. For example, in Brazil we have 20% of our portfolio and in Chile we have 10% of our portfolio. So that's obviously going to be beneficial for our profitability.

Yes. I may add on the impact on both assets and liabilities. As you know, we maintain a mostly floating rate loan book. So as U.S. dollar rates go up, we should be able to benefit from re-pricing on both sides of the balance sheet with a net positive effect on net interest income and margin.

Okay, great. And just in regards to your credit quality: you say it's very good and your NPLs have remained steady. I'm curious as far as that credit quality, is it mainly concentrated on large enterprises? Or is there significant exposure to small business? As we come out of this recovery with the shakeout of small businesses and the reopening, how is that going to impact you? Can you provide some color on your credit quality as far as the mix and where you see it going forward?

Yes. That's also a very good question. I'll take a step back so you understand the historical context of our risk appetite and performance. Short answer is it's basically big corporations and banks. We have very little—actually, no exposure to small and medium businesses, because we exited that market back in 2018. After the large loss in 2018, the bank started de-risking. 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 and an ROE of almost 9%. When I took the role in March, the pandemic hit, and we decided for obvious reasons to de-risk even further: shortening tenor, increasing our liquidity at the expense of the size of the book, which was significant. We reduced about $1.5 billion in two months, roughly 25% of the book, and we shifted to more financial institutions and exited riskier sectors like mining, retail and airlines. As the pandemic evolved and 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. Going forward, as the region shows stronger signs of recovery, we are now in a position to take additional controlled risk in two main ways: returning to our historical mix of financial institution and corporate exposures, and returning to our historical tenor profile rather than staying overly short. These remain exposures to large corporations that normally have sales over $300 million and have access to local and international capital markets. We are not venturing into small and medium businesses. We will continue to complement this strategy with value-added products, like the ones I showed earlier in the presentation. I hope that answers your question.

Our next question was submitted 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. We do maintain some derivatives, in particular to swap to cover certain liabilities that we have in Mexican pesos. 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 explains the change. It's the change in valuation of these derivatives, which tends to be volatile in the interim during the life of the derivatives and the underlying exposures. They are economically well matched, but the accounting valuation may reflect volatility that is recorded in OCI. I don't know if that answers the question.

Due to temporary ineffectiveness.

Yes, due to temporary ineffectiveness. But they tend to correct over time, and since they are economically matched, at maturity they should go close to zero.

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.