Foreign Trade Bank Of Latin America, Inc. Q1 FY2022 Earnings Call

Hello, everyone and welcome to Bladex's First Quarter 2022 Conference Call on this 4th day of May 2022. 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 Bladex's future results, plans and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are Bladex's expectations on the day of the initial broadcast of this conference call, and Bladex 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 release and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of the 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 very much, Shelby, and good morning to everyone. I'm here today with our CFO, Annie Mendez; our Chief Commercial Officer, Sam Canineu, is also on the line; and a few other members of my executive team, to discuss Q1 results for this 2022. Please let's go straight to Slide 3. Okay. So this quarter was once again a record-breaking quarter in terms of asset growth. We reached $8.4 billion in our credit portfolio at the end of the quarter. That is up 14% from our previous quarter and 38% from a year ago. The Commercial portfolio grew 12% quarter-on-quarter and 28% in the last 12 months, and it's now close to the historical peak of Bladex of $7.4 billion. This is now the seventh consecutive quarter of continued growth, this time boosted mainly by the increase in commodity prices and trade shows. Net interest income for the quarter was up 4% compared to last quarter and 36% year-on-year. Having said that, interest income does not reflect the full impact of the increased volume of commercial assets observed during the period as most of the growth took place in the last weeks, I should say, of the quarter, and the bank maintained higher liquidity levels at the beginning of the year in anticipation precisely of this expected increase in the credit portfolio. However, this robust asset growth will provide a strong basis for a sustained improvement in the bank's revenue growth in the forthcoming months. Nevertheless, profits for the quarter were down 13% year-on-year due to additional credit provisions based, as you know, in IFRS 9, directly related to a significant growth of the credit portfolio during the quarter. Once again, all the growth has been accompanied by strong credit asset quality, and nonperforming loans remain close to 0. Annie will later elaborate a little bit more on this, and she'll talk about the dividends recently declared from our Board. And of course, no changes there, as you saw. Moving on to Slide 4. In this slide, we show the usual waterfall graph to illustrate the fast turnover of our portfolio during the quarter. In Q1, we had more than half of our Commercial book maturing. That is almost $3.5 billion in maturities, and we were able to disburse $4.3 billion at significantly higher spreads in new loans for as much as 36 basis points on average. Therefore, lending spreads continue their positive trend. On Slide 5, we show the breakdown of our loan portfolio both in terms of geographies and sectors. The Commercial team, now led by Sam Canineu, has been actively taking advantage of the positive trend in trade volumes, such as downstream, oil and gas in Peru and Panama, and the food and manufacturing sectors in Mexico. This latter is closely tied to the U.S.-Mexican trade corridor. The exposure to financial institutions remained relatively stable in nominal terms at $3.1 billion quarter-on-quarter but decreased its relative participation to 42% of the total, down 6% from the previous quarter. In Slide 6, we see the balance sheet quarterly evolution during the last year. On the asset side to the left of the slide, we show a consistent growth trend in both our loan and investment portfolio, accounting for a combined total of almost 90% of total assets at quarter end. Let me mention a couple of things about our fixed income investment portfolio that has now broken the $1 billion mark at the end of the quarter and has been growing steadily for the last 6 quarters now. This portfolio complements our commercial assets and provides further diversification to our credit exposures. The main component is a credit investment portfolio of over $900 million, which increased $288 million during the quarter. At the end of the quarter, 48% of this credit investment portfolio was invested with non-LatAm issuers, mainly from the U.S. We also have a smaller liquidity portfolio of close to $170 million, 100% of which qualifies as high-quality liquid assets according to Basel III definitions, placed on multilateral and U.S. issuers and aimed at providing diversification to our liquidity investments, otherwise invested mostly with the New York Fed. On the right, we illustrate the evolution of Bladex's funding structure. Deposits were up during the quarter, reaching close to $3.3 billion, recovering from a typical seasonal behavior of the last months of the year. In Q1, we also saw an almost $450 million increase in long-term borrowings and debt, having closed several relevant transactions, such as the reopening of the debt placement in the Mexico capital markets for MXN 3 billion, approximately $150 million, and a $300 million global syndicated transaction done by our Treasury unit. These new resources will allow us to keep funding our commercial growth while maintaining our cost-efficient, diversified, and very resilient funding base. I'm going to leave it here for now and turn it over to Annie so she can walk you through the P&L and its strength. And then after Annie comments on the P&L, I will share our view on the current macro scenario and the impacts on Latin America in general and life specifically. And then, we will open it up for questions.

Thanks, Jorge, and good morning to everyone. Let me now give you a little more color on our first quarter results, starting on Slide number 7. Profit for the first quarter of 2022 for $11 million was down 13% year-on-year and 45% on a sequential quarterly basis. As Jorge commented, this lower bottom line results mainly reflect increased collective credit provisions during the quarter. If excluded, profit would have been close to fourth quarter 2021 level. As Jorge also commented, Bladex has capitalized on the strong demand for trade finance, boosted by higher commodity prices and trade flows. Loan growth was particularly strong during the month of March, so the related revenue stream was not fully reflected in first quarter results and remains to be seen in full in top line revenues in coming months, while IFRS 9 credit provision charges are recorded upfront, as you know. Notwithstanding, revenues during Q1 were up by 38% year-on-year and remained relatively stable, up 1% quarter-on-quarter, mainly on higher net interest income, I will surely expand on this, and on a sustained growth trend in letters of credit fees with increases above 30% year-on-year and in the mid-single digits quarter-on-quarter. Syndication fees were $2 million short of fourth quarter 2021 levels, reflecting the uneven transaction-based nature for this business. There is, however, an attractive pipeline of transactions ahead for 2022 as we have seen this activity pick up since the second half of 2021. Operating expenses increased 21% year-on-year and 7% quarter-on-quarter, mainly on higher personnel-related expenses, as we have been strengthening our workforce through new hires to support increased business activity. Also impacting the quarter-on-quarter expense comparison was a one-time salary-related expense reduction during the fourth quarter of 2021. Now moving on to Slide 8, I'd like to dive into the drivers on the quarterly evolution of net interest income or NII. The $6.8 million or 36% annual increase in NII mostly relates to the $1.7 billion expansion in the bank's combined average loan and credit investment portfolio. Considering as well the $1.8 billion growth in average funding, the net volume effect resulted in an increase of $6 million in NII when compared to the first quarter of 2021. In addition, the net grade effect added another $0.8 million to NII year-on-year, mainly as the all-in rate differential between loans and financial liabilities increased by 11 basis points on higher credit spreads reflecting growth in medium-term lending and market rates starting to pick up, aligned with expected Fed actions. Now when compared to the fourth quarter of 2021, NII was up by $0.9 million. Again, strong credit portfolio growth with average loans exceeding prior quarter balances by $492 million and credit investments by another $142 million was partly offset by the cost of increased liquidity position during the quarter, up $366 million on average, which in turn resulted from increased average funding for over $1 billion as the bank secured incremental funding toward late 2021 and early 2022 in anticipation of strong loan growth, which ultimately was fully deployed by March of 2022. This average asset composition with increased liquidity levels relative to total interest-earning assets had an impact on overall asset yields during the quarter, which in turn caused a 10 basis point quarter-on-quarter decrease in net interest margin, denoting net interest income to total average earning assets, reaching 1.32% for the first quarter of 2022. By the end of March, however, cash was reduced to $654 million. So overall liquidity, including the high-quality liquid assets bond portfolio, reached $825 million, in line with LCR regulatory requirements. As a result, net interest margin for the month of March recovered to 1.49%, a quick reversal from the downward trend in the first two months of the year and improving by 7 basis points from the fourth quarter 2021 level of 1.42%. Moving on to Slide 9, the bank maintains a high-quality credit exposure in its commercial and investment portfolios, as evidenced by the low level of NPL or Stage 3 credits close to 0% of total loans and by the relatively stable overall portfolio reserve coverage of 0.7%. Considering NPLs alone, reserve coverage exceeds 5x. Provisions for credit losses during the quarter amounted to $8 million as total credit exposure increased by over $1 billion. Most of this credit exposure, precisely 98%, remains classified as low risk for Stage 1 as per IFRS 9. Stage 2 credits with increased risk since origination remained at 2% of total exposure, relatively stable with respect to the preceding quarter and down from 5% a year ago. Please let's now move on to Slide 10 showing our capital position. As of March 31, 2022, Basel III Tier 1 capitalization stood at 16%, down from 19% in the preceding quarter and from 21% a year ago, due to the higher credit risk-weighted asset base, up 58% year-on-year and 20% quarter-on-quarter, impacted by increased loan and investment portfolio, while equity levels remained relatively stable at over $1 billion at the end of the quarter. In the same manner, still well above the regulatory minimum of 8%, the regulatory capital adequacy ratio reached 13.4%. Just to highlight, both these ratios follow Basel III methodology, but the first one takes the advanced internal risk-based approach in calculating credit risk-weighted assets while the regulator applies the standardized approach. With respect to quarterly dividends, the Board recently declared the same $0.25 per share, in line with preceding quarters, representing 82% of first-quarter earnings and a yield to current stock prices in excess of 6%. With this, let me now turn the call back to Jorge. Thank you.

Thank you, Annie. Great job. Let me just share a few high-level thoughts on the current macro scenario and the impact on Latin America and on Bladex. First of all, with respect to the effects of the Russian invasion on Ukraine, let me start by saying that Bladex does not have any direct or material indirect exposure to Russia, Belarus, or Ukraine. Moreover, Latin America does not have meaningful trade flows nor financial linkages with those countries. Although trade flows for certain products may be more substantial on a specific basis, such as fertilizers and new products, Bladex, however, also does not have a material credit portfolio exposure in any of these sectors. Based on our analysis, which obviously included close communication with our client base, we see minimal effect or impact of this conflict on our clients' operations. Having said that, the region is feeling the ripple effects of the conflict, some of which may even play to the region's advantage. There's no doubt that the surge in commodity prices, exacerbated by the conflict, has resulted in a positive trade shock for Latin America. With the exception of Mexico, whose manufacturing-based economy and most of Central America are net importers of commodities, all other major Latin American economies are key commodity exporters. Now while the commodity price increase is favorable for the commodity exporters in Latin America, obviously, lower growth and higher inflation are clearly not. As a result, growth forecasts for the region were revised down slightly, inflation rose, and official interest rates are now expected to move further into restrictive territory. Irrespective of that, foreign trade in the region should still grow almost 10% for this year and close to 5% for 2023. With all this said and given the quality of our customer base and the short-term reach of our portfolio, we at Bladex remain optimistic with our prospects. As illustration, part of the healthy increase in our loan portfolio this quarter was due to the fact that Bladex was able to capture demand for financing from large importers and exporters that were overlooked by the typical global commodity banks that either had their lines stopped or were focused on managing the Russian-Ukraine exposure. We believe that such a window of opportunity for Bladex should continue at least through the second quarter of this year, allowing us to continue on a trend to increase our lending margins. The same way we did during the onset of the pandemic, we will continue to leverage our agile business model, our expertise in the region, and focus our lending in activities on winning sectors, countries, and clients. Finally, as we reach a more efficient use of our capital, we are confident in our ability to increase the profitability of our credit portfolio, given its high turnover as well as favorable market dynamics that will benefit our business model. I'm going to leave it there. Thank you, and we will now open it up for questions.

We have our first question from Chris Sakai with Singular Research.

I'm in for Jim Marrone. I just had a question on inflation in Latin America. How concerned is Bladex with inflation? And which country do you see to be the most problematic in regards to inflation?

Yes, that's a great question. Firstly, I want to highlight our positive view on the responses from the main central banks in the region, all of which are shareholders of Bladex, as they took proactive measures even before the Federal Reserve to address inflation. We're not overly worried in the short term. There has been an increase in local real interest rates, which benefits Bladex as demand for hard currency financing rises. This may lead to some economic slowdowns, but due to the short-term nature of our portfolio, we believe we can manage that effectively. If you ask me, we are somewhat concerned about countries like Argentina and to a lesser extent Brazil, but it’s not something that keeps us awake at night. We are monitoring the situation closely and feel comfortable with our exposures, which are primarily to exporters and hard currency. I don't know if you want to add anything, Annie.

No, I think it's very clear. In terms of particular countries, I think Argentina would probably be very much impacted by higher inflation.

Which by the way, we have dramatically reduced our exposure there from, I don't know, $800 million at some point a few years ago to less than $100 million today.

Okay. Great. And then one question on your investment portfolio. It's grown pretty well over the last year. Do you have any idea how it's going to grow for the rest of the year? What is your target there?

Yes, good question, Jim. As I said in the opening remarks, that portfolio is designed to complement our commercial loan portfolio. So to the extent that we have increased demand in the loan portfolio, we see the investment portfolio slowing down. But they work together. So when and if we see less demand on the commercial side, when that happens, then you'll potentially see an increase in our investment portfolio. So today, demand on the commercial side is very strong. So we see a slowdown in the growth of our investment portfolio.

We'll take our next question from Tom McGuire, Private Investor.

And good conference call and good results. The one thing I don't understand is I see a disconnect between the market price of your stock and your book value, and it seems to me it's 40% or greater. And your book value is a reflection of your balance sheet, which is a reflection of your loans, which you have good loan quality, short term in nature, and very low nonperforming, all that. So why do you think there's such a wide disconnect between your stock price and your book value?

Thank you, Tom. Yes, you are absolutely right, and we are very much aware of that. In that regard, we really want to improve. Going forward, you should pay attention to that. Our IR team and capabilities will be able to better communicate the growth prospects for Bladex, which we are very excited about and hope to see reflected in the share price. As you mentioned, our book value is significantly higher than what the market currently acknowledges. We also have a very clean book, which largely reflects the current book value of the bank.

Yes, you're absolutely right, there is a disconnect. For us, there is no fundamental reason for that to happen, and we expect the share price to eventually reflect our true value.

Okay, good. So to paraphrase you, you're saying there isn't anything wrong that investors are concerned with. It's more that a whole bunch of investors don't know about you, and you've got to do a better job. Exactly?

That's part of it. You can see Latin American banks, which may not be direct competitors, are trading clearly above book value due to their different business models and shareholder structures. We believe there is no reason why we shouldn't be at least at that level, and we are confident that this will happen sooner rather than later.

Okay. And like I said, very good call.

Thank you.

Thank you, Tom.

We'll take our next question from Brad Golding with CRC.

I have a handful of questions. First, regarding the loan book, are you experiencing increased funding volume, or is the growth in your loan book due to the same amount of funding but higher commodity prices?

Good question. Sam, do you want to take that one? Are you on the line?

Sure, Jorge. Yes. I think, Brad, the answer is both. Of course, we see a lot more coming from commodity inflation and the fact that we're financing the big importers and exporters of commodities in the region that they increase their working capital needs. So we're happy that we can follow that because we had lines available for them. But there is also an underlying increase in just our origination of new loans with new clients as well as with existing clients. So, but obviously, the more material is giving the higher commodity prices. I hope I answered your question, but no, if not.

No, definitely. My next question is, do you anticipate that continuing? With stable commodity prices, will you keep growing the loan book?

Yes, I think the timing of comparisons matters. I expect to see an increase even if commodity prices remain stable since last year, although not to the same extent. We are being selective in our approach to growth, focusing on increasing profitability and extending the lifespan of our portfolio. Based on the current market information, I believe there are good opportunities for continued growth despite the existing book and even with the rising demand for commodities. However, large volumes driven by increases in commodity prices can influence the figures depending on their scale.

Of course. And I assume the higher commodity prices are enhancing the credit quality of your borrowers broadly?

Yes. On a net basis, yes. We finance both importers and exporters. In the LatAm region, many exporters are commodity producers, which positively impacts their business and profitability. However, we must also consider importers, particularly national oil companies. Currently, higher commodity prices are not necessarily beneficial for them since they are paying more for raw materials and finished goods. We are mainly dealing with sovereign entities or very large corporations, so there are no concerns in that regard.

Your importers usually have stronger credit profiles while your exporters are weaker, but they are expected to improve. This seems to be a favorable scenario. How much can you expand your loan book with the existing capital? Additionally, can you maintain your share buybacks?

Annie, do you want to take that? Or should I take?

Sure. So as I said, we are a strong, capitalized bank, we will continue to be, given the volatile nature of the region. Everything related to capital management, dividends, stock repurchase, it's up to the Board and it's continuously discussed at the Board level. I prefer not to speculate about future dividends or buybacks. What I can tell you is we're going to be strongly capitalized. We are not going to risk that in our entering into a territory as our capital ratios are tier and just to make the portfolio more efficient and more profitable. I don't know, Annie or Sam, do you want to add something, feel free.

Yes. I would like to add that our business model, which primarily focuses on short-term, trade-driven activities, is advantageous in times like these when there is an increase in demand for working capital and rising interest rates. This allows us to quickly turn our book and capture debt. We believe that a significant portion of our portfolio matures in less than a year, so capital should not be a concern.

Okay, fantastic. And a couple of final points, and we're always happy to have you visit New York. We'll certainly roll out the red carpet when you get out to promote the bank. And it also looks like your Treasury group did a great job of managing the rate risk on the fixed income portfolio.

Thank you, Brad. We constantly go to New York, and we love the red carpet.

Okay. Well, please call me when you do. Congratulations on another great quarter.

Thank you.

We do have a submission from the webcast. You indicated that net interest margin recovered in the month of March to a level of 1.49%. Do you see this as a sustainable level going forward?

Short answer is yes. We do believe that the net interest margin close to 1.50% in March is sustainable going forward. As we said before, the growth is fueled by mostly by a significant trade-related demand. And also, there are very significant, in some cases, rate hikes in local currencies in most countries in the region, which has increased the demand for dollar currency financing, and that obviously helps Bladex.

And a follow-up question. How will expected Fed actions to increase interest rates impact the bank's margin and overall net interest income?

I'll take that. Like we've mentioned previously and as you may know, due to the nature of our lending business, which is predominantly made up of short-term or floating rate notes, Bladex's interest rate gap is very moderate. In addition, during the last couple of years, we have been entering into fixed-rate, medium-term debt capital markets transactions to provide protection against the risk that could be derived from our fixed-rate assets also in the longer tenor. I can comment that what we are observing so far is that the base rate variation effect has been neutral to positive to our NII. And in addition, over $1 billion of interest lending assets are financed by noninterest-sensitive equity. So as the process of repricing on both sides of the balance sheet materializes, the bank's bottom line will also benefit from the increase in gross yields of its assets. I'd like to put this into perspective, giving you high-level numbers. With over $1 billion in equity, let's say, a 250 basis point increase in rate would add $25 million to NII on an annualized basis or approximately 30 basis points to net interest margin. That's, of course, once all repricing in assets and liabilities have finalized. Of course, as interest rate increases are gradual and ongoing, this full impact may take several quarters after rate actions subside.

We do have another question from the website. The quarterly results and comments attribute an $8.1 million provision for credit losses, approximately $0.22 per share on the expansion of the portfolio. It's also noted that the portfolio growth was concentrated at the end of the first quarter. These items imply that the second quarter should generate a higher NII without offsetting increase in loan loss provisions, correct?

Correct.

Yes, that's correct. As we mentioned, a reflection of that is the net interest margin that we observed in March, which was close to 1.50%. Assuming a stable portfolio in the next quarter, you would see increased revenues from that growth along with stable provisions.

Yes, that's absolutely right.

It appears that we have no further questions at this time. I will now turn the program back over to today's presenters for any additional or closing remarks.

I just want to thank everybody for their questions. We are extremely excited with the performance of the bank and looking forward to increasing growth and profitability. Thank you very much, and take care.

Thank you.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.