Earnings Call Transcript - BLX Q2 2020

Operator, Operator

Hello, everyone, and welcome to Bladex's Second Quarter 2020 Conference Call. On the 28th day of July 2020, 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 today. It is available through the webcast and on the bank's corporate website at www.bladex.com. Joining us today is Mr. Jorge Salas, Chief Executive Officer; and Ms. Ana Graciela de Méndez, Chief Financial Officer. These 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 the Section 21E of the Security 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 market 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 and uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results may differ significantly from the results expressed or implied in these communications. And with that, I am pleased to turn the call over to Mr. Salas. Please go ahead.

Jorge Salas, CEO

Thank you, Cary, and good morning, everyone for joining us today to discuss our second-quarter results. Today, I'm joined by Ana Graciela de Méndez, our CFO; and a few members of the team. This morning I will be talking about our balance sheet management during the quarter. And then Ana will discuss the P&L implications of it. After Ana's remarks, I will make some closing comments and then I will open it up for questions. Before we dive into the balance sheet, I want to update you on our business continuity plan. The fact is that close to 95% of our staff is still working from home, and our BCP remains in place. We continue to serve our customers without any interruptions while keeping our employees safe and very engaged. I would like to start my comments today by referring to the main message we conveyed a little over three months ago in our last call when discussing our first-quarter results. As some of you may recall back in April, we emphasized that beyond the bank's historically solid capital levels, our business model allowed for the unique ability, and I want to stress, the unique ability to rapidly adapt to changing market conditions. I'm going to take it a step further now and argue that our business model becomes a comparative advantage that is especially relevant in the current context. Let me elaborate a little bit more on this. We all know that catering exclusively to corporate clients significantly reduces the credit risk in the portfolio. Approximately half of our portfolio is comprised of financial institutions, and the other half are basically top-tier corporations in the region. Bladex has zero exposure to the retail or small business segments which have been impacted the most by the crisis. Moreover, unlike most banks operating in the region, our loan portfolio is essentially short-term. The short-term nature of our portfolio not only becomes a selective liquidity buffer, but also when combined with the regional footprint, allows the bank to swiftly relocate the portfolio in resilient sectors and lower risk countries across Latin America. As we anticipated in our previous earnings calls, and as you will see now, successfully handling the different levers embedded in our business model has proven to be incredibly valuable in managing our balance sheet during the second quarter. As you can see in slide 3, we started the quarter with roughly $5.8 billion in the commercial portfolio, including almost $500 million in contingencies essentially trade letters of credit. The average yield in our portfolio back three months ago was LIBOR plus 194. In slide 4, you can see that we had almost $2 billion maturing during the quarter. I'm happy to report today that we were able to collect over 99% of all scheduled maturities for $2 billion and even had some prepayments of approximately $222 million. We only had roughly $20 million in loans that were successfully restructured during the quarter and are now current. This we believe is a clear demonstration of the sound credit quality of our loan portfolio. As you may see in slide 5, we disbursed over $1 billion during the quarter at wider spreads, averaging LIBOR plus 365 basis points. This $1 billion in disbursements were made after contacting every single client, reassessing the industry risk under COVID-19 for the entire portfolio, and tightening our underwriting standards. The math is very simple: $2 billion mature and we're almost all essentially collected on time while disbursements were $1 billion at almost twice the spread. The result on slide 6, is a $1 billion decrease in the commercial portfolio equivalent to 16% done by design to further strengthen our liquidity position in times of uncertainty. Slide 7 shows our asset size remained basically unchanged. Obviously, however, the reduction in the loan portfolio balances by 16%, coupled with the increase in liquidity that went from roughly 20% at the end of Q1 to almost 30% of total assets or $2 billion by June 30, have impacted the results for the quarter. Ana will explain the effect on P&L later in the presentation. The end result is a lower risk profile of the portfolio. As shown in slide 8, we ended the quarter with a three percentage point increase in exposure to investment-grade countries now accounting for 58% of the total portfolio and a continued important stake of 52% in top-tier financial institutions which we consider among the most defensive due to the regulated nature of the sector. The remaining exposure is well diversified among sectors and countries. Slide nine portrays the change in the liability size of the balance sheet compared to last quarter. Our deposit base, which has historically represented a stable cost-effective funding source, increased by $417 million or 17% quarter-on-quarter with an increase in the relevant participation from our Central Bank shareholders now representing 52% of total deposits. Again, a clear demonstration of their continued support during uncertain times. On the other hand, the bank was also able to tap capital markets and bilateral funding sources throughout the world increasing the tenor of our borrowings and debt from 10 to 16 months and benefiting from the decreasing interest rate environment. It's also worth mentioning that after the repayment of a 144a bond for $250 million last May, we successfully issued a long-term local bond in the Mexican market through which we were able to raise the U.S. dollar equivalent to approximately $230 million. This was our fifth issuance in the Mexican market and one that marked a significant milestone being the first issuer to tap that market since the pandemic started. I'm going to leave it there for now and hand the call over to Ana, our CFO, to comment on the financial results for the quarter.

Ana Graciela de Méndez, CFO

Thank you, Jorge, and good morning to all. So let's move on to Slide number 10 on second quarter results of operations. Net income for the quarter was $14 million representing a 23% decrease quarter-on-quarter and a 37% year-on-year, mainly due to lower interest and fee revenues, down a combined total of $5.3 million impacted by the bank's decision to increase its liquidity position and to lower loan balances in view of the current market environment as Jorge mentioned. Fees were also down on the absence of transactional structuring and syndications activity for the quarter in the current context. In addition, the combination of losses on financial instruments for $3.9 million, mostly related to an unrealized loss of the debt instrument measured at fair value through profit or loss, and the release of $2.6 million in credit provisions resulted in a net charge of $1.3 million overall as a deterioration for the quarter. All of these were compensated by a $2.3 million or 22% reduction in operating expenses. Profits for the first half of 2020 totaled $32.4 million, down 26% year-on-year reflecting similar trends as those mentioned for the quarterly results. Lower profits on a stable and solid level of equity of over $1 billion resulted in decreased return, recording close to 6% ROE both for the second quarter and the first half of the year. As of June 30, 2020, Tier 1 capital ratio under Basel III methodology increased 4.5 percentage points from the previous quarter to 24.8%, reflecting lower risk-weighted assets on the account of decreased loan portfolio balances, while asset quality remained sound. Net interest income or NII presented on slide 11 decreased to $21.7 million in the second quarter. And net interest margin or NIM of 1.28% was down 31 basis points quarter-on-quarter, mainly due to the change in asset composition whereby low-yielding average liquidity increased by 144% to an average of $1.9 billion during the quarter, representing 28% of total average assets from 12% in the previous quarter. Meanwhile, average loan portfolio decreased by 15% quarter-on-quarter to $4.8 billion, representing 70% of average assets from 86% in the previous quarter. As a result of this change in asset composition and also considering a 5% increase in average interest-bearing liabilities, the net change in volumes resulted in a net negative impact of $6.6 million in NII. This was partly compensated by the rate net positive effect on NII, amounting to $2.5 million, as the bank's interest rate gap was favorably positioned in a decreasing market rate environment. So excluding the liquidity component, the differential between loans and funding rates widened 46 basis points during the quarter, reaching 1.99% in the second quarter of 2020, compared to an average of around 1.5% in previous quarters. For the six months ended June 30, 2020, net interest income totaled $47.5 million, down 15% from the year before, while net interest margin of 1.43% decreased 34 basis points on the same period. This is explained by the change in asset mix alluded to before, as well as by lower market rates impacting the overall yield of assets, financed by our ample capital base. On to slide 12, during the second quarter of 2020, the bank recorded credit provision reversals totaling $2.6 million, mostly related to the sale of its single remaining credit impaired loan or NPL in the sugar sector of Brazil for $0.19 on the dollar, compared to a previously allocated individual Stage 3 reserve of 86%. This sale resulted in a $52.1 million write-off and a $2.7 million Stage 3 credit provision reversal, bringing NPL balance to zero at June 30, 2020. The bank's combined total of Stage 1 and Stage 2 allowances for credit losses was relatively unchanged with respect to March 31, 2020 balance. This was the result of lower reserve requirements on decreased end-of-period credit portfolio balances reflected in the $974 million reduction in Stage 1 exposure. This was offset by the increase of $136 million in Stage 2 exposure, as the bank made a downward revision in the outlook for certain countries mainly Argentina and for certain clients impacted by the current environment. Having said this, exposure that we have assessed as high-risk under the current context was reduced by $185 million to 11.1% of the portfolio during the second quarter, highlighting the collection of maturities and prepayments amounting to $79 million in the airline industry. Other sectors in this high-risk category are oil and gas upstream and its supply chain, sugar, retail and auto industry among others. None of these sectors represent more than 2% of the total portfolio aside from oil and gas upstream, which accounted for 2.9% of the portfolio at June 30 and it's mostly with a quasi-sovereign entity with a split sovereign support in an investment-grade country. Overall, the bank's total allowance for credit losses represented nearly 1% of total credit portfolio at June 30, 2020, 100% of which remains current. Credit provision reversals were offset by a $3.9 million loss on financial instruments, most of which was related to the decrease in fair value of a debt instrument recorded as part of a loan restructuring back in 2018. Continuing on to Slide 13. Operating expenses for the second quarter of 2020 decreased by 22% quarter-on-quarter to $8.3 million, mainly due to decreased salary and other employee expenses on the account of reduced performance-based variable compensation provisions. Year-to-date, expenses were down 8% to $18.8 million, also on lower personnel expenses as well as on cost savings in other expenses. Efficiency ratio stood at 41.5% for the quarter and 38.7% year-to-date despite these expense reductions mainly on lower revenues. I will now turn the call back to Jorge for his final remarks. Thank you.

Jorge Salas, CEO

Thank you, Ana. So to put this all together, I will say that the high-quality of our client base and the levers embedded in our business model have allowed us to successfully navigate this crisis up until now. Significantly increasing liquidity in a matter of weeks and collecting over 99% of maturities close to $2 billion across all industries and countries in a timely manner is perhaps the clearest demonstration of that. Having said that, we're cognizant of the significant challenges that lie ahead. 2020 GDP estimates for the region are close to negative 9.5% now. Moreover, most of the countries in Latin America have limited fiscal room and are still trying to figure out how to gradually reopen their economies while keeping the spread of the virus under control. In this context, after more than three years of conducting business in America through several negative cycles in regions, Bladex has a good understanding of the changing circumstances and the macroeconomic dynamics of the different countries in the region. Moreover, being a long-standing ally of our clients throughout many of these crises gives us a good grasp of their strengths and their challenges. We believe that, in general, our clients, mostly industry leaders in their respective markets with ample liquidity and funding sources, will not only be able to navigate the crisis but are well-positioned to take advantage of the opportunities that will arise for them in their sectors. Bladex will continue to be there supporting them. I'll now open it up for questions. Thank you.

Operator, Operator

At this time, we would like to open the floor for questions. It looks like our first question will be from Jim Marrone from Singular Research.

Jim Marrone, Analyst

Yes. Thank you for taking my question. So I guess my first question would be in regards to slide number 11. So it's just looking at the favorable interest rate gap position in the decreasing market rate environment and the widening of lending spreads. So I think I also heard the comment that you've increased some of the loan capacity to certain sectors. Perhaps if you can just comment again on the sectors that are seen as more favorable and your position in the future. And then I have a follow-up question after that.

Jorge Salas, CEO

Okay. So thank you for your questions. That's several questions in one if I understood correctly. Ana, why don't you start with the interest rate and spreads question and then I'll tap into the sector's questions.

Ana Graciela de Méndez, CFO

Sure. So as I mentioned, the net interest margin in general has been impacted due to the asset composition, the change in mix because we did increase our average liquidity and decreased average loans. And of course, liquidity yielding close to 19 basis points has had an impact in the net interest margin. But I also mentioned that we have seen a widening of net lending spreads, and that you can see in the graph on page 11 that we increased the differential between lending and funding rates by about 46 basis points. So at the end of the day, the combination of both the impact of lowering interest rates in our balance sheet, which I also mentioned was favorable during the second quarter because the liabilities re-priced faster. And then on the other hand, our lending did decrease. So this widening of spreads did not fully impact the net interest margin, at least not yet. So, I don't know if that is clear enough? Or if you want a follow-up question or maybe Jorge you can address then the country and sector question.

Jim Marrone, Analyst

Yeah. That's fine. The next question could be answered now.

Jorge Salas, CEO

Yeah. So, regarding the sectors. So, we see demand in top tier banks, so lower risk. Those are systemically important banks in low risk countries with a central bank with a lot of higher power. Then, we have the food industry, utilities, power generation, distribution, communications, and those are oil and gas imports. I mean, those are all sectors where we're seeing a lot of demand.

Jim Marrone, Analyst

Okay. Very good. And just one other question in regards to governments in the countries that you operate. So there seems to be a growing concern regarding the large amount of deficit and debt that governments are taking on in order to stimulate the economy and ride through this pandemic. So, can you just maybe provide some brief comments on how the rising government debt and deficits could impact the operations of Bladex?

Jorge Salas, CEO

I mean, certainly, it's very difficult times for most countries in Latin America. Also, it seems like the epicenter of the pandemic has moved to Latin America. So that places even more challenges. Now, the most vulnerable countries we see are Argentina and Ecuador, due to their weakness in their fundamentals and their need to restructure their debt. We've been reducing exposure in both countries even before the pandemic started more in accordance to our historically conservative approach. But, I mean, we lend in say in 17 different countries. I mean, they're all different realities. In effect, as we mentioned before, the shift in our lending strategy has been more towards investment-grade countries, which is almost 60% of the portfolio today. But, yes, certainly important challenges in most countries. We've seen also devaluations of their currency in protecting their international reserves. And we've also seen very active multilateral aid, especially from the IMF very recently. I don't know if that answers your question?

Jim Marrone, Analyst

Yes. That's great. Thank you for the comments.

Operator, Operator

Thank you. It does look like we have a web question. And it says, I understand the need for liquidity, but with $2 billion in cash earning less than 0.2% and with only $450 million in market cap trading at a 57% discount to book. Has there been any consideration of any stock repurchases, considering it would result in a 9% return from dividends and increased net book value per share. Thank you.

Jorge Salas, CEO

I will let Ana answer that.

Ana Graciela de Méndez, CFO

First of all, regarding liquidity, we view our current liquidity position as temporary, particularly during the second quarter when we had limited visibility on the future impact. We have strengthened our funding structure further and continue to maintain a highly diversified funding framework. Additionally, we are identifying new lending opportunities, and we plan to engage in increased lending while adhering to prudent credit underwriting standards. However, we anticipate that our liquidity of over $2 billion will begin to decrease, and we expect to see a slow increase in lending moving forward. It's important to emphasize that our liquidity situation is mainly temporary. On the topic of capital management, we regularly discuss this with our Board, focusing on both general capital management and dividends. Historically, our bank has maintained a robust capital position, especially in a volatile operating environment. As we expand our assets and lending, our risk-weighted assets will revert to levels we’ve seen in the recent past, which may reduce our capital ratio. Nonetheless, we will continue to manage the bank conservatively with respect to capital. Over the last five years, our average Tier 1 capital ratio has been 19%, which reflects our commitment to maintaining a strong capital position. I hope this answers your question.

Operator, Operator

Thank you. Our next audio question will come from Pavel Oliva from Rockhill Global.

Pavel Oliva, Analyst

Hi, good morning. I wanted to follow up on that question. You reduced the dividend a quarter or two ago, and considering how well you manage asset quality and liquidity, what would it take to restore the dividend? And have you discussed the possibility of a buyback with the Board, as it seems to be the best investment for shareholders at this point? Thank you.

Jorge Salas, CEO

Yes, I mean it's a very good question. First of all, as you all know the dividend policy is up to the Board and it's a quarterly decision based on the results for the quarter, so I prefer not to speculate on until we did this. We did maintain the dividend from last quarter, but more with the historically high levels of capitalization of the bank which are a reflection of the volatile nature of the region we operate in. And I can tell you, though, that capital preservation will continue to be a priority for sure during this time at least until we have some more visibility on how this whole situation is going to evolve. And we have yes ongoing conversations with the Board on obviously the future of the bank. I want to stress though that we do have a very robust pipeline and are ready to grow our balance sheet again.

Pavel Oliva, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question will be from José from MetLife.

Unidentified Analyst, Analyst

Yes. Hi. Thank you for taking my question. Do you hear me?

Jorge Salas, CEO

We do.

Unidentified Analyst, Analyst

I wanted to ask about your concentration in Argentina. Is the recent closure more related to the decrease in loans, or is there actually more lending taking place in the country? If it's more lending, could you provide some details on where you are lending, especially considering the recent downward revision of the outlook for Argentina? Thank you.

Jorge Salas, CEO

In Argentina, we have experienced a decline, with $180 million at the end of June compared to $226 million at the end of December 2019. Previously, at the end of 2018, we had over $600 million. This decrease is largely attributed to the largest integrated oil company in the country, which is state-owned and has a history of not defaulting, even during sovereign defaults in the past. With the recent rise in oil prices, we feel confident about our exposure in that market.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. Our next question will be from Robert Tate from Global Rational Capital.

Robert Tate, Analyst

Hi, there. Can you hear me?

Jorge Salas, CEO

Yes. Hi, Robert. How are you?

Robert Tate, Analyst

Hi, Jorge, and hi, Ana. Yeah, I just had two questions and then one request. So, firstly, I would just like to congratulate you on the conservative loan portfolio. It seems that the past work you've done to reduce the risk has paid off with very low impairments. And also, your presentation is quite nicely set out and informative. So, thank you for that. So Jorge, I just have a question for you and maybe Ana can comment as well. Please would you elaborate on the magnitude and recoverability of the airline loans? And please could you comment on the impairment indicators? And to what extent provisions have been raised for these loans? For example, it was reported that Bladex made a small $30 million loan to LATAM airlines in January 2020, and I presume they are indicated for this loan because the airline filed for Chapter 11 credit protection. So, obviously, I don't expect to go to any detail on any particular loan, but just generally, if you could just comment on the magnitude and recoverability of the airline loans and impairment indicators and whether there's any provisions raised so far?

Jorge Salas, CEO

Yes. Thank you, Robert. That's a very relevant question. Good news, we've been successfully reducing our exposure in the airlines industry by as much as 54% quarter-on-quarter. So, we do have exposure with two of the main airlines in the region. One is headquartered in Panama and the other one in Chile. And yes, there are obvious impairments on the Chilean carrier. And I can tell you that we are actively monitoring the Chapter 11 process on LATAM. But we feel comfortable with the research we have there.

Robert Tate, Analyst

Okay. Thank you. The second question is just based on your comments on the loan portfolio and the conservative nature of your balance sheet at the moment. It appears to me that the likelihood of Bladex having a surprising, large loan impairment at this point is fairly low despite the magnitude of this crisis. Would you agree with this assessment? Or is that too difficult to say even at this point?

Jorge Salas, CEO

I would agree. We cannot rule anything out given the uncertainty of the times. We are closely monitoring our portfolio and regularly communicating with our clients. We believe we have adequate provisioning. However, the reality is that no one knows when this situation will end. While aggregate demand is a concern for the future, we feel confident about the current health of our loan portfolio.

Ana Graciela de Méndez, CFO

If you allow me. Yes, I just want to add that as you know we follow IFRS 9 accounting norm. So we already incorporate forward-looking expected trade losses in our reserve model. So in the allowance for credit losses that we have as of June 30, 2020, we have already incorporated these forward-looking expectations in our reserves as it pertains to the current portfolio. So I can also add that Stage 1 and Stage 2 excluding the NPLs that we got rid of during the quarter, Stage 1 and 2 reserves coverage has gone up by 30% since the beginning of the year or 22 basis points. So we have been incorporating forward-looking expectations of our portfolio in the analysis of countries, sectors, and client specifics. So I just wanted to add that.

Robert Tate, Analyst

Thank you, Ana. I have one final request. I want to echo the previous caller's comments regarding dividends and share buybacks, especially concerning the share buybacks and the notion that it may be challenging to find a better investment opportunity at this time. If it's possible to have a conversation with the Board about these matters, that would be appreciated. The topic of dividends is frequently discussed, but I don't believe Bladex has previously engaged in share buybacks. Part of the reason might be related to the liquidity of the shares. I think having a discussion with the Board on this could be beneficial for the shareholders.

Jorge Salas, CEO

I'm sure. I mean, we do have open discussions with the Board about this topic and other relevant topics. I can tell you today the focus is to keep navigating the storm the way we're doing it. But certainly that discussion takes place. Sorry, but I cannot elaborate more on that.

Robert Tate, Analyst

Thank you.

Operator, Operator

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn it back over to our speakers for closing remarks.

Jorge Salas, CEO

Yes. So if there are no more questions, I want to thank you for joining the call. Thank you for the support in Bladex, and please stay safe and healthy. Thank you very much, everybody.

Ana Graciela de Méndez, CFO

Thank you. Good morning.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.