Earnings Call Transcript - BLX Q4 2022

Operator, Operator

Good morning everyone and thanks for joining our Fourth Quarter 2022 Earnings Call. Before we begin our presentation, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the Company's control. For a description of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and our earnings release. Speaking on today's call is our CEO, Jorge Salas; and our CFO, Ana Mendez. Also joining us today are some of my colleagues from the executive team that will be available for Q&A. With this, let me turn the call to Jorge. Please go ahead.

Jorge Salas, CEO

Thank you, Carlos. Hello everyone and thank you for joining. Today, we will discuss our fourth quarter results and take the opportunity to summarize the progress on the execution of our first year of our five-year strategic plan. Let me start by reviewing the highlights of 2022 and then I will turn the call to Ana, our CFO, who will explain the fourth quarter results in detail. Finally, I'll make some closing comments related to the outlook for 2023, how we're navigating the current environment and provide some guidance. Let me go straight to Slide 3 please. Amid geopolitical tensions, record high inflation and a global slowdown, Bladex delivered very strong results. In 2022, we managed to grow our loan book by as much as 18% during the year, increase our margins and maintain a very robust asset quality. Our net interest income was up 71% year-on-year, and our net interest margin increased almost 40 basis points. Additionally, fees, both syndication and letter of credit fees were up 8% year-on-year. The results showed net income for the year was almost 50% higher than last year, and return on equity was almost 300 basis points higher than last year, and perhaps more importantly, the trend, as we will see now, is very positive. Behind these results, there is a renewed management team that is carefully executing a well-thought-out strategy designed to capitalize on the strong upside potential of our unique business model while taking advantage of the current macro scenario. Economic activity in Latin America exceeded our expectations and remained resilient last year. The region grew almost 4%, and foreign trade flows reached record highs. The anticipated and decisive action of Latin American Central Banks, our Class A shareholders allowed a gradual absorption of global shocks. There is no doubt that the economic activity in the region, together with tight credit markets and high commodity prices had a positive impact on Bladex's business performance. Having said that, the main drivers of the solid financial results for 2022 were largely the product of the execution of our strategic plan. Moving to Slide 4. Let me give you a brief update on the progress of our strategic plan. As I mentioned during our Investor Day in November, Bladex has a clear opportunity to increase its profitability without changing the essence of its business model. Optimizing capital allocation, increasing cross-sales with fee-generating products, automating key processes, expanding our client deposit base and growing our customer base without changing our credit risk appetite, are some of the avenues for growth in the plan. Our renewed commercial team, now headed by Sam Canineu, has been able to expand our client base by 29% thus far. All of our new clients have the same risk profile as our current client base, top-tier corporations in the region. Furthermore, 42% of the average growth in 2022 came precisely from clients that were added during the year. The commercial team was also able to capitalize on our single point of contact model and manage to increase product penetration by 15%. That is, 15% of our customer base has now at least one additional product. Moreover, we were able to increase our corporate deposit base, which together with fixed rate, medium-term funding that the bank has been securing since 2020 has been key to mitigating the impact of interest rate hikes on our cost of funds. All of this was possible not only because we added new bankers in key markets. It was possible because we also streamlined our new client onboarding processes, reducing new onboarding time by 43% and also redesigned our key operational procedures to reduce inefficiency, allowing for additional transaction volume, which has increased already by 30% over the last year. I'm going to leave it here for now and turn the call to Ana, our CFO, who will walk you through our fourth-quarter results in detail. Ana?

Ana Mendez, CFO

Thanks, Jorge. Good morning, everyone. I am pleased to present our quarterly and annual results starting on Slide 5 with a $31 million profit for the fourth quarter of 2022, reaching a total of $92 million for the year, denoting a 47% annual increase. In turn, annualized quarterly return on equity has also been increasing, reaching a level of 11.6% in the fourth quarter, positioning the bank for sustained double-digit return on equity. Actual return on equity for the year 2022 reached close to 9%, up by 284 basis points from the previous year. In the next few slides, I will give you more detail on the main drivers sustaining the positive trends that flowed to the bottom-line and increased profitability. Turning to Slide 6. Total assets increased by 15% on an annual basis to $9.3 billion. On the back of strong 18% growth in the loan portfolio, reaching $6.8 billion at year-end. Including another $0.9 billion in contingencies, mainly consisting of the issuance and confirmation of letters of credit, Bladex's commercial portfolio closed at $7.7 billion, an 18% increase from the previous year. This strong growth in Bladex's core business reflects its focus on enhancing cross-selling and expanding the customer base, while taking advantage of the macro environment in Latin America with increased economic and trade flow activity. The bank's commercial business is complemented by an investment portfolio, allowing for further diversification of exposures by country, with a balance of over $1 billion at year-end. In addition, the bank's cash and due from banks, mostly placed with the New York Federal Reserve, stood at 13% of total assets at year-end. Following prudent liquidity management under Basel III standards, as required by Panama's banking regulator. Turning to Slide 7, you can see the high turnover of our commercial portfolio with maturities exceeding 60% of the total during the quarter and disbursements for a similar amount allowing us to quickly pick up the trends in higher lending spreads, which we continue to experience for several quarters now. As we continue to focus on margin expansion through optimization of portfolio mix and risk-adjusted returns, the average lending spread over the market base rate, which is mostly reflected in the fourth quarter, stood at 2.81%, denoting a 66 basis points increase from a year ago. The average duration of the portfolio remains short at close to 12 months, with 72% maturing within the next year. As shown in Slide 8, our funding structure stays well diversified. Deposits have historically represented an important and resilient source of funding throughout economic cycles, while also being the most cost-effective one. As of December 31, 2022, deposits represented 40% of total funding, with 45% coming from our central bank Class A shareholder, another 39% from our client banks and corporations, and the remaining 16% related to our Yankee CD program. Apart from deposits, Bladex's funding comes from several sources across the globe, including ample availability of bilateral credit lines from a wide range of correspondent banks and the continuous access to the debt capital markets as well as the global syndicated loan market. Turning to Slide 9, Bladex remains well-capitalized, reaching a Basel III Tier 1 ratio of 15.3% and the Panamanian regulator's capital or equity ratio of 13.2% at year-end. During 2022, Bladex achieved a more efficient use of capital, having increased its loan portfolio at higher margins and returns. As we commented on our last quarterly call, we saw a deceleration in loan growth during the fourth quarter, having favored margin expansion over balance sheet growth, while remaining committed to a sound capital position, a pillar of our business model. In addition, the Board recently declared a dividend of $0.25 per share for the quarter, unchanged from preceding quarters and representing a payout of 29% of fourth quarter earnings. Turning to Slide 10, we present the continued positive trend in net interest margin and spreads driving strong top-line performance. Net interest spread, representing the rate differential between interest-earning assets and financial liabilities, reached 1.63% in the fourth quarter of '22, an increase of 20 basis points from the previous quarter and 37 basis points from a year ago, mainly on account of increased lending spreads. In turn, net interest margin, representing the yield of interest-earning assets, including the portion financed by the bank's equity, reached 2.11% in 4Q '22, an increase of 34 basis points from the previous quarter and of 69 basis points year-on-year, supported by both higher net interest spread and by the impact of increasing market rates on the overall yield of assets financed by the bank's equity. Moving on to Slide 11, we can see that the overall impact of rate increases on assets and liabilities supported by higher lending spreads and market rates, as I just stated, was the reason behind about half of the $61 million increase in net interest income for the year 2022. The other half is attributed to strong average credit growth, mainly on the loan portfolio, which increased by over $1.4 billion or 28% when compared to the year before, complemented by another $536 million growth in average credit investment portfolio accompanied by the related increase in financial liabilities and continued prudent and proactive liquidity management. On Slide 12, fee income from letters of credit has shown an increasing quarterly trend throughout 2022, resulting in a total of $14 million for the year, representing a 16% annual increase from the previous year. The other important component of fee generation for the bank relates to the structuring and syndication business. Given its transaction-based nature, its activity should be analyzed annually rather than on a quarterly basis. For the year 2022, it also showed stronger results increasing by 15% to a level close to $5 million. As shown on Slide 13, Bladex maintains a sound asset quality level. Low-risk Stage 1 exposure accounted for 98% of the total credit portfolio at $8.5 billion at year-end. Accounting for another 1.7% were credits classified as Stage 2, for a total of $147 million, representing closely monitored credit that have experienced increased risk but are still performing. Finally, Stage 3 or impaired credit represents merely 0.4% of total exposure for a total of $35 million at year-end 2022, as we classified new credit for a total of $25 million as impaired during the fourth quarter. Overall, total reserve coverage is about twice the balance of impaired credit. Total credit provision charges for 2022 amounted to $19.5 million related to increased individually allocated allowances to Stage 3 credits as well as to an increase of Stage 1 collective reserve on credit portfolio growth during 2022. On Slide 14, we can see a positive trend in the bank's efficiency, as solid revenue growth has consistently overcompensated higher expenses by design. For the year 2022, the cost to income efficiency ratio stood at 33% compared to 38% in the previous two years. With a focus on strengthening Bladex's execution capabilities, expense increases mainly reflect higher salaries based on new hires and a new performance-based variable compensation structure, along with other expenses related to strategic initiatives to improve processes and technology. Let me leave it here and turn the call back to Jorge for his final remarks. Thank you.

Jorge Salas, CEO

Thank you very much, Ana. The macroeconomic and financial outlook for Latin America is far from being settled and balanced. We see 2023 as the year of transition, transition towards lower growth, transition towards lower interest rates and transition towards a slightly lower inflation rate, but still above the target. Clearly, inflation is likely to be more persistent than many expected not so long ago. The space and timing for the turning point interest rate is the big question mark. Our expectation is that this will happen towards the end of 2023. Key for the region and for Bladex is the fact that trade flows that are currently at record levels will grow an additional 2%, reaching almost $3 trillion by the end of 2023. This is 37% higher than pre-pandemic 2019 levels. There is no doubt that the surge in commodity prices, exacerbated by the Russian invasion of Ukraine, is the main driver of this positive trade shock for Latin America and particularly for South America. Having said that, while commodity price increases are favorable, mediocre GDP growth and high inflation is not favorable for the region. In this context, during 2023, we will focus more on profitability and less on growth. Moving on to Slide 17, let me mention a few words on management's focus for the year. Unlike last year, where we grew 18%, in 2023, we aim at single-digit growth, 3% to 4%, consistent with the macro trend. We plan to maintain disciplined credit underwriting standards, as the current high-interest rate environment poses clear risks, particularly for over-leveraged companies, especially if coupled with a demand shock. Thirdly, as Ana mentioned earlier, we see a positive trend in margins going forward. The bank is currently positioned as asset sensitive in anticipation of additional interest rates. Moreover, our front line and our treasury units are focused not only on optimizing risk-reward lending spreads, but also ensuring that we keep growing our deposit base, which is clearly our most cost-efficient funding source. Lastly, we are convinced that we need to keep making progress on process redesign and automation, and enhancing our product offering. As I mentioned before, changes made in key processes are already yielding good results. We're working hard to complement our product offering with treasury and structured trade and working capital solutions. This will not only strengthen client relationships but also favor our profitability going forward. When we go to the last slide, Slide 18, let me share some guidance for the year. We expect core equity ratios to be strengthened. We are forecasting a range between 15% and 16%, as our growth will be moderate and even more profitable than last year. We expect our net interest margin for this year to be above 2022 levels between 2.1 and 2.4. Net interest margin for Q4 stood at 2.1%, and that figure still does not incorporate the full impact of higher market rates. Fees will continue to grow between 8% and 10%, mostly from letters of credit, but also from our syndication desk. Our efficiency target will be around 2022 levels, that means 33%, as we expect that higher revenues will continue to offset investment in process improvement and technology. Last but not least, our return on equity will likely be in the low-double-digits in line with the longer-term guidance that we shared during the investor day last November. By the way, the full webcast is available in the IR section of our website. I'm going to leave it here for now and open the call for questions. Operator?

Operator, Operator

We'll start with the first text question from Patrick Brown. First of all, excellent results and congratulations. I have two questions. My first question is about the recent supply chain disruptions, especially with China. There's been a lot of discussion about Mexico benefiting from near-shoring. What are you observing on the ground? Has this created any opportunities for Bladex? My second question is regarding revenue growth during 2022, which has helped offset the significant increase in expenses. However, part of this revenue growth is tied to market performance. How are you preparing the bank for potentially lower market scenarios to maintain the current cost to income ratio?

Jorge Salas, CEO

Thank you, Mr. Brown, for your question. Let me start tackling the second question first. As we have mentioned, the main objective of our strategic plan is to ensure that the bank has sustainable returns. As we stated on Investor Day, the target is mid-teens returns by 2026, and we're clearly on track as you can see. Bladex's share wallet with most clients is improving, but there’s still clearly a big upside, and our product offering is also limited, as I said, we're working hard on that. We are developing new products that will generate additional spreads and fees and that will compensate for a potential decrease in rates. This includes scaling our letter of credit business, project payments fees, revenues from treasury products, and expanding our deposit base. That will certainly compensate for a decrease in rates as we make progress. And in scaling the bank, we will for sure maintain our efficiency and potentially improve it. I have to say, that having said all this, we do not see pre-pandemic interest rate levels in the near future. For sure not at 0%, from where we started. In regards to the second question about near-shoring, the short answer is yes, we are starting to see some business opportunities that we believe are the result of the early phases of near-shoring, particularly in Mexico. We're seeing companies developing industrial parks, mainly in the automotive and telecommunications sectors; as a matter of fact, I saw today an announcement that Tesla is considering opening manufacturing production in Mexico. Near-shoring will strongly benefit large Latin conglomerates that are our clients. Many of those clients are asking for capital for their investments. So, the short answer is yes, this should ultimately lead to increased trade flows between the U.S. and Mexico, and that's the core of our business, so inevitably it will benefit Bladex in the long run.

Operator, Operator

Okay, thank you very much for that answer. Our next question comes from Mr. Ricardo Vallarino, Individual Investor. You commented on the Investor Day that you set a target size with the commercial portfolio of $10 billion to $11 billion for the year 2026. Recently, you have commented that you expect portfolio growth to slow down in 2023. Can you give us a roadmap on how you see Bladex reaching the investor target?

Jorge Salas, CEO

The pace of our growth is dependent in large part on the dynamics of the region. So, we grew more than expected the first year, and then we're slowing down a little bit this year; basically, because of the headwinds and the economics of the region that we're observing now. So, the $10 billion to $11 billion target on our commercial portfolio is we are on track. Again, the pace of growth will depend largely on the dynamics of the region, but also on the extent that we have additional products and a larger customer base, as we are getting now.

Operator, Operator

The next question is also a text question. This is from Mr. Jeffrey Auto from Jeffrey Auto CPA. Congratulations on your fourth quarter and full-year 2022 results. I had high expectations and you have exceeded them. I do have a concern about your non-performing loans. In the fourth quarter, they grew from $11 million to $35 million with the bank largely involved in trade finance. Generally short-term, I'd like to have some clarity on this. Is this a result of the bank's changing lending criteria, a mistaken oversight on the Company, industry, or country lending activity? Is this a level we should expect to see with the volume in the bank's activities?

Jorge Salas, CEO

Thank you for your question. First of all, credit underwriting standards have not changed and will not change. We will remain very conservative. We did have an uptick in non-performing loans and it's mainly due to one exposure in particular, which is a non-banking financial institution in Mexico. That represents less than 0.3% of our loan book and it's largely reserved by the end of 2022. We have materially increased the coverage after the Company announced Chapter 11 in Mexico last November. So, we're really not concerned about our exposures in non-bank financial institutions. That is one case in Mexico; and our non-bank financial institutions do not represent more than 3% of our portfolio, and it's mainly regulated companies or affiliates of financial institutions, and it's mainly in Chile. So, we are not concerned and not changing our credit risk appetite.

Operator, Operator

Our next question comes from Andrea Atuesta from Bancolombia. I would like to have more details about what you were expecting in net interest margin and profitability if the rates begin to decrease but the expenses are stable. What will the strategy be to maintain solid margins?

Jorge Salas, CEO

Let me turn the call to the question to Ana. Do you want to comment on rates?

Ana Mendez, CFO

Sure. Thank you. Yes, our expectations about the net interest margin, as Jorge already mentioned with respect to the NIM, what we see is that we still have to see all the re-pricing of interest rate increases in our assets and liabilities. So, in the very short-term, we expect net interest margin to continue expanding. Jorge mentioned between 2.2% and 2.4%; that depends on future Federal Reserve actions and the re-pricing that we see in our balance sheet. After rate increases, we hope they come to a stop. Like Jorge just mentioned in the previous answer, we are in the process of developing new structured products and tailor-based solutions that will enhance spreads, and that's precisely what our five-year plan is about. So, we do expect that to be able to compensate for rate increases. Also, as Jorge mentioned, we do not anticipate that interest rates are going to go back to 0%, as we saw at the beginning of the pandemic. So more than normalize interest rates of around 2.5% to 3%, the fed fund rates should remain constant. So, in our projections for ROE target meetings, that is definitely contemplated. Hence margin expansion and new fee-generating products, along with interest rates that in a normalized level should be about 2.5%.

Jorge Salas, CEO

I think Sam, our Chief Commercial Officer, wants to add if you're worried about that too.

Sam Canineu, CRO

Yes, I'd just like to reinforce that even though it might not be so noticeable within the numbers, a big part of the increasing profitability that we face, we then facing quarter after quarter comes from, I would say this new layer of business that Bladex has been building that is a core part of our new strategy. This comes from the various types of arbitrage that we are doing, both in terms of client financing in different countries, as well as all the structured trade finance parts, supply chain, finance receivable discounts. This new layer of business has been increasing quarter after quarter. And this also comes with a higher margin. The same applies to new clients. We have been onboarding significantly, and I think you have the numbers for last year. We did increase that substantially. We continue to build that new layer of business and to create more optionality with everything that we do. So, we're not dependent on let's say the legacy business or business as usual that we have been doing. I think that this is building well. And I think we're right on course with the plan that we presented last year. Thank you.

Operator, Operator

We have a follow-up question from Andrea. How do you expect commissions and fees to behave in 2023 for syndication and letters of credit business? What is your expectation of growth on this front?

Jorge Salas, CEO

Those transitions because they're very different in nature. The letters of credit business, again, is part of the strategy that we've been implementing. First of all, adding new clients that are specifically doing more of this type of business. So, many of the clients that we onboarded last year were clients specifically for the letter of credit business, as well as we have been focusing on cross-selling letters of credit business to clients that are only doing lending. We have become increasingly successful in that area. So, I think the direction for that business in particular is to continue to grow. Of course, we depend on the market; the letters of credit business is very tied to trade in the region. And if the trade flows reduce, of course, the business suffers, but that should be compensated by new or additional clients that we're adding, both existing clients in terms of cross-sell as well as new clients. As for the syndication business, that is a completely different business and it is one that really takes time to grow substantially. Bladex has a quite strong captive base of investors that come along with us on most transactions we do. But we're also very careful about what we sell to the market. It's a business that we have not been overly aggressive with. We continue to do as we did in the past, creating solutions for clients that are willing to pay an extra fee for us to fundraise for them, which also is a business tied to M&A activity when they require certainty of funds. The market has been slower this year, but what we added that is new is a project finance business that should also generate more structured fees. So, I expect this year to be very much in line with last year, hopefully looking to increase the number, as we think we can, but we depend on market conditions for the syndication business.

Operator, Operator

Our next question comes from Michael Rockman from GBR Consulting. How is the management and the board of directors thinking about capital allocation with dividends being more than three times covered and the stock at a substantial discount to book value?

Jorge Salas, CEO

Capital allocation, dividends, and all alternatives, I mean, including buybacks and potential hybrid instruments, that's an ongoing discussion at the board level. We just reported a 15.3 common equity Tier 1 ratio, which is at the lower end of the range that we have established. We want to operate the bank within the range between 15% and 16%. As I mentioned, we are committed to a sound capital position. It's a pillar of our business model, and it's a pillar of our investment-grade rating. I can say we're focused on optimizing the bank's capital allocation to support the growth of our long-term five-year plan. That will take the bank to a commercial portfolio between $10 billion and $11 billion. So, if we're focused on the long-term target more than the short-term.

Operator, Operator

I'm seeing no further questions at this point. I will now be passing the line back to the management team for the concluding remarks.

Jorge Salas, CEO

No, I just want to thank you for your questions and everybody for joining this call. As I mentioned before, we see 2023 as a year of transition in the region. We are committed to profitability and perhaps not so aggressive growth this year; underwriting standards will not change and we will focus on profitability going forward. That's what I have to say for now, and thank you everybody for connecting.

Operator, Operator

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and have a great day. Goodbye.