Friday, July 17, 2015

El Rhazi, Banco Latinoamericano de Comercio Exterior, S.A. (BLX) CEO Rubens Amaral on Q2 2015 Results - Earnings Call Transcript | Seeking Alpha

El Rhazi, Hello, everyone, and welcome to Bladex's Second Quarter 2015 Conference Call. On today, the 16 of July, 2015, 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 Web site, at www.bladex.com.


Joining us today are Mr. Rubens Amaral, Chief Executive Officer of Bladex; and Mr. Christopher Schech, Chief Financial Officer. Their comments will be based on the earnings release, which was issued yesterday. A copy of the long version is available on the corporate Web site.


Any comments made by the executive officers today may include forward-looking statements. These are defined by the Private Securities Litigation Reform Act of 1995. They are based on information and data that is currently available. However, the actual performance may vary due to various factors, which are cited in the Safe Harbor statement in the press release.


Thank you, Josh. And good morning, everyone, and thanks for joining us today for the second quarter and half year 2015 earnings call. Yesterday we've released information about our results for the first half of 2015. Despite our lower than expected performance for the second quarter I am very pleased to report a strong first semester for 2015 in terms of Bladex results.


Let me share some key indicators for the first six months performance which spotlight the quality of our earnings in comparison to the first six months of 2014. So increasing now net income of 11%, low portfolio growth of 7.4%, efficiency ratio includes 33%, earnings per share increased to $1.26 and return on average equity improved to 10.6. As you can appreciate the key metrics of our performance remains solid which bodes well for an even better second half for 2015.


With respect to the second quarter performance most of the transactions were short-term business finance, where margins are tighter because there is still plenty of liquidity available to clients both in native currency and U.S. dollars which is a consequence pressures down the stress. The medium to long-term deals all impacted our goals more towards the end of the second quarter which deferred the positive impact on revenues for the third quarter 2015 but required the increase in the positions as we had mentioned in previous calls could be the case.


In terms of fee income, although our Syndication business is tracking bum last year's performance, I am glad to share Amar along you that the pipeline of new deals announced to $900 million. Business [specific] pipeline comprises of seven new mandates to execute transactions in Peru, Brazil, Ecuador, Guatemala, Honduras, Panama and Paraguay. These transactions are all legal term deals which will definitely have a positive impact on our efforts of increasing the margins. This side usually we see income we would shortly share Amar along you the closing of these transactions as we are in the last stages of finalizing these deals. We continue our effort to further strength out franchising this new business line, setting the base for another successful year in adding to our fee income generation.


In terms of liquidity management, we continued our strategy of diversifying our funding charter by successfully placing the global capital markets and new bond issue for five years last months of April for a total amount of $350 million, a deal that was oversubscribed several times showing the interest on our company. Not less important in terms of liquidity, our base of deposits continues to increase importantly which strengthens our financial soundness and reduces our cost of funding.


Let me share with you how we're looking at the next semester as far as our focus is concerned. We are working to first accelerate the conversion about new transactions without compromising the credit quality, so average balances can increase more rapidly and impact our interest income early in the semester. Second, improving the margins as we continue to diversify the portfolio towards a more medium-term transactions which combined with increased average balances early the semester will contribute to greater revenues. Third, deliver on the mandate of our syndication business and bring new ones for the fourth quarter thus increasing our return on assets and using more efficiently our capital.


And last but not least increase the client base by improving our prospection of new clients which helps our objective of increasing diversifying of our credit portfolio. Therefore as you see our outlook remains positive for remainder of the year but we're cognizant of the fact there is few challenges we had which we uniquely continue to monitor carefully such as first the global economic surroundings which involves among others what's happening in Greece the adjustments in China, the expected increase in interest rates in the United States, the oil and commodity prices among others but not as important for us Atlantics the Latin American surroundings which involves the increasing volatility of native currencies, divergent path of growth in the countries across the region, the slower growth of trade et cetera.


As we have commented before in our previous calls, our banks prepared to benefit from more less challenging environments without compromising results and the credit quality of our portfolio. In this respect, we expect growth of the loan to continue according our initial guidance of 8% to 10% for the whole year and we're working to have a better second semester which combined with a very good performance of the first half of 2015, we'll produce another year of good results and returns to our shareholders. In line with that as you have been informed, our board has approved the dividend of $0.385 for the second quarter of 2015 confirming first the positive view of the results of the bank and second their commitment through sharing with our shareholders such results.


With that, I will now turn El Rhazi over to Christopher to guide you through our presentation. Thank you very much. Christopher, please.


Thank you, Rubens. Hello, and good morning, everyone. Thank you for joining us on the call today. And as usual we're discussing our second quarter results, I will focus on the leading aspects that have impacted our results and I will make reference to the earnings call presentation that we have uploaded to our Web site together with the earnings release and which is being webcast as we speak.


So before we go into more detail, let's go Page 4 for a fast rundown of our chief financial highlights and drivers that shaped this quarter. The second quarter 2015 closed with net income through Bladex shareholders of $20.2 million compared to $28.8 million in the previous quarter and compared to $20.7 million in the second quarter of 2014. In order to accurately present performance in our recurring business activities, we focus on business net income which is recurring net income derived from our principal business activities of financial intermediation, which generates net interest, commission and fee income and also other income.


We also refer to it as core income or income from core activities and so this business net income reached $22.5 million in the second quarter, down slightly 2% compared to the second quarter of 2014 chiefly as commission income is still lagging prior year levels as you heard from Ruben. Business net income was down 15% from 26.4 million in the first quarter of 2015 and that is chiefly due to provisions from higher end-of-period commercial portfolio balances which required reserves. The quarterly net interest margin was 5 basis points under the level seen in the second quarter of the year ago and also 5 basis points under the first quarter of this year.


In similar fashion the quarterly net interest spread which represents the difference between average interest rates earned versus average rates paid, dropped 4 basis points year-on-year and 5 basis points quarter-on-quarter. Year-to-date both management margin and net interest spread are in the alike levels of the prior year period at 181 basis points and 165 basis points respectively.


This quarter we seized on opportunities to grow our asset base and to set the base for accelerated revenues growth in the coming months.


For this asset growth, we established required reserves and which drove of course the increase in provisions and this provision increase made business return on assets and return on equity metrics dropped quarter-on-quarter but remains stable year-on-year. The business efficiency ratio was 33% in the second quarter 2015 the alike level as in the previous quarter and compared to 32% in the quarter of a year ago. In regard to capitalization level the Tier 1 Basel III ratio stood at 16.1% at the end of the second quarter 2015 just down slightly from 16.4% in the previous quarter due to asset growth and continues slightly -- and it continues slightly above the Basel I level which we continue to report temporarily just for the sake of period comparison purposes.


And last but not least for the announcement as already mentioned by Rubens that came out by the day before yesterday. The Board of Directors declared a dividend payment for the second quarter of $0.385 of share which continues to add an effective dividend yield component through our total shareholder value proposition. So let's look into quarterly analysis in a bit more detail moving to the next line Page 5. It shows the evolution of net income for the six months of 2015 compared to the six months of a year ago.


Year-on-year and year-to-date net income was up from 11% compared to the alike period of the year ago. Net interest income was the main driver for that on higher average portfolio balances and favorable net interest spread on net interest margin. As already mentioned commission income lack behind the prior year period in non-core income mainly from the participation in the investment fund continues ahead of last year's level.


Moving through the quarter-on-quarter comparison on Page 6 we see net interest income dropping slightly compared to the first quarter 2015 on account of lower average loan portfolio balances as portfolio growth accelerated towards the end of the quarter and on lower net margins which we will talk about in just a minute. Cheese and other income increase versus the first quarter 2015 as our letter for credit and contingencies business showed increased activities, provisions increased due to portfolio growth as mentioned before and expenses had a slight decline quarter-on-quarter.


Non-core income which represents the participation in investment funds swung to a loss this quarter. On Page 7 we take another look at net interest income and margin and year-on-year interest income was up on a greater business scale and stable margins. The quarterly variants in net interest margin were a result of lower lending rates in an environment of liquidity which is still abundant focusing on high quality risk.


The average original tenure of our lending exposures declined slightly and that also contributed to the quarterly decline in our net interest margin. On Page 8 we spotlight the average portfolio balances growth in segmentation year-on-year, the corporate client segment continued to grow while exposures to financial intuitions remain relatively stable. Quarter-on-quarter portfolio averages declined slightly as portfolio growth picked up towards the end of the quarter. The necessary portfolios characteristics is [trade] finance focus and short-term nature remain intact.


On Page 9 we present breakdown of our commercial portfolio balances by country on the left and by industry sector on the right. Changes versus the previous quarter have been relatively minor as we gradually turn exposures in sure countries and industry segments while we're growing others. Brazil exposures remains stable while Mexico is increasing its share of our portfolio as a result of a diversified growth opportunities that this market presents to us.


Moving on to Page 10 which show the evolution of credit quality and reserve parameters which essentially remains stable quarter-on-quarter. Our exposures in country sectors and clients are continually monitored to ensure a sound credit profile and we have not had to make any adjustment of significance to our exposure profile. On Page 11 a fast recap of operating expenses and efficiency levels. Expenses continued to see slight declines versus the comparison period and the business efficiency ratio which excludes the non-core income from the participation in the investment fund remains stable. We continue to job towards efficiency improvements which over the next couple of quarters will primarily be a function of increased revenue generation.


And moving on to Page 12, we show our fee income evolution, as Rubens already mentioned and as we discussed last quarter we talked about this year's dynamics in our loan intermediation and syndication business already. While the second quarter again showed no close transactions and very limited secondary market activity we continued to expect a positive evolution for the remainder of the year as you heard already. We'll be very soon the announcing the first closed transaction for the year and our pipeline of mandated and perspective transaction looks indeed very healthy. On the letters of credit side we continue to increase diversification and have strengthened our internal capacity also with personnel and operating work flow for perspective to help accelerate that business going forward as well. On Page 13 we highlight return on average equity and capitalization trends, in terms of the year-on-year trends the year-to-date return on average equity continues to be on track.


Capitalization levels remains strong with Tier 3 ratio hovering above 16%. And finally on Page 14 we highlight our focus on total shareholder return. As mentioned the Board of Directors continued its consistent approach in validating the bank's core performance, trends and again authorize the quarterly dividend payment of $0.385 a share.


Thank you. At this time we will open the floor for your questions. [Operator Instructions]. And we will take our first question coming from Jeremy Hellman from Singular Research.


Hey, I was wondering that provided you guys could talk a little bit more about the competitive environment and what you're doing in answer -- and do the backdrop being, you know there's ample liquidity in the market -- framed against economic activity that's below where it was past couple of years. So curious provided you guys are turning business away because others are competing aggressively on price or are you taking a different tact?


In terms of -- first of all in terms of liquidity available in the marketplace, I mentioned in my initial remarks that liquidity is a function not only of U.S. dollars and that also local currency in case with the devaluation of currencies and some of the inventory mentions that have implemented in countries for instance such as Peru, clients are more compelled to use local currency rather than U.S. dollars, so in that sense we had some sort of competition that is not normally the case, because normally in the case of trade finance the pricing of U.S. dollars funding is always more competitive for clients.


So there was increased competition from a liquidity standpoint in terms of the local currency. In the terms of turning down deals we were very careful about the margins we're taking our portfolio. But that you can see from the increasing our disbursements, we increased 40% quarter-to-quarter, the total disbursement at the back almost $1 billion in the disbursements throughout the first quarter to the second quarter. So although we are being selective, we are not turning down transactions and that's there deal is well below our targets.


In terms of the overall environment, you see Brazil's big market is still big exposure, they have recession this year and the reviews of the market or the [INS] has reduced the perspective growth in Brazil even more. So it has tremendous impact in terms of the overall market. Mexico the second largest economy is not growing at the levels that we were expecting initially. So Central America overall is more or less the same as we had seen since the beginning of the year and Peru a little less, Columbia also little less because of impact of oil prices. So overall it is more subdued to the market but we're are assuming a movement in terms of increasing inter-regional trade recently Brazil Mexico set together and design co-operation accord increased bilateral trades puts us -- it's a very good news for us because these are the major markets and if they do more business between themselves that will back our business both in Brazil and Mexico. Central America although there is no critical mass there, you can appreciate that our total exposure is almost as high as we have from Brazil, so we see opportunities that will receive it there as well. And Peru Columbia, we had discount in portfolios but we are expecting to increase again by the third and fourth quarter.


So overall as more subdued trade flows not growing as fast as they used to be -- we are well positioned to capture this proximity continue our growth in spite of a more, not so tiny prospects for the growth in the future.


And just continuing on that last theme on inter-regional activity, would it be proper to assume that it's favoring Bladex and also any other regional banks at the expense of global banks from other regions be it Asian banks, U.S. or European banks?


That's another important point of your question. We have seen a less difference on international banks but all the banks are coming back to the region but when we mentioned the inter-regional trade as you asked in your question that is something that trade was more Bladex in the regional banks. So we have some competition of regional banks mostly in Central America because you know the Columbian banks are very aggressive in their expansion towards Central America, so there we'll see more competition from them. But overall indeed, the other markets except for some European banks, more German banks, they are more active in the trade financially in that. We are not seeing as much competition from international banks as we've seen in the past.


Well, couple of questions, one following-up on the liquidity and in terms of net interest margin we could see some pressure there this quarter, in the past you've guided for margins as we're getting to the 2% level. Do you think that given the environment today that that's still as possible, if so how long would it take to get there, so just want to get a sense of and how you see margin evolving going forward? And then second question in terms of profitability, you also in the past have guided for ROE turning to the mid teens close to 15%, is that still a target that you see was reasonable within this quarter as ROE was a bit below 10% and if so again how long do you think it would take to get there?


Thank you, Tito for your question, I think generally we all agree here that the second quarter of this year is not really a good representation as to what we think Bladex can do and will be doing. And so I wouldn't get hung up on looking at the quarterly results as much and just focus on year-to-date evolution which we think is reasonably good and can and will certainly improve there, if the environment does not deteriorate dramatically. And so in regards to the margin targets, we of course would love to arrive 2% level sooner or rather than later. And if the Fed makes their rate moves maybe we can get there sooner, but really what is more important for us is reaching our return targets, and so if we can get a 12% return on our core business, we're at the least amount of risk on the balance sheet and that is achieved within margin of 185 basis points and we are happy with that.


So 2% is not necessarily the only solution to getting good returns, but of course we're looking to expand our margins and that primarily will not be in the form of taking on more risk with brand new clients that we know -- and very little about it's more about doing more longer tenured transactions with the existing clients base that we have. And so we're beautiful happy to see that this quarter there has been some good disbursements movements in that arena in the medium to long-term lending. And as you've heard Rubens' earlier those indications and when those indications get close we'll have a nice pipeline of additional medium-term lending on the books and so that is where we expect to really try the margin expansion. But again we'd love to be at 2% no question, but you know it's not mission critical to arrive that 2% level this year or next year.


We will get there, we're pretty certain about that but we can't really tell you just how long it will take.


And in terms of the area Christopher it's a lot untimely detail, I have been telling to markets that our target is the consistent return 12% based on core business and to develop new initiatives to help us to get meeting 50% in the years ahead. So last year we finished the year with 12% and the way we're working today and what we expect this year as we can to go and return consistently 12% by year-end in 2015. And so that although this quarterly performance as Christopher mentioned shouldn't be in your proxy for the rest of the year, we had 10.6 early to the first six months of year that is slightly better that we did last year, so with that in mind and seeing the pipeline received that we're showing along with the syndications but in traditional business, we expect to have second semester that very close to 12% return on equity and continue our target of working towards new initiatives that is too soon for and we need to share with you, but it's all objective in the medium-term to get to 15%.


Just one clarification and maybe in the beginning of the call you said, how numerous syndication years you had in the pipeline, could you just repeat those numbers how many deals there were and what the amounts were and how much that will contribute to fee income?


Last call we said we had -- last call in the first quarter around 11 to 12 possible views, but today what I could tell you is that we have seven mandates and that we evolve and we know this type of transactions can do that sometimes they depend on the client position sometimes seven deals then go through and then deals are cancelled, but now we have pipeline of $900 million of transactions no [money] we take 20% to 30% of this amount and the rest we distribute and these are 7 transactions.


Well I prefer not to at this second because you know that market conditions can back, so I don't want to give you a number and then something happens to the market and then the next quarter you told me this number and you didn't deliver.


But I think for the entire year we said that even last quarter that we expect to be doing as good as last year or even better in that line of business in this syndication business and we still think this is attainable.


Just following up on Tito's question I guess what I get and understanding on the underlying earnings power to reach this 12% ROE. I understand there will be a mix between fee income and some improvements in NII. But can you give us some more color on that according to our calculation we see different to reach like over $30 million for quarter to reach the 12%. So I just want to get a better sense. And then my second question would be could you remind us on your interest rate sensitivity how much do you benefit on NII on -- from timing increase.


I'll take the first question and Christopher will take the second question. I understand, I would say just go back to last year and see where we were last year in the second quarter and see that we were not in a different position than we were today. So this is not new for us and traditionally you know that in our business the second half of the year is always stronger than the first half of the year. So that?s one and I would know the economic environment is not as strong as it used to be, it's lower than last year. The pipeline of deals we're seeing it gives us the continuity to tell you that we expect to have a very strong performance in the second quarter that income definitely core improving our net interest margin by having this medium-term deals. And as I mentioned also because at the end of day we are working to accelerate the average balances of our portfolio all in this. So that will continue to definitely to improving our net interest income over the return in the fourth quarter.


So that is crucial for us and that is exact what we're doing now. Syndications in terms of fee income I'm not talking about possibly deals we mentioned the deals that I mentioned I am talking about mandates. And that?s had any major problem in the markets these deals will be closed very soon and that in itself will be the relentless impact being in our ROA in that space. So with that and comparing what we did last year in the same period of time and seeing that the pipeline is now less strong than it was last year. I am very self-assured that we will be able to achieve this amount of revenues for the second half of the year. Christopher.


And in regards to the sensitivity towards rate increase of course you'll know that we are floating rate back. And so with a distinction I would say in comparison to other banks that our reprising cycle is extremely short. We fund ourselves, let's say three months LIBOR basis and lend on the same team LIBOR or six months LIBOR basis. And so the only reprising gap that we would have really the, extend of it would the difference between a three months liability and a six months loan.


And so within two months entire book of business that we have is re-prices and we can have this rate increases on to our client base which is standard scope of business.


Now you also know that we have a strong equity base to support every single loan that is outstanding and which we don?t pay interest expense on. And so a portion of the rate increases drop immediately down to the backside line, but you will pick nine parts of equity and sorry one part of equity and nine parts of debts. And you assume given increase in rates in base rate LIBOR rates you'll see that this one part because not pay these rate increase and that drops down to the backside line. We think to every 10 basis points that go up we should maybe keep 1 basis points that very crude rule of sum but it should give you as indication of what may happen once they see still up there.


We also are working of course to optimize our funding constitution to make sure that we benefit the most of it until you saw us increase our deposit base substantially which is very low cost until. And so we are indeed positioning ourselves within the limits that are allowable in our internal guide lines to be able to benefit from potential rate increase which notwithstanding we do not anticipate for this year. And based on our production see we don?t count on these types of effects because we don?t pretend to know anything better than decided show. And so while it's not projection numbers, when it happens it will be beneficial to us. I don?t know if this answers your question?


On net interest income I'll talk in terms of absolute numbers no, we could do these types of projections all day long and they will be always long -- given the facts, rates have not moved, so we haven't even tried to be honestly.


Just one easy, which is the trend on decent regimens from the fund, and I know your reducing and making redemptions on a quarterly basis. But if you can remember is this the timeframe also if you can clarify either any exposure, presumably you have not but if you have any exposure to all through the companies that are been investigated in Brazil right now on the corrections conduct?


First of all we have informed before that we have agreed to have a look at both for investment in fund for three years, that expires March 31, 2016 and we continue, determined to pursue that course of action. So by March 31, 2016 we'll be out of our obligation to keep the minimum amount required. Nevertheless we continue to redeem as define that presents some returns. We just had $4 million with redemption in the first six months of this year, so we'll continue to do so, that's the defined reforms. So just to continue that we need to exit this fund by March 31, 2016. In terms of construction companies, my answer is very simple, no, we don't have any exposure to the construction company being investigated in Brazil.


Actually this is Gary Lenhoff, I'm sorry. Gentlemen I apologize if you addressed this. The provisions for the quarter 5.7 million for loan losses, can you clarify for me how much of that is new -- is a general provision based on the new activity in the quarter versus coming back in provisioning for existing loans that may impact the quality which may have changed during that time?


Yes, sure, if you don't mind I would like to take this question Gary. So the overall coverage ratio of 123 basis points has moved quarter-on-quarter. So there is no increased risk on the balance sheet based on our results, methodology that will be immediately detectable if you saw us change that coverage ratio and of course the composition all with barriers have been limited because we have exposures increasing or declining in certain countries, sectors, clients and that always worked out to be basically the similar profile in basic -- in more fundamental perspective. And with regards to generic versus particular results you saw that the non-occurring loan portfolio is actually declining slightly and so we have -- I'm just looking at the numbers here. We haven't -- we did not made any major changes in the composition of the particular versus generic and these existing exposures are so small anyways that they don't really impact on particular results side. We don't really have much of an impact.


I would say Gary, if you allow me Chris ahead of our methodology cost for identifying the country risk where we were in so eventually where the two positions that you're seeing in different countries we might make some moves in breaking for the country and no more additionally we'll bridge movement move in fact the range we position sale and you have a little bit of that in increasing of the provisions and because our methodology also cost for less depletions in the traditional trade finance business than in short term when we do more the provisions increase and as I mentioned in my initial remarks as we did more transactions -- at the end of the quarter. That project will happen, so we -- our methodology required for increasing the provisions.


So it's not that there is a deterioration in this profile. It's simply adjustment to the new mix of the portfolio that we have that caused us to have the provision that has syndicates and the guidance we always try to give the markets that will be based around 120 to 125 of the total portfolio, that?s the average range that we even have on position according to the mix of the portfolio that we can vary, it plays any deterioration that requires any specific provision then we?ll inform you that that's the case. In this quarter that was not the case that we had slight deduction in our requirements from an accrual. I don't know what -- that answers your question.


Yes that's very helpful. Second question which I think Rubens you may have just touched upon the provision for the off balance sheet credit risks actually there was a reversal, is that tied to what the mix issue that you just described?


Yes exactly so, I mean, we reserve for alone and same way we reserve for a letter of credit which is not alone of course with this no money to disperse in case of the letter of credit, but we view this as a same type of exposure as it were. So the methodology is really the same for both, but then we can see and the evolution of these reserve balances for both types of instruments or and vary overtimes as the activity increases or decreases over time. So of course the letters of credit portfolio is much smaller than the loan book, but you also should know that the use of letters of credit is primarily applicable in markets where the risk perception is not as accelerate than others and so normally the contingency business would require higher levels of required reserves.


Right and were there any adverse developments in that portfolio in the quarter or again this just an impact of the general reserve?


No-no, we just did more business in particular countries with use of letters of credit and that shows the reserve decline in duration just more activity.


And then last question, you guys did this every time we don't have this question when you have foreign currency gains but when there are losses obviously in your business you have a reasonable bit of currency exposure, can you just give us some color on the $1.2 million impact on foreign currency in the quarter and again your thoughts on how to administer currency or how you manage currency in if that's just a given volatility that we as investors have to expect on quarterly basis at least?


Right and so I exactly what you intend and of course the line net loss on foreign currency exchange and just card of the whole story because you should know that the internal guidelines and policies at Bladex do prohibit us on having that exposures in many currencies that is better than $500,000 and so we should never show any significant impact on FX. And so the way we protect ourselves is to establish the corporate coverages and so the effect of that coverages sadly for an accounting perspective you're not able see the same line, we'll have to go through other lines such as the derivative financial instruments and hedging line which has a plus of 800,000 and 900,000 offsetting the 1.4 million FX loss and you should also include the net gain and loss and trading securities which are the standalone instruments that we have on the book which protects us in general terms from the overall or the overall FX exposures.


So if you add up these lines the derivative financial instruments and hedging line and net gain loss on trading securities line and the net loss on foreign currency exchange, you will wind up with exactly zero or very close zero and that is how it's designed to be.


Thank you. [Operator Instructions]. At this time, now I would like to turn the call back over to Mr. Rubens Amaral for any closing remarks.


Thank you Josh, thank you for your patience today. We are very pleased with the results of the bank and we'll continue to work hard to bring you and better quarters in third and fourth quarters of the year finishing the very strong 2015. So thank you very much. We're looking forward to talking to you in the next quarter. Have a good day.


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