Banco Latinoamericano de Comercio Exterior, S. A. Q3 2023 Earnings Call Transcript

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October 20, 2023

There are 3 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to BloodDeck's Third Quarter 2023 Earnings Conference Call. A slide presentation is accompanying today's webcast and is also available on the Investors section of the Company's website, www.bladex.com. There will be an opportunity for you to ask questions at the end of today's presentation. Please note, today's conference call is being recorded. As a reminder, all participants will be in listen only mode.

Operator

I would now like to turn the call over to Mr. Jorge Salas, CEO. Sir, please go ahead.

Speaker 1

Thank you, operator. Good morning to everyone joining us today to discuss our Q3 results. Q3 was a record breaking quarter. As you will see in today's presentation, we continue to make progress on our 2026 strategic plan aimed at attaining sustainable Mid teen returns. Today, I will start with a high level summary of the results, highlighting our key achievements And then, Ani, our CFO, will provide a detailed breakdown of the numbers.

Speaker 1

After that, given the better than expected performance so far, I will update our guidance for the remaining of the year and then I will open the call for questions. Let's proceed to the next slide. So here we have all relevant financial metrics show clearly once again a very positive trend, This time with record figures. Clearly, we are being able to capitalize on the bank's structural competitive position in Latin America. We are consistently taking advantage of the different avenues for profitable growth that we identified in our strategic plan.

Speaker 1

Starting with the asset side of the balance sheet, the growth on the portfolio was 4% year on year, but perhaps More important is the fact that the asset quality has remained very healthy with NPLs below 0.1% despite the challenging environment Marked by high interest rates both in dollars and in local currencies in Latin America. Once again, An undisputable testament of the quality of our clients and our underwriting standards. On the liability side, client deposits, Our most cost efficient funding source continued to grow steadily, both in nominal terms as much as 23% year on year And also as a fraction of total funding, now representing 50% of total funding compared to 42% just a year ago. On the P and L side, we have achieved a new record for net interest income in the quarter, totaling $60,500,000 A 11% increase compared to the previous quarter and an impressive 51% growth compared to the same period of last year. Our net interest margin now stands at 2.48 percent, reflecting 71 basis point improvement year on year.

Speaker 1

Also, fee income was 71% quarter on quarter increase, 77% year on year. Our letters of credit unit essential for us as a trade bank continue to deliver exceptional results, setting new records both in volumes and in fees. Also, our syndication team had an outstanding performance. The team successfully executed 2 very relevant transactions last quarter confirming our strong presence in the regional syndication market. One, we serve as joint leader ranger and bookrunner for an $80,000,000 committed facility for GeoPark, An oil and gas company with operations across Colombia, Peru, Chile and Brazil.

Speaker 1

Secondly, we acted as joint leader ranger On a $1,000,000,000 term loan facility for Ecopetrola, a landmark transaction for Bladex, Supporting the largest Colombian company and one of the largest LatAm entities, again with presence in Colombia, Mexico, Peru, Chile and Brazil. All this resulted in a historical record figure of net income for the quarter for $45,800,000 Biggest bottom line result ever for BlackRock. The resulting quarterly return on equity was almost 16%, also the highest in our recent bank history. Several factors are behind these outstanding results. Ongoing client onboarding effort has yielded an increase in the customer base of over 30% year on year, Also, higher participation of corporate clients in our portfolio mix, which now represents 63% of our loan portfolio, has resulted In the consolidation of wider lending spreads and furthermore, our commercial team has also been actively Originating new medium term transactions, as I just mentioned, which have benefit margins with a minimal effect on the average duration of the portfolio.

Speaker 1

It's essential to note that these achievements have occurred in a more competitive landscape, driven by the reopening of capital markets In a region with increased competition, not only from local banks, but also from international banks. Now I'll hand it off for Annie for more detailed financial analysis and then I will resume after. Annie, please.

Speaker 2

Thank you, Jorge, and good morning to everyone. Please let's move to Slide number 3. Quarterly net income has been steadily increasing over the last year and a half, reaching close to $46,000,000 for the Q3 of 2023 or $1.25 per share, representing an annual increase of 70% And of 23% on a sequential quarterly basis. This record recurring operating results, growth and annualized Return on equity rose to 16% for the quarter. The positive trend in bottom line results we have seen over the last several quarters has consistently been driven by higher top line revenues, primarily on strong business volumes and margins.

Speaker 2

Let me now walk you through our balance sheet and profit and loss underlining the main items driving this solid performance. So, moving on to Slide 4, total assets in excess of $10,000,000,000 at quarter end increased by 8% from last year on the back of robust loan portfolio balances complemented by a stable Investment Securities portfolio and a sound liquidity position. The commercial portfolio, including loans and off balance sheet letters of credit Guarantees once again reached record levels at $8,200,000,000 at quarter end, up 5% from last year and 2% from the preceding quarter. This portfolio remains well diversified across countries and industries And Mexico at 12%, complemented by relevant exposures in other Central and South American countries. New client onboarding and product cross selling continue to drive strong business volumes, particularly in the letter of credit business and vendor finance, both closely related to short term commodity trade financing.

Speaker 2

This explains the short term nature of the portfolio, 69% of which is scheduled to mature within the next 12 months. The $1,000,000,000 investment securities portfolio provides further country risk diversification as 69% is placed with non LatAm issuers, mostly from the U. S. This portfolio is fully comprised of securities held to maturity accounted for at amortized cost, 77% of which is placed with investment grade issuers. The average remaining tenure of the portfolio is less than 2.5 years.

Speaker 2

The Bank's cash position, mostly placed in the New York Federal Reserve, led to liquidity levels at 15% of total assets and 37% of deposits at quarter end. Given the wholesale nature of our business model, we follow a prudent liquidity management approach, Following Basel Methodologies, liquidity coverage ratio as required by Panama's Banking Regulator. On Slide 5, funding sources remain well diversified across products, geographies and tenors. Deposits, now representing 50 percent of total funding, as Jorge just mentioned, reached $4,200,000,000 at the end of the Q3, also at record levels. Its growth reflects our cross sell strategy, together with the continued relevant participation from our Class Asia Others Central Banks.

Speaker 2

In addition, our Yant YCBD program exceeded $1,000,000,000 after more than 2 years of having been launched, providing granularity to our funding base. The other half of our funding constitutes short- and long term borrowings and debt, including several issuances in the debt capital markets, mainly in the U. S, Mexico and Panama, as well as private placements under our Euro medium term loan program. Plavix also continues to have ample availability of bilateral credit lines from many correspondent banks worldwide, as well as constant access to the global syndicated loan market. Turning to Slide 6.

Speaker 2

Our sound capital position continues to be enhanced by earnings generation, with capital ratios reflecting our internal risk appetite, even as we continue to grow our business and incorporate new clients. The Board recently declared a dividend of $0.25 per share, an amount unchanged from preceding quarters, representing 20% of quarterly earnings. Now turning to Slide 7. We continue to grow our average asset volumes while maintaining a positive trend in financial margins, Driving strong top line performance. Net interest spread, representing assets and liabilities average rate differential, has shown an increasing trend over the past several quarters, reaching 1.83% in the Q3 of 2023, mainly on the account of higher lending spreads and efficient cost of funds, with a proactive management of the interest rate gap in an increasing rate environment.

Speaker 2

In turn, the net interest margin also denotes an improving trend, reaching 2.48 percent for the quarter, reflecting both the positive evolution in net interest spread and the overall positive impact of higher asset rates improving the return of equity funding such assets. Overall, net interest income or NII continues to strongly benefit from higher margins And lending volumes, as we have seen quarterly net interest income constantly growing since the beginning of 2021. With respect to the preceding quarter, the Q3 2023 NII increased by 11% to $60,500,000 About half of this quarterly increase reflects the net effect of higher average credit volumes as average loans Increased by $381,000,000 or 6% over the quarter and the investment portfolio grew another $100,000,000 or 11%. The other half of NII growth from the preceding quarter was driven by higher asset rates, which continue to reprice at a faster pace than liabilities And it's supported by sustained strong lending spreads, which on average have increased by 66 basis points in the 1st 9 months of 2023 compared to last year. Moving on to Slide 8, Fee income growth also showed a solid performance during the Q3, having increased by 77% from last year, Reaching $11,000,000 All fee income generating business lines had an outstanding performance.

Speaker 2

Fees from letters of credit, a pillar of our business plan, continued to increase from higher business volumes, Reaching $6,200,000 for the quarter, up 76% from last year and 23% from the preceding quarter. As Jorge mentioned, we also saw greater activity in the syndications business, having closed 2 structured transactions during the quarter, resulting in close to $3,000,000 in fees. Other fees, mostly related to committed credit facilities, also benefited from opportunistic transactions. As shown on Slide 9, asset quality remains sound With 97% of the total credit portfolio categorized as low risk under Stage 1 as defined by IFRS 9. Accounting for another 3% were credits classified as Stage 2 for a total of $273,000,000 Most of this Stage 2 exposure consists of credits in certain industries in which we foresee downturns in their operating cycles and hence reflect increased risk in our model based expected loss reserve allocation, but are currently all performing.

Speaker 2

Finally, Stage 3 or impaired credits only represent 0.1 percent of total exposure amounting to $10,000,000 unchanged from the preceding quarter. Overall, credit provision charges for the Q3 of 2023 were $6,500,000 Reaching total allowances for credit losses of $56,000,000 at quarter end, covering NPLs by 5.6 times. On Slide 10, strong revenue growth continues to have a positive impact on efficiency, Allowing a cost to income level of around 27% for the Q3 of 'twenty three, similar to the last two previous quarters. During the Q3, expenses increased by 25% from the preceding quarter due to employee related costs, including one time effects and which relate to a higher salary base over the last year on new hires as well as provisions for performance based compensation congruent with our focus on strengthening Plag's Let me now leave it here and turn the call back to Ori. Thank you.

Speaker 1

Thank you, Annie. Moving on to Slide 11. This slide attempts to break down the drivers behind the better than expected NII results. As you can see here, Net interest income for the 1st 9 months of the year is 70% or €69,000,000 higher than the same period of last year. 40% of this NII or more than $27,000,000 of this increase is explained By higher market interest rates so far this year, the other 60% is a result of the combined effect of the execution of different initiatives in our plan.

Speaker 1

All of them have contributed to strong margin expansion with sustained average volume growth. So moving on to the next slide. Given the results so far, this slide shows our new guidance for the year. We foresee net interest margin for the year similar to the current levels that is between 2.4% 2.5%. Fee growth will end up substantially above our initial expectations, driven by all fee generating business lines And primarily by our letters of credit units.

Speaker 1

We also anticipate closing the year with an efficiency ratio of approximately 27%, better than our initial estimate of 32%. And all of these for all of these reasons, We are revising our 2023 ROE guidance from 11% to 13% to a new range now anticipated to be between 14% and 15% return on equity by year end. Lastly, increased profits and the resulting rise In retained earnings, continue to support our profitable growth and to preserve the bank's capital ratios as initially anticipated. So our initial guidance for core equity Tier 1 ratio remains unchanged. I'll leave it there and open the call for questions now.

Speaker 1

Operator?

Operator

Thank you very much If your question has already been answered, you can leave the queue by clicking on put your hand down. There is also the possibility to ask your question through the You may select the icon and type your question with your name and company. Written questions that are not addressed during the earnings call will be returned by the Investor Relations team. Our first question is from Inigo Vega from Jefferies. What are the $2,200,000 in other net fees in the quarter, are they sustainable going forward?

Speaker 1

Anya, you want to take that?

Speaker 2

Yes, sure. Hi, Eniggo. Thank you for your question. As I mentioned, these Fees represent opportunistic credit committed transactions that generated additional fees in this quarter. We do estimate that the run rate of fees reported in this line item is around $1,000,000 going forward.

Speaker 2

So that will give you a sense of

Operator

Inigo also has another question. NII up to 11% quarter over quarter, Can you bridge the increase in, 1, changing volume 2, impact from higher spreads, either loans or funding and 3, impact from rates.

Speaker 2

Okay. I'll take that too. So The net effect of higher volumes represented around $3,000,000 in the NII growth. Average earnings Overall increased by $843,000,000 during the quarter with respect to the preceding quarter, of which about $400,000,000 relates to higher average lending. And of course, this was all offset by increased average liabilities, but the overall impact on volumes is around $3,000,000 And then on the other hand, assets continue to show a better repricing than liabilities, as overall asset rates increased by 38 basis points during the quarter, while liabilities was up by 34 basis points.

Speaker 2

So this resulted in another $34,000,000 in NII. With respect to lending spreads, quarter on quarter, they remain pretty similar. We do have seen an important increase, as I mentioned, of 66 basis points of lending spreads when we compare This year with last year in terms of the 9 month period and funding rates also and spreads also remained pretty stable during the quarter for the last couple of quarters.

Operator

Next question from Patrick Brown. Back to the Israel, Hamas conflict, please comment about your view on any implication in the Latin region and in Bladex in particular. Let

Speaker 1

me take that one, Annie. So it's a very good question with no easy answer here, Because the implications are mixed depending on which countries in Latin America we talk about and And the extent of the escalation of the conflict, if it happens. On the one hand, we have the effects on commodities. I think when the conflict hit in the Middle East a couple of weeks ago, the West Texas was about $80 a barrel. Yesterday, it closed around Over $90 a barrel, that's more than 10% in 2 weeks.

Speaker 1

So this obviously benefits oil exporters In LatAm, so mostly South American countries, but the opposite will happen for Central American and Caribbean economies There are mainly importers of refined products. In Bladex, as a trade bank, We finance both imports and exports. So in general, an increase in commodity prices and particularly oil has been historically It's beneficial for Bladex. However, if the conflict continues to escalate, there will be more volatility, of course, in the financial markets. And obviously, the world's aggregate demand will be affected.

Speaker 1

So, we are I mean, the word is cautious, we're being cautious, we are Closely following the turn of events, monitoring our exposures that are mostly short term and also our liquidity sources that are Ample and very diversified. So but the word is we're being cautious and be very attentive of the turn of events.

Operator

Patrick has a follow-up. Any plans to modify your dividend policy given the amazing results?

Speaker 1

Yes, thank you. Again, as I mentioned, capital management, Including dividends, potential buybacks, our ongoing discussions at the Board level, obviously always focusing On maximizing total shareholder return, the Board is well aware that on the one hand, our payout ratio has been decreasing as We have extraordinary results. On the other hand, the commercial team does have a very strong pipeline for Profitable growth, which is the end goal of our plan. In any case, we have provided guidance for 2026 That includes managing capital ratios, as I said, between 15% 16%, and a target portfolio of 10,000,000,000 And we will remain strongly capitalized and not risk our investment grade by any means. So whatever decision the Board decides to make regarding capital management should in principle be aligned with our 2026 Guidance and again focusing on maximizing shareholder return.

Speaker 1

Today, dividends is a quarterly decision at the Board level. So it's up to the Board, and I can tell you ongoing discussions are having on a continuous basis.

Operator

Next question from Andrea Patricia. Congratulations for the results. Could you give us some color about the guidance expectations of the result for 2024?

Speaker 1

Yes. We're working thank you, Andrea, we're working on our 2024 budget now, and I believe in the next call, we will give some

Operator

Okay. Thank you very much. That's all the questions we have for today. I'll pass the line back to Bladockstein for their concluding remarks.

Speaker 1

No, I just want to thank everybody for your questions and your interest. And we'll continue focusing

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Key Takeaways

  • BloodDeck delivered record Q3 results with net interest income of $60.5 million (up 51% YoY), net income of $45.8 million and a quarterly return on equity of nearly 16%.
  • The loan portfolio grew 4% year-over-year while asset quality remained pristine, with non-performing loans below 0.1% and 97% of exposures in low-risk (Stage 1) categories.
  • Client deposits—BloodDeck’s most cost-efficient funding source—rose 23% YoY to represent 50% of total funding, up from 42% a year ago.
  • Fee income jumped 77% YoY, driven by record letters-of-credit volumes and standout syndication mandates including an $80 million facility for GeoPark and a $1 billion term loan for Ecopetrol.
  • Given the stronger-than-expected performance, 2023 guidance was raised to a 14%–15% ROE, a net interest margin of 2.4%–2.5% and an efficiency ratio around 27% by year-end.
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Earnings Conference Call
Banco Latinoamericano de Comercio Exterior, S. A. Q3 2023
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