Banco Latinoamericano de Comercio Exterior, S. A. Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 19, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to Bladex First Quarter 2023 Earnings Conference Call. A slide presentation is accompanying today's webcast and is 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 that the conference call is being recorded. As a reminder, all participants are in a listen only mode.

Operator

I would now like to turn the call over to Mr. Carlos Rad, the Investor Relations Officer. Please go ahead, sir. The line is yours.

Speaker 1

Good morning, everyone, and thanks for joining our first quarter 2053 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.

Speaker 1

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 the Q and A. With this, let me turn the call to Jorge. Please go ahead.

Speaker 2

Thank you, Carlos, and good morning, everyone. I will start today by providing a high level summary of our results, as well as an overview of some key metrics on the execution of our strategic plan. After that, Ani, our CFO, will discuss results in more detail. Later, I will share some assessments of the current global macro scenario as well as its effects on Bladex. And finally, Moving on to Slide 2.

Speaker 2

So this slide provides a summary of our results for the quarter. As anticipated in our last quarter results call, our focus for 2023 is on profitability rather than growth. Results for this quarter are a clear reflection of that emphasis. Both Our treasury unit and our renewed commercial team had a very strong performance despite the challenging environment of the last few months. The results speak for themselves.

Speaker 2

Record net interest income for the quarter was $52,000,000 more than double compared to Q1 2022. Net interest margin was at 2 41%. Again, that is over 100 basis points higher than the same period last year. On top of that, fee income was also strong, particularly, but not only letters of credit fees, which as a trade bank are an essential part of our business model. All this resulted in a net income for the quarter of $37,000,000 more than 3 times the same period of last year.

Speaker 2

Quarterly return on equity was 13.7%. Consistent with our guidance, the loan book was essentially flat for the quarter, but our loan portfolio remains healthy with a robust and diversified pipeline. Moving on to the next slide, Slide 3, please. Our strong performance this quarter is the result of a carefully executing Let me briefly share with you 4 key metrics that are part of our frontline KPIs for the year, onboarding time, new clients, incremental deposits and fee generation from our letters of credit business. Our commercial team continues to expand our client base through our new streamlined client onboarding process.

Speaker 2

We have reduced onboarding time by 46% already, which has allowed us to add 4% new clients last quarter. We have not and will not change our customer profile. We will only serve top tier corporations and banks in the region. But expanding our client base has allowed us to enhance lending spreads in a more challenging macro scenario. As you see in the bottom left part of the slide, Client deposits grew 12% quarter on quarter.

Speaker 2

Both Class A shareholders and corporate clients including financial institutions grew deposits and our Janke CD program also had a favorable performance in the last quarter, an additional demonstration of the resilience of our funding base during challenging times. Importantly, deposits are clearly our most cost efficient source of funding. So to the extent they represent only 45% of total funding, there is still significant upside potential here that our plan intends to capture. Finally, as you see in the graph below, Fees from our letters of credit unit keeps growing steadily quarter after quarter. Fees for Q1 We're close to $4,000,000 up 18% from a year ago.

Speaker 2

Behind this growth, There is also a new streamlined process designed to accommodate the increased volume we're seeing over quarter after quarter. I'm going to leave it here for now and let Annie discuss the results in more detail.

Speaker 3

Thanks, Jorge. Good morning to everyone. So now let me discuss the underlying drivers and trends of our Q1 'twenty three results starting on Slide 4. As Jorge just mentioned, We continued on a solid trend of bottom line results with net interest with net income reaching $37,000,000 for the quarter, resulting in a remarkable 13.7% annualized ROE. These results reflect the continued growth of top line revenues given a positive trend in lending spreads and a favorable interest rate GAAP position, which continues to benefit from the latter increases in U.

Speaker 3

S. Dollar market rates since the beginning of last year. Let me now walk you through our balance sheet and profit and loss line items to better explain these results. So let's turn to Slide 5. Total assets remained stable quarter on quarter at $9,200,000,000 up by 9% from a year ago.

Speaker 3

As we mentioned in our last call, Throughout most of 2022, we saw strong loan growth due to the synergies generated by the incorporation of new clients combined with the boost in commodity prices and trade flows. We also anticipated Lower lending balances toward year end 2022 and entering into 2023, given the more challenging macro outlook, while remaining focused on optimal capital allocation and increased returns, while preserving and a sound capital position. As such, loan portfolio balances reaching $6,700,000,000 at quarter end were slightly lower than the previous quarter by 1%, but still up by 3% from the year before. The bank's lending business is complemented by an investment securities portfolio, allowing for further diversification of exposures by country with an ending balance of $940,000,000 in book value at quarter end. Of this total, 96% or $901,000,000 are held to maturity and accounted for at amortized costs, for which no mark to market is recognized in the balance sheet or income statement.

Speaker 3

Nonetheless, The calculated market value for this portfolio at March 31 represents 96% of its book value and its mark to market is equivalent to approximately 3.3% of the bank's equity and 2.8% of its liquid assets. The remaining $39,000,000 in investment securities are recognized at fair value through other comprehensive income in equity with a mark to market representing merely 54 basis points for $211,000 at quarter end. The bank's cash and due from banks, mostly in the form of placements with the New York Federal Reserve, stood at 14% of total assets and 37% of deposits at quarter end, denoting a prudent liquidity management, particularly under the increased volatility experienced towards the end of the quarter given the financial sector shakeup. Moving on to slide 6, you can see the high turnover of our commercial portfolio with maturities amounting to 4 point $1,000,000,000 for the quarter, representing about 59% of the total and disbursements for a similar amount. This distinctive trait of our business model, which repeats every quarter, allows us to quickly pick up lending spreads and market rate trends, which has been consistently the case over the last several quarters, capturing the upward trend in both.

Speaker 3

So average lending spread over the market base rate mostly suffered for the Q1 of 2023 stood at 2.99 percent, denoting an 80 basis points increase from a year ago and up by 18 basis points from the preceding quarter. Aside from loans, the commercial portfolio includes of balance sheet exposure, mainly related to letters of credit business closely tied to trade activity, which increased by 16% from the preceding quarter and by 29% annually to $1,100,000,000 for a total commercial portfolio balance at $7,800,000,000 up 1% from the preceding quarter and which was 6% above last year levels. Average duration of the portfolio remains short at close to 12 months with 69% maturing within the next year. Continuing on to slide 7, in a scenario of heightened uncertainty, given the recent turmoil in the U. S.

Speaker 3

And European Financial sectors, The resiliency of Bladex's funding structure has once again been tested and verified as the bank increased its deposit base during the quarter to $3,600,000,000 up by 12% from December 22 levels and up by 10% from a year ago, as Jorge just commented. Deposits have historically represented an important and resilient source of funding throughout economic cycles, a large portion of which coming from the Latin American Central Banks, our Class A shareholders, who plays a share of their international reserves with Bladex. In addition, The bank has in place a Yankee CD program that has been successfully growing in volume and provide granularity and further diversification to our deposit base. Apart from deposits, we continue to have ample availability of bilateral credit lines from many correspondent banks worldwide, as well as continuous access to Debt Capital Markets and the Global Syndicated Loan Market. Turning now to Slide 8, Our capitalization at quarter end stood at similar levels from year end 2022 as we remain committed to a sound capital position, continuing to favor margin expansion through optimization of portfolio mix and risk adjusted returns over loan growth as was the case in the preceding quarter as well.

Speaker 3

The Board recently declared a dividend of $0.25 per share, an amount unchanged from preceding quarters. Now turning to Slide 9, we present a Sustained positive trend in net interest margin and net interest spread, driving strong top line performance. Let me first refer to the net interest spread, which is the average rate differential between assets and liabilities, reaching 1.82 percent in the 1st Q 2023, an increase of 19 basis points from the preceding quarter and of 67 basis points from the Q1 of last year. This increase in NIS reflects both increased lending spreads and positive market based rate differential between assets and liabilities, reflecting our short dated asset sensitive interest rate GAAP and which will tend to decrease once market rate interest rates stabilize. Net interest margin representing net interest income divided by average interest earning assets reached 2.41 percent in 1st Q 2023, an increase of 30 basis points from the preceding quarter and of 109 basis points from last 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.

Speaker 3

Moving on to slide 10, we can see that the overall impact of rate increases on assets and liabilities supported by higher lending spreads and market rates as just stated, was the driver of net Interest income increased during the Q1 of 2023. So the NII increase on account of higher rates was $6,900,000 This effect was partly offset by the net impact of average volume variation, accounting for a decline of $3,700,000 in NII with respect to the preceding quarter. This was mainly the net result of a $488,000,000 or 7% decrease in average lending balances, while average liquidity balances increased by $84,000,000 or 7%, somewhat compensated by the reduction of $404,000,000 or 5% in average funding volume. On Slide 11, fee income from letters of credit have shown an increasing quarterly trend for the last several quarters. As we have seen greater activity in the LC business with increased volumes, transactions and clients as Jorge mentioned.

Speaker 3

The other main component of fee generation for the bank relates to the structuring and syndication business. Given its transaction based nature, this activity should be analyzed annually rather than on a quarterly basis. We didn't see much activity during this Q1, in part also explained by seasonality, but we do have a pipeline of transactions that should bear results in coming quarters, bringing annual fees at similar levels than in 2022. As shown on Slide 12, asset quality remains robust, having $8,500,000,000 or 98 percent of the total credit portfolio categorized as low risk under Page 1 as defined by IFRS 9. Accounting for another 1.5% were credits classified as Page 2 for a total of $133,000,000 an amount that has come down from $147,000,000 in the preceding quarter and from $289,000,000 last year.

Speaker 3

Stage 2 exposure consists of closely monitored credits, which have experienced increased risks since origination, but are still performing. Finally, Stage 3 Our impaired credits represent nearly 0.4 percent of total exposure for a total of $35,000,000 and amount unchanged from the preceding quarter. Overall, total reserve coverage is more than 2 times the balance of impaired credits. Total credit provision charges for the Q1 of 2023 amounted to $6,300,000 mostly related to increased individually allocated allowances to Stage 3 credits as well as to an increase of Stage 2 reserves on certain investment securities that were downgraded internally. On slide 13, we can see a positive trend in

Operator

the bank's

Speaker 3

efficiency, reaching a cost to income level below 27% for the Q1 of 2023, as solid revenue growth has consistently overcompensated higher expenses by design. During the Q1, total expenses were down from the preceding quarter on the account of slower pace in administrative expenses, which is usual during the Q1 of the year. Salaries and employee related expenses, on the other hand, remained relatively stable on a quarter on quarter basis and presents an annual increase due to higher salary base or new hires during 2022, congruent with our focus on strengthening Dyadic's execution capabilities as delineated in our strategic plan. I will now leave it here and turn the call back to Jorge. Thank you.

Speaker 2

Thank you, Annie. We anticipate this 2023 to be a year of transition towards slower growth, eventually lower interest rates and slightly lower inflation rates, although still above target levels. We recognize that the timing and scope for the turning point in interest rates remains unclear, but we anticipate this shift will occur towards the end of Our business model characterized by very short term duration and essentially a matched Book with assets and liability sharing similar, although not identical, centers provide A strong advantage in the current banking landscape. As Annie explained before, The fact that we are able to swiftly position our balance sheet to be slightly asset sensitive or liability sensitive depending on the rate environment outlook has proven to be particularly beneficial recently. As far as the region we operate in, in general, we believe contagious risk for Latin American banks should be limited for 3 main reasons.

Speaker 2

1, they have minimal exposure, if any, to U. S. Regional banks. Banks in the region have substantial level of local retail deposits. And of course, the duration of their securities portfolio tends to be much shorter than those of U.

Speaker 2

S. In 2022, the Latin American economies outperformed growth expectations despite the global challenges, But growth forecast for 2023 have been revised downwards due to financial conditions, lower commodity prices and overall global economic uncertainty. Despite these headwinds, foreign trade levels remain robust. The macroeconomic and financial outlook for Latin American countries is still far from being balanced and stable. We see a challenging transition from peak to below trend growth GDP levels.

Speaker 2

And we see inflation decreasing, but still remaining above target rates, just like in the U. S. Although challenging, particularly from a credit risk standpoint, the current Also provides substantial opportunities for Bladex for several reasons. 1, high trade levels, increased demand for trade finance, our core business to the fact that domestic interest rates in LatAm are in most cases significantly above And those in the U. S.

Speaker 2

Have increased the demand for dollar denominated financing and we are essentially a dollar denominated lender. And we see larger global institutions limiting their exposure in the region in times of increased volatility, leaving us with less competitions for our clients. We will keep taking advantage of the opportunities that this context provides without relaxing our credit underwriting standards. Now, given our recent performance and particularly the fact that we are Already in the higher range of our last net interest margin guidance that is closer to 2.4%. Today, we are updating our 2023 ROE guidance from an original 10% to 11% range to a new higher range that we anticipate to be between 11% 13% by year end.

Speaker 2

In closing, we remain committed to enhancing profitability this year by prioritizing strategic investments and operational efficiency, and we are optimistic about the execution of our strategic plan. I'm going to leave it here and now open the call for questions. Thank you. Operator?

Operator

Thank you very much for the presentation. We'll now be moving to the Q and A part of the call. Question. We acknowledge all the text questions that have already come in. We'll give a minute or so for the questions to come in.

Operator

Okay. The first question, we'll read a A few text questions first. The first question is from Mr. Patrick Brown, individual investor. Great results.

Operator

Congratulations. Is this level of profitability a new normal for Bladex? Is it sustainable in a lower interest rate environment? And my second question, what is the rationale behind not increasing your dividend policy back to the pre pandemic levels.

Speaker 2

Hi, Thank you for your two questions. One with the first one first. As we detailed in our Investor Day back in November, I remind you all that the webcast is in our website. Our strategic plan is designed to tap into 5 major upside opportunities, and this will yield incremental Profitability without changing the essence of our business model. And these opportunities, we've been Reporting on them are mainly, 1, increasing our customer base and our cross sell Penetration, we've been reporting on that for the last year and this quarter as well.

Speaker 2

2, Changing our funding mix to be more heavy on deposits as opposed to other sources. We've said over and over that deposits are Our most efficient source of funding and we've been growing that systematically. 3, operational Re nearing some key processes have yielded great results and we're already seeing that. 4 is turning basically our treasury unit in more of our client solutions platform to generate additional fee income. That's an important project of this year and we'll be reporting on that as time goes by.

Speaker 2

And then in 5th and probably the most important one is adding structured trade finance solutions to our plain vanilla products. This will be supply chain finance solutions that will enable us to increase margins Without incremental credit risk as we take advantage of the arbitrage opportunities in the supply chain of our clients. I think we think that All this together with active balance sheet management will assure that we reach Sustainable mid teens ROEs over the long run as we communicated in our Investor Day. Second question was, I think regarding I think it was 2 questions, right?

Operator

What is the rationale behind not increasing your dividend policy to pre pandemic levels? Yes.

Speaker 2

Good question as well. Consistent with the guidance that we gave, as I said, In the Investor Day, the bank is clearly in growth mode. This year growth will be moderate given the headwinds in the region, but make no mistake, the bank is in growth mode. We are currently operating at the lower end of our capital ratio guidance that was between 15% and 16%. This is the capital ratio that we feel we need to operate in the region we operate and we are we will remain strongly capitalized and not risk our investment grade rating by any means.

Speaker 2

Having said that, the Board has, As I always say, it's ongoing discussions on capital management, always with a long term view. Alternatives on capital management that are discussed at the board level include issuing 81 hybrid type instruments depending on market conditions, potential extraordinary dividends in case we have exceptional returns and even additional buybacks depending on market conditions. So all that has been discussed at the Board level.

Operator

Yes, we'll be proceeding to the next Next question, this question is from Mr. Jeffrey Oto from Jeffrey Oto, CPA. Congratulations on your continued execution of your business plan. As a long term investor, I truly appreciate your work. Thank you.

Operator

Regarding net interest margin, you leveraged up in late 2021, capturing the 2022, 2023 Increase in interest rates against prior and lower cost of funds.

Speaker 3

Could you please give us

Operator

a little bit more insight as to the timing of your debt maturities and the difference between your existing cost of funds and what the approximate cost and rate would be in today's environment.

Speaker 2

That's a very good question as well. Thank you so much. Since this is related to funding and cost of funds, I'm going to turn it to Eduardo Vibone, our Head of Treasury and Capital Markets. Eduardo, do you want to tackle that?

Speaker 4

Yes. Thank you, Jorge. The first significant maturities for the bank are U. S. Bond with a couple of MAXIC initiatives that will take place in late 2024 and 2025.

Speaker 4

Having said that, the bank maintains a practically marked book in terms of contractual maturities and we'll continue to monitor markets to see any new opportunities that the capital markets may provide to further reinforce our already robust funding base. As regards to cost of funds, which I believe was the second part of your question, I would say that considering the short average Our current funding levels are a good reflection of the costs the bank has to face in the market in the current environment. As regards to interest rate gap, the bank took advantage of a low interest rate environment in 2020, 2021 to enter into Fixed rate medium term transactions that have resulted in a positive average GAAP, allowing assets to reprice faster than liabilities. The benefit of this gap approximately 25 basis points as of today is expected to narrow as interest rates reach their peak. Having said that, the bank maintains more than $1,000,000,000 of very low cost fixed liabilities that reprice beyond the next 12 months.

Operator

Okay. Thank you very much. We'll now take the voice question from Mr. Inigo Sega from now. Please go ahead, sir.

Operator

Your line is open.

Speaker 5

Hi, good morning, Jorge and Anna. I got a question on net interest margins, which has been A positive surprise, I would say. You were guiding like between 2,000,000 and 2.4,000,000 for the full year. Now you said We are at 2.4 already, which means that the return on equity will go instead of 10, 11 to 11.13. How do I need to think about net interest margins during the rest of the year?

Speaker 5

I know there's a lot of moving pieces. I know there's interest rates and there's uncertainty, but leaving aside the interest rates in the States, And especially on the lending spread, the lending spread looks very good, 3%, which is more than the sort of target you had. How do I need to think about that spread in the next few quarters? I guess this is risk appetite, this is the optimization plan and the market environment. But if you can give us some color on how do you expect The margins aside from the interest rate cycle in the States.

Speaker 5

Thank you.

Speaker 2

Thank you, Inigo. So we are Clearly a dollar denominated lender, all of our assets and liabilities, Most of them are floating. So interest rate levels in the U. S. Do affect have a direct effect on our spreads.

Speaker 2

I'm going to turn the Annie can probably Give a more detailed answer and perhaps when we talk about base rates and how we're looking at them. And then when we think about spreads, I'm going to turn it To Samuel for more of a short term view of what we're seeing this year in terms of spread In the region, Anne, you want to talk about?

Speaker 3

Yes. Thank you, Inigo. Good day. And yes, I know You mentioned to leave out the effect of U. S.

Speaker 3

Dollar interest rate, but like Jorge said, that's a big portion. Like Eduardo just mentioned before, we did position the bank towards late 2021 and the beginning of 2022 With debt, an important amount of debt that we place at fixed rates and that are going to reprice even beyond next year. And continuously, we have Seeing that the increases in interest rates as they are laddered, They have had an increasing impact, a positive impact in our net interest margin over the last several quarters. We actually saw that peak this quarter. And like Eduardo just mentioned, that differential today amounts to about 25 basis points, which is in terms of net interest margin.

Speaker 3

As interest rates level off, We should start to see some pickup in terms of the funding costs, but it will also take time because of the maturities of the debt that we have going forward. And in terms of the base rate differentials as well as the spread that I'm going to give the word to Sam now, You have to remember that every quarter, we have a turnover of our book of about half or even more than half of the book that's maturing, the loan book and a lot of it happens also on our liability side. So we are definitely able to pick up any trend both in our base rates or market rates and in our spreads. Like Eduardo said, we do see stable spreads in our funding costs. We haven't seen any increase there even recently with a recent term loss in the financial sector in the U.

Speaker 3

S. Or Europe. And now I can give Sam the word now to talk a little bit about Our lending spreads, which we also saw increased importantly over the last several quarters, particularly in the boom of commodity prices of last year. But Sam, please?

Speaker 6

Yes. No, sure. I think first of all, when we look at and Ina, I need to touch on this point. When we look at our business model, given the very short tenure of our book, It's hard to make any prediction on, let's say, medium term spreads because it can change very fast, upwards as we've seen, and of course downwards depending on the market condition. What I can say is that everything and back a little bit about the strategy that we've been doing is about creating increasing our cost opportunities, increasing recurrency of the in our loan book to be less subject to changes in market conditions even for the short term book.

Speaker 6

I would say the level of spread that we have reached up to now Has a lot to do with those changes in the I would say in our business model and improvement of our business model, all the new clients we have added, as well as, of course, capturing the market conditions, particularly the increasing commodity price. We saw a Q1 in this year of a lower demand across the region because of the just economic environment, at lower prices of commodities, but we were still able to sustain margins because we just have more clients now to choose from. I think When I look at the next quarters, I think I don't see as much as upside in increasing margins, because we're not changing our credit profile. On contrary, we're very aware of what's going on and we're not going to take more risks than desired. So the challenge and the objective is to sustain the current spreads that we have been achieving so far.

Speaker 6

And I think We have been doing a good job so far, and I don't expect to change materially from that.

Speaker 2

Hope that answers your question, I would only stress that the ability of this bank given the short term nature of the And the repricing to shift from slightly asset sensitive to liability sensitive In case we see the rates pivoting in one way or another.

Speaker 5

Super clear. Thank you very much. Thank you. Thank you, Anil.

Operator

Okay. Thank you very much. Our next question is a voice question from Andrea Twesto from Bancolombia, please go ahead ma'am. Your line is open.

Speaker 7

Hello, good morning and thank you for taking my question. I just have one question regarding the guidance, taking into account the positive dynamics of the results at the beginning of 2023. Can you please repeat the guidance of your main indicators by the end of the year. And I also want to know if this guidance contemplate the new trends and the recovery of the international trade that we are beginning to watch in Latin America. Thank you very much.

Speaker 2

Thank you, Andrea, for your question. I'm going to start by the last part first. GDP growth for Latin America will be slowing down. This year, we expect 1.2% GDP growth, 2% more in the order of 2% for 2024 according to the IMF. So we see a slowdown GDP growth slowdown in the region.

Speaker 2

On the other hand, trade for the region, imports plus exports is estimated to grow 2% this year and almost 4% next year. So that as far as a region and I must say that trade levels in Latin America are at record highs. Trade in 2022 was Almost $3,000,000,000,000 that's 57% higher than what we have what we had in 2020 and almost 30% higher than what we had pre pandemic. So trade is a very important driver for us and It is at record levels and growing this year. As far as our guidance for 2023, as I mentioned, capital will remain between 15% and 16%.

Speaker 2

Net interest margin, we mentioned between 2.1% and 2.1%, we're already at the higher end of that range. Fees, as Andy mentioned before, growing between 8% 10% as they have done traditionally and that includes syndication and letters of credit fees. Efficiency is current, it's still Improving, but it's even better than our that we originally anticipated because of the increase and revenues and what we did change was our ROE for the year, what We initially said between 10% 11%, and now we're saying, given what we're seeing and especially our Q1, Our results more in line with between 11% 13% for the year. That's our guidance. Do you have any additional questions?

Speaker 2

Hope that answers your question.

Operator

Thank you very much. We will be now moving to a text question from Mr. Ricardo Ballarino from Individual Investor. Congratulations on an excellent record setting quarter. Two things that really jumped out to me were the efficiency ratio of 26.9% and net interest spread of 1.82%.

Operator

Could you elaborate on how you see these two behaving for the rest of your strategic plan?

Speaker 2

I think we've touched on that before. The way the plan is designed, Ricardo, is to take advantage of the spread now, of course, While they are there, we have achieved a more efficient capital level. We have increased our customer base. We are cross sell is always it's also improving, But the real key to the plan is what I mentioned before regarding additional fee income on Treasury Products and also Structured Credit Finance, Supply Chain Finance STAFF solutions. That is where we're going to have additional margins and you're going to see and that's what we're working on now and that should compensate for headwinds in the future.

Speaker 2

So we do see we are confident that we are executing our plan as we thought, and we do believe that we will achieve Mid teens ROEs in a sustainable manner by 2026.

Operator

Thank you very much for the answer. Our next question is a voice question from Mr. Jim Maroney from Singular Research. Please go ahead sir. Your line is open.

Operator

Just once again, Jim Maroney from Singular Research. It's a question from your line. Your line is open. Please go ahead.

Speaker 8

Yes. Thank you for taking my call. You may have touched upon it again, but if you could just reiterate. You did a great job in managing the book. You've explained well the interest rate sensitivities on both your assets and liabilities.

Speaker 8

But if you can just provide a little bit of color in terms of your clients' books. What are you hearing from your clients in terms of higher rates, The inflation impact and the increased risk of perhaps default and Bladock's approach to perhaps higher credit risk Going forward with regards to your provisions, if you could just provide a little bit of color what you're hearing from clients in terms of their books as well as your approach to handling

Speaker 2

Let me just say a couple of things and then I'll turn it to our Head of Commercial Unit, Sam Canineo. I mean, there is no doubt that sustaining this Levels of interest rates will have a credit effect on clients that are over leveraged in the region. And our plan accounts for that and our level of provisions account for that. Good news is that we have the ability to shift our exposures to clients that are less leveraged in case we need it in different countries and in different sectors. As far as Interest rates in the U.

Speaker 2

S. And our clients accessing capital markets, we're also seeing some of that recently and that's where we see our true competition is perhaps even more capital markets than other international banks or even local banks. But I'm going to let Sam.

Speaker 6

Yes, sure. Well, I think the good news About the current environment is that in our business model, we I think over the years, there is always a country which we're present there is facing what, Let's say the rest of the globe is facing right now. So there's nothing new on how we operate. We and this is part of our selection criteria for client sectors, Countries in the moment that we enter, the moment in the exit, as well as the average life of our book. So with that said, Of course, right now, we see in the region the combination of recessionary environment and high interest rates.

Speaker 6

Of course, sectors there are certain sectors like retail, among others that are suffering more. We have no exposure to those to the sector and therefore we're not really seeing an issue. I think We stress a lot, particularly when we go to medium term, we stress a lot interest cover ratios as well as debt leverage ratios. So whatever is more, let's say, permanent financing or long term financing, our book is very healthy And all of our clients could sustain the current environment without a problem. I think, of course, that's also I'd like to also focus on the opportunity that this brings us because right now when we see a lot of banks in the market more With concerns over the portfolio, we can focus on really helping companies that have Good companies that have seen a drop in liquidity from banks who have to worry about problem loans and that gives them ability to step in And add great clients.

Speaker 6

So I think this is again net positive for us. Thank you.

Operator

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

Speaker 2

I just want to thank everybody for your Very good questions. We are optimistic about the future and the execution of our plan, and we are confident that this Positive trends will continue going forward. Thank you very much.

Operator

Thank you very much. This concludes today's conference call. We'll now be closing all day. Thank you very much and goodbye.

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Earnings Conference Call
Banco Latinoamericano de Comercio Exterior, S. A. Q1 2023
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