Banco Latinoamericano de Comercio Exterior, S. A. Q2 2023 Earnings Call Transcript

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July 21, 2023

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Bladex's Second 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.blavix.com. There will be an opportunity for you to ask questions at the Please note, today's conference call is being recorded. As a reminder, all participants will be in listen only mode. I would now like to turn the call over to Mr.

Operator

Carlos Sward, Investor Relations Officer. Please go ahead, sir.

Speaker 1

Good morning, everyone and thanks for joining our Q2 2023 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 XetuFib 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 joining us today. I'm excited to share our 2nd quarter results. I'll start by presenting the highlights of our performance for the quarter and Inani, our CFO will discuss the results in detail. After that, I will comment on our views on the economic dynamics of the region for the second half of the year. And then as always, we will open the call for questions.

Speaker 2

Moving to the next slide, Slide 2. Bladex had another outstanding quarter. Both our treasury unit and our renewed commercial unit had a very strong performance. The results speak for themselves. Once again, We're showing record net interest income for the quarter, dollars 54,000,000 in NII for the quarter, slightly higher than last quarter and 67% higher than the same period a year ago.

Speaker 2

Similarly, Net interest margin stood at 2.42 percent, 88 basis points higher year on year. All this has been possible largely because we have been gradually and strategically reconfiguring our assets and our liability mix. On the asset side, the client country mix has been optimized as well as new client onboarding remains strong across every geography we operate. This is very much aligned with our commercial team now having a higher weight on their rare rub goals, on their scorecards, under the new variable compensation scheme. Similarly, on the liability side, deposits, our most cost efficient funding source, have been steadily gaining share of the funding mix.

Speaker 2

Deposits as of quarter end were over $4,000,000,000 for the first time in Blythe's history. This represents almost $900,000,000 or 30% growth year to date. But perhaps more importantly is the fact that they now represent 49% of total funding as opposed to 42% a year ago. And we expect this trend to continue going forward. Also on the funding side, our Treasury unit successfully issued medium term debt in Panama for the first time ever and most recently in the Mexican market.

Speaker 2

Both issuances were supported by a very robust demand and adds to the diversification of our funding sources. Anna will comment on this in her section. Also, I want to highlight another record breaking results, fee income. Fee income was up 35% quarter on quarter and 38% year to date. This is mainly driven by our letters of credit fees, which as a trade bank is of course at the core of our business model.

Speaker 2

We have reached over $1,000,000,000 in debtors of credit for the first time ever. Again, process redesign and increased operational capacity have enabled us to keep growing this business steadily. Bottom line for the quarter was $37,100,000 for a return on equity of 13.4 percent similar to the previous quarter and in line with our 2023 guidance and our long term guidance of attaining a sustainable mid teen returns by 2026. These results are a A clear reflection that Blythe has reached an inflection point as we keep gaining traction in the execution of our strategic plan. A comprehensive plan designed to capitalize on the very clear upside potential of our unique business model that has been carefully executed by our Renew management team.

Speaker 2

I'm going to leave it there and turn the call to Ani.

Speaker 3

Thank you, Jorge, and good morning to everyone. I would like to start with the quarterly evolution of net income for the last year on Slide 3, where we continue to see a solid trend with a 61% annual increase in quarterly profit, reaching $37,100,000 for the Q2 of this year, similar to the preceding quarter's level and resulting in a 13.4% ROE. This strong result continue to be driven by the sustained improvement in top line revenue. Given a positive trend in the commercial business evolution, continuing to focus in new client onboarding and cross sell, driving higher diversification and positive lending spread evolution. In addition, Higher market interest rates continued to positively impact NII.

Speaker 3

Let me now walk you through our balance sheet and profit and loss line items to better explain these results. So turning to Slide 4, total assets reached an all time high of over $10,000,000,000 at quarter end, representing a 14% annual increase on the back of increased loan and investment portfolio balances and a sound liquidity position. The commercial portfolio, which includes loans and off balance sheet letters of credits and guarantees, also reached Record levels, totaling $8,100,000,000 at the end of the second quarter, up 7% from last year and 4% from the The growth of the commercial portfolio was driven in part by the incorporation of new clients, mainly in the corporate sector and by cross sell efforts, both part of the initial optimization phase of our strategic plan. The portfolio remains well diversified across countries, Having sized business opportunities in our top country exposures such as Brazil, Mexico, Colombia, Peru and several Central American and Caribbean countries. In terms of products, letter of credit business remains strong and vendor finance, which is closely related to short term commodity trade financing, proved resilient as the commodity cycle received mainly maintaining good traction.

Speaker 3

The short term nature of the portfolio Generate high turnover with over 60% maturing quarterly and an average duration of close to 12 months with 72% maturing within the next year. The bank's lending business is complemented by an investment securities portfolio, allowing for further risk diversification, as almost 70% is placed with non LatAm issuers, mostly from the U. S. This portfolio reached over $1,000,000,000 at quarter end and is fully comprised of securities held to maturity and accounted for at amortized cost, with an average remaining tenor of less than 2.5 years. 75% of this portfolio is invested with investment grade issuers with an average rating of BBB- for the total portfolio.

Speaker 3

The bank's cash position mostly placed in the New York Federal Reserve stood at 18% of total assets and 45% of deposits at quarter end, denoting a proactive and prudent liquidity management, which follows Basel methodology liquidity coverage ratio. Now let's move on to Slide 5, where we see our funding sources that remain well diversified across products, geographies and banners. As Jorge mentioned, we continue to see an increase in deposits, reaching a record level of over $4,000,000,000 as part of our cross sell strategy from our client banks and corporations together with our Yankee CD program, which continues to show a strong performance and provides granularity to our funding base. Deposits from our Class A shareholders who place a share of their international reserves with Plavix Continue to have a relevant participation in the total deposit mix. Overall, deposit growth enhances and continues to represent a stable and cost effective source of funding.

Speaker 3

We continue to have ample availability of bilateral credit lines from many correspondent banks worldwide, as well as constant access to debt capital markets and the global syndicated loan market. During the Q2, As Jorge also pointed out, we tapped for the first time ever the Panamanian debt capital market, having registered A corporate bond revolving program for up to $300,000,000 in the local exchange, with an outstanding balance currently at $66,000,000 along with other short and long term private placements totaling over $160,000,000 under our Euro medium term note program. More recently, at the beginning of July, we successfully issued debt for a total of MXN 4,000,000,000 or $238,000,000 equivalent in the Mexican debt capital market with 3 5 year maturity tranches at a very competitive price when swapped to U. S. Dollars.

Speaker 3

Turning to Slide 6, We remain committed to a sound capital position, a pillar of our business model, which supports our investment grade ratings. Capital levels continue to increase on the account of solid quarterly earnings, resulting in improved capital ratios in line with our internal targets and risk appetite. The Board recently declared a dividend of $0.25 per share, and amount unchanged from preceding quarters. Now turning to slide 7. We continue to see a positive trend in financial margin, driving strong top line performance.

Speaker 3

Net interest margin reached 2.42 percent in the Q2 of 2023, up by 88 basis points from last year and remaining relatively stable from the preceding quarter. On one side, higher weighted average asset rates have improved the return of equity funding such assets. On the other side, The average asset and liability rate differential or net interest spread has also expanded over the last year. This in turn reflects a positive evolution in lending spreads as well as a proactive management of the interest rate GAAP in an increasing interest rate environment. As a result, Net interest income or NII presented on Slide 8 has shown a strong growth over the last year.

Speaker 3

NII has increased by 83% or close to $49,000,000 when comparing The net interest income for the 1st 6 months of 2023 with the same period of the year before. Out of that total, $22,500,000 relate to an increase of 72 basis points in lending spreads over market based rates, such as Free Monthly Software for instance, while another $19,000,000 is attributable to the effect of high returns on the share of the balance sheet funded by Equity, as weighted average asset base rates have increased by 366 basis points to an average of 4.40 percent during the first half of the year. Also, the bank has benefited from a base rate differential created by a slightly Asset sensitive repricing gap, adding another $5,000,000 to the NII variation. The remaining $2,000,000 increase in NII is mostly explained by the net effect of higher volumes and a change in assets and liability mix. The impact of higher market interest rates accounts for over 40 basis points in the net interest margin for the first half of twenty twenty three when compared to the same period of last year.

Speaker 3

On a pro form a basis, assuming terminal rates of around 3% to 3.5%, The net interest margin would decrease by an estimated 15 basis points from the current 2.42 percent level. We expect this to happen progressively over the course of the next couple of years, a period during which we expect to see the results of various initiatives contemplated in our strategic plan that will more than offset the impact of lower market rates in our NII. Among those, it is worth mentioning the enhanced lending spreads from structured products in trade finance, Continued accretion of corporate clients and increased share in medium term lending, both on our participation in our syndicated loans and project finance deals as well as lower funding costs from higher corporate deposit base. Additionally, we expect increased non interest income from letters of credit, syndications and the deployment of treasury products, which will further complement revenue levels. So moving on to slide 9, fee income from letters of credit continuing to Well, as well as I'm sorry, as we have seen greater activity both in balance and transaction volumes, as well as cross sell and acquisition of new clients.

Speaker 3

Together with fees from structuring and syndications business and other fees mostly related to guarantees. Total fees for the Q2 of 2023 have increased by 52% over the last year. We expect the LC business to continue showing a strong performance and foresee a pickup in syndication activity in the second half of the year as we have a pipeline of transactions that should bear results. As shown on Slide 10, asset quality remains robust with 98% of total credit portfolio categorized as low risk under Stage 1 as defined by IFRS 9. Accounting for another 2% was credit classified as Stage 2 for a total of $205,000,000 consisting of closely monitored credits, which has experienced increased risk since origination, but are currently all performing.

Speaker 3

Finally, Stage 3 or impaired credit decreased to 0.1% of total exposure and now amount to $10,000,000 which was previously fully reserved. Overall, total reserve coverage is close to 5 times The balance of impaired credits. Credit provision charges for the Q1 of 2023 amounted to $4,700,000 mostly related to portfolio growth and to a lesser extent to increase SAGE-two thirteen reserves. On Slide 11, we continue to see a positive trend in the bank's efficiency, maintaining a cost to income level of around 27% for the Q2 of 2023 as a result of solid revenue growth and the closed cost control. Having increased the bank's salary base over the last year on new hires, congruent with our focus on strengthening Bladex's execution capabilities as delineated in our strategic plan.

Speaker 3

Let me leave it here for now and turn the call back to Jorge for his final remarks. Thank you.

Speaker 2

Good afternoon, Hany. As we move into the second half of twenty twenty three, we anticipate a more challenging environment for the region. We project a slowdown in Latin America's growth to 1.6% this year after the remarkable 4% we all witnessed in 2022. But there are both upside and downside risks to our growth forecast for the region. On the upside, we see potential in the surge of foreign direct investment observed towards the end of 2022 and in the early part of this year.

Speaker 2

This has proven to be more sustainable than we initially expected and that will keep representing for sure lending opportunities Additionally, resilient flows of remittances coupled with historically low Levels of Hispanic unemployment in the U. S. Provide further upside potential for growth. On the downside, As commodity prices receive from their 2022 peak, their contribution to the overall GDP growth in many countries has been weakening in recent months. This decline in export earnings, driven primarily by prices rather than volume as a result of the decrease in global commodity flows.

Speaker 2

Considering these factors, our growth projections and monetary policy outlook already account for some modest Currency weakening in the late 2023 and in 2024, supported by the recent easing in inflation that sets the stage for rate cuts in the region in the second half of this year. I want to emphasize that we remain confident in our ability to navigate these conditions successfully and keep taking advantage of the opportunities that constantly arise in this volatile region. Once again, our strategic plan remains on track. We are pleased with the progress and execution thus far and we are convinced that the bank is well positioned to fulfill the guidance for this year. Lastly, I want to recognize our new Investor Relations team that has made significant progress in fostering Robust relationships with the investment community.

Speaker 2

They not only put together our inaugural Investor Day last year, but have also proactively engaged with investors in all major regional investor conferences. Moreover, after years without form of coverage, Dife now has 3 sell side analysts covering our stock, which is of course which of course increases the value for our growing shareholder base. Before opening the call for questions, I want to express my appreciation to our team, our clients, to drive long term value for all of you. I'm going to leave it there and open the call for questions now. Operator?

Speaker 1

Please standby that the operator is having

Speaker 2

some problems. We will

Speaker 1

be back in a couple of minutes. Hi. I'm Carlos from Larex. I'm going to take The first question from Inigo Vega from Jefferies. It's a recent question.

Speaker 1

His question is

Speaker 2

Yes. Good question, Inigo. The truth is that the ability to grow this business is more a function of the capacity to process than anything. This quarter was indeed very good for our letters of credit business. It's important to know though that besides the growth From the existing clients that have accelerated via cross sell rate goals On the balance of our front line, there were a couple of specific one off opportunities in this quarter.

Speaker 2

We will and it's an essential part of our business. There is an important project to automate and digitalize this process to keep growing this business Further, we expect additional volumes and fees going forward.

Speaker 1

The second question comes from Patrick Brown, an individual investor. Can you remind us your NIM sensitivity per 100 basis points change in rates? How much Time it takes for your assets and liabilities to fully reprice for higher rates?

Speaker 2

Good question. So for every 100 points movement in interest rates, there is an impact of about 12 basis points on our net interest margin. This of course varies quarter for quarter, because as Ani always said, we have a very short term duration on our portfolio, but that's our best estimate. Our balance sheet structure is You have obviously cash maturing immediate repricing, then you have Obviously, the loan portfolio and then you have a longer duration on our investment portfolio that averages 2.5 years. So net interest margin should remain between 2.2% 2.4% during 2023.

Speaker 2

That's our best estimate. And most likely on the upper range considering the recent results. This is of course subject to whatever the faith decides to do on rates.

Speaker 1

Thank you, Jorge. Next question comes from Andrea Tuesta from Bancolombia. Can you give us

Speaker 3

Thank you, Andrea. So there are 2 main effects in the loss of financial instruments for this quarter. About half of it Results from the temporary ineffectiveness of the bank's hedges. As you know, the bank does not run into any currency mismatches and we don't maintain any trading position. So we contract very simple derivative transactions to hedge the currency or interest rate risk arising mainly from our bond issuances So these hedges are perfect to maturity.

Speaker 3

However, due to the accounting norm, They require to be accounted for at fair value. And even though at maturity, One will completely offset the other. At different moments in time, the fair values of the underlying debt and the hedge may fluctuate and result in either negative or positive effect and that was the case in this quarter. The remaining effect relates to the sale of and that's about the other half of investment securities at amortized costs, given increased risk that we saw at the beginning of the quarter and this is aligned to our risk management policies with respect to this portfolio.

Speaker 1

Thank you, Annie. The next question comes from Gilberto Garcia from Barclays. It's a live question, so I'm going to open the line for

Speaker 2

him. Humberto?

Speaker 4

Hi, good morning and thank you for the call. I had a couple of questions. First on your NIM guidance, it implies a bit of Potential pressure in the second half of the year, what could be What would drive this pressure on NIM? And on another subject on dividends, given the Rather consistent positive trends of the past quarters. Would you consider increasing your dividend in the near to medium term?

Speaker 4

Thank you.

Speaker 2

Thank you, Hiberto. I'm going to take a dividend question first and then I'll hand it over To Sam to talk about the net interest margin. So as I always say, dividend is a quarterly decision and it's up to the Board. And I can tell you that discussions at the Board level, not only on dividends, but in general Capital management alternatives, including not only dividends, but also even potential additional buybacks is a permanent discussion. I would stress, however, that the share we have shared Short term guidance and also longer term guidance for 2026.

Speaker 2

And part of that guidance is to manage capital ratios between 15% 16% in our target portfolio between $10,000,000,000 $11,000,000,000 So whatever we do on capital management will fall within those ranges. But ultimately, It's at the Board level and I cannot comment more than what I just said. Sami, you want

Speaker 1

to Yes. So this is Samuel Canino, the Chief Commercial Officer. On the margins, speaking about the low margin, The margins on our commercial portfolio. We I would say that up to now, we were able to consistently increase Our margins, as it could be noticed in the well, I think it's probably 7th or 8th consecutive quarter. But we feel that we're getting to a cap in terms of how we can increase margins with existing and new clients, of course bound by our own credit appetite.

Speaker 1

We're not I think it's been clear that we're not going to change our credit appetite and we feel that we have reached close to the limit, of course, by increasing, for example, we have not increased substantially the medium term portfolio that Can help us to increase margins because we saw better opportunities in terms of risk return on the short term, but that can change. So that can help to increase. But we feel that going forward based on the activity of this quarter, We see that it's easing out a little bit and that's why we haven't changed the guidance. Of course, there are other components of the NIM such as the base differential between assets and liabilities. And that one, it really depends on the Fed action.

Speaker 1

If we if margin if the Fed continues to increase, of course, then we can keep that differential or even increase a little bit that would have a positive impact on our NIM, But it really depends on the Fed action. But yes, that's why I think the reason behind not changing the guidance. Thank you, Sam. Next question comes from Inigo Vega from Jefferies. What is the Stage 3 exposure you wrote up in the quarter?

Speaker 1

Any recovery potential on that particular ticket? Thanks.

Speaker 2

Thank you, Inigo. So we're talking about

Speaker 3

the

Speaker 2

non bank financial Institution in Mexico, it's Unifin. Our exposure there was a total of 25 $1,000,000 $0.20 on the syndicated loan and $5,000,000 on the bones and it was 0.3% of our total portfolio and it was completely written off during the quarter. We are not very optimistic on any recovery there. So I think that was the last question. Thank you everybody for connecting and stay safe.

Speaker 2

Thank you very much. Goodbye.

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Key Takeaways

  • Bladex delivered a record net interest income of $54 million in Q2 and achieved a 2.42% net interest margin—up 88 basis points year-over-year—by strategically reconfiguring its asset and liability mix.
  • Customer deposits reached an all-time high of $4 billion, representing 49% of total funding and growing 30% year-to-date, while the bank diversified its funding base with inaugural medium-term debt issuances in Panama and Mexico.
  • Fee income jumped 35% quarter-over-quarter (38% year-to-date), driven by letters of credit fees as LC volumes surpassed $1 billion for the first time following process redesigns and capacity expansions.
  • The balance sheet expanded to over $10 billion in assets (+14% YoY), underpinned by a well-diversified commercial portfolio, a $1 billion held-to-maturity securities book and a prudent liquidity position at the New York Fed.
  • Looking ahead, Bladex forecasts a Latin America growth slowdown to 1.6% in H2 2023 but remains confident in its strategic plan execution and ability to meet full-year guidance amid evolving regional dynamics.
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Earnings Conference Call
Banco Latinoamericano de Comercio Exterior, S. A. Q2 2023
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