Banco Latinoamericano de Comercio Exterior, S. A. (NYSE:BLX) Q2 2022 Earnings Conference Call August 4, 2022 11:00 AM ET
Company Participants
Carlos Raad – Investor Relations
Jorge Salas – Chief Executive Officer
Ana Mendez – Chief Financial Officer
Sam Canineu – Chief Commercial Officer
Ed Vivone – Head of Treasury & Capital Markets
Conference Call Participants
Jim Marrone – Singular Research
Pedro Escudero – DOMA Perpetual
Operator
Good morning and welcome to Bladex’s Second Quarter 2022 Earnings Call. A slide presentation is accompanying today’s webcast and is available in the Investors section of the company’s website, www.bladex.com. There’s an opportunity for you to ask questions at the end of today’s presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode.
Now, I would like to turn the line over to Mr. Carlos Raad, Investor Relations Officer. Please, go ahead, sir.
Carlos Raad
Thank you. Good morning, everyone, and thanks for joining our second quarter 2020 earnings call.
Before we begin our presentation, allow me to remind you that certain statements made during the course of the 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 US Securities and Exchange Commission and our earnings release.
Speaking on today’s call is our CEO, Jorge Salas, who will provide an overview of the second quarter and our strategic priorities. Ana Mendez, our CFO, will then discuss the quarter’s financial results in more detail. And after that we’ll open the call for your questions. Also joining us today is Mr. Sam Canineu, our Chief Commercial Officer and the rest of the Executive Bladex’s team. All will be available for the Q&A.
With this, let me turn the call to Jorge. Please, go ahead.
Jorge Salas
Thanks, Carlos, and good morning, everyone, joining us today to discuss our second quarter results. Today I’ll start with sharing results. I would like to take the opportunity to provide an overview on the strategy that we have been working on for the last year; a strategy with clear objectives, enhanced profitability, ensure long-term sustainability and of course, increased overall value creation for all of our stakeholders.
As you all have seen during the last few quarters, we have been consistently growing our book and expanding our margins. Today, I would like to highlight that the strong results we are presenting are largely the product of the strategic plan, a plan that is already in place and gaining traction. I will discuss the strategy behind this plan in more detail soon.
Before, let me give you an overview of our second quarter results. This was without a doubt a very strong quarter for Bladex. Our credit book maintained the growth momentum shown in the first quarter, reaching a historic record level of $8.7 billion. The commercial portfolio has now shown consecutive growth for eight quarters in a row, with NPLs close to zero for over two years now.
Our net interest margin continued the positive trend, observed in the last five consecutive quarters. Net income basically doubled compared to last quarter, reaching $23 million. That is an increase of 63% year-on-year, resulting in a 9.1% return on equity for the quarter. Ana will talk about these results in detail later on in this presentation.
The point I want to make today is that, these strong results are driven by two main factors: an internal one, the new strategic plan; and an external one, the current uncertain global macro environment.
The current context of high inflation, raising interest rates and high demand for commodities offers many opportunities for Bladex. Let me share our views on this second point first.
Three main points here: one, in today’s context the short-term nature of our loan portfolio allows us to accelerate repricing, capturing the upside of the interest rate increases; two, also our focus on foreign trade financing in Latin America positions us well to benefit from higher lending spread from customers who are directly experiencing increased demand for higher price commodities; and finally, the disproportional increase in local rates in the region, versus dollar-denominated rates, is driving a higher demand for dollar loans.
And this happens precisely when some of the main global banks that traditionally provide hard currency financing in the region have been forced to focus their activities to other geographies, due to their own internal risk-weighted asset limitations. In short, the current uncertain macro environment is, in many ways, a perfect opportunity for Bladex.
Having said that, obviously, this context carries important risk factors. Also, as we always stress, each Latin American country has its own unique fiscal reality that can be and will be affected differently in this uncertain context. But the point remains, overall, the current macro scenario is favorable for Bladex and has contributed to some extent to our strong results, including the ones we are reporting today.
Moving on to Slide 4. I want to begin by explaining the process we undertook to build our new strategic plan over the last year. After successfully navigating the strongest part of the COVID storm, Bladex’s management team together with the Board of Directors in a leading strategy consulting firm, began a collective effort to develop a five-year strategic plan.
The plan builds on the strength of our unique business model and aims to increase the bank’s profitability to show consistent double-digit returns by significantly enhancing the stability and the resiliency of our underlying business. The plan includes a series of initiatives aimed at expanding both our customer base and our product offering. The plan also calls for an upgrade on our IT processes and processes infrastructure to support the incremental transaction volume we are anticipating.
New key talent has been added as part of our talent acquisition and retention program, we have also established a new performance-based compensation structure that further our management and shareholders’ interest. In this context, we also upgraded and relaunched our IR function now led by Carlos Raad, our new RFO, who starts with building a team to enhance investor outreach and communications.
And switch to Slide 5. As I mentioned earlier, our new strategy is anchored in Bladex’s competitive advantages. The plan has three main group of initiatives. First group of initiatives to optimize and scale the commercial strategy through the expansion of our client-base with the same low-risk profile that we have traditionally target; two, initiatives to expand our product offering; and three initiatives that we call [indiscernible] that have to do with talent processes and IT.
First let me share a couple of thoughts on the commercial strategy. Just in terms of geography, there is a clear and significant commercial potential in the two largest economies in the region, Brazil and Mexico, where we already have a foothold. We have decided to double down in these geographies by increasing our commercial strength.
Similarly, Central America and the Caribbean, our most profitable region continues to provide strong business opportunities. So we have also decided to strengthen the dedicated commercial team in the region. This effort has already resulted in a relevant expansion of our customer base. This year, we have already grown 9% the number of new active clients in our portfolio. In terms of volume we estimate that between 30% and 35% of the credit growth for this year can be attributed to new clients.
Secondly, I would like to expand on the group of initiatives geared towards the enhancement of our product portfolio. As you all know, today, our product offering primarily consists of syndicated loans short-term by lateral trade-related financing vendor finance and letters of credit. Bladex enjoys a very loyal customer base that has consistently demanded a series of products and services that we do not yet offer.
I’m talking about basic treasury hedging products, local currency financing, such as the one we offer in the Mexican market, project financing and also structured trade solutions. That is the type of solutions that allow arbitrages between clients and suppliers through structures that generate better margins without increasing credit risk. All of these products are currently being developed as part of our plan.
Finally, attracting and aligning talent as well as upgrading our processes and the underlying IT capability, is essential to achieve the objectives of this plan. In this sense, as I mentioned before we have implemented a new variable compensation scheme that includes scorecards with KPIs directly tied to metrics in the strategic plan. The new compensation structure has been key to attract top talent and aims at aligning the executive compensation with value creation for our shareholders.
My executive team today has four new members, two of them in recently created position. Next slide, we’ll focus on that. Finally, our Board wants to ensure that we do all this in a sustainable manner. To ensure that, the Board has broad oversight of our ESG practices to the Board level through the newly named Compliance and Sustainability Committee.
Moving on to Slide 6. In this slide we show the four main changes that have taken place in Bladex’s Executive Committee during the year. Number one, we created a strategy office. Olazhir Ledezma, with extensive experience in strategy and design, is the head of this office. Olazhir also manages a newly created PMO unit that has turned Bladex into a project based organization. We also hired a new Chief Commercial Officer, Samuel Canineu also in the call ex-head of ING in Brazil has done a wonderful job expanding our client base and keeping a strong price discipline. We also hired a new Chief Audit Officer, Lizzeth Díaz who brings extensive experience in substance control, in charge of ensuring that our bank maintained its strong commitment to the observance of the best Arctic practice standards.
And finally as I mentioned we decided to upgrade the IR function and now reports directly to me, and it’s headed by Carlos Raad. By the way as part of this new IR plan, we will host an Investor Day in the fourth quarter of 2022. The idea is to take a deeper dive, of course, into our strategy and the initiatives that we have in place as well as to give you an opportunity to meet some of the key executives in charge of implementing this plan.
All of my colleagues come with significant experience and best-in-class credentials. While our team has not only strengthened at the most senior level, we have also hired new middle management talent in three main areas; pressuring, sales, of course, and IT.
With that I will now turn the call to Ana, and then I will make some closing remarks before we open it up for questions. Ana?
Ana Mendez
Thanks Jorge and good morning to all. I will now go into more detail on the evolution of our business and results of operations during the second quarter of this year. So let’s please move to slide number 7. Once again this quarter’s credit disbursements of over $4 billion exceeded collective maturities that represented more than half of the commercial portfolio. These denotes the fast turnover and short-term nature of the portfolio, characteristic of our business model with 71% maturing within the next 12 months and the average remaining tenure at approximately one year. Lending spreads on new loans exceeded those maturing by 26 basis points, reinforcing the positive trend of recent quarters.
In slide 8, we can see that quarterly growth continues to be evenly distributed across countries and sectors. Exposure by country remains relatively stable except for Brazil and Peru each up by two and one percentage points to 16% and 8%, respectively.
In terms of sectors, financial institutions represent 41% of the portfolio down by one percentage point from the prior quarter due to strong growth in other commodity related sectors, such as oil and gas downstream, now representing 14% of total exposure.
In the following slide, we present the quarterly evolution of our balance sheet structure at the end of each period. Total assets set record levels again this quarter, reaching close to $9 billion as seen in the graph to the left on the back of sustained loan growth, complemented by a credit investment portfolio, which allows us to further diversify our exposures by country, including investments in non- LatAm issuers, mainly from the US representing 51% of the total.
As presented on the graph to the right this asset growth has been consistently supported by a well-diversified funding base. First, a resilient level of deposits for over $3 billion, 51% of which is coming from our Central Bank Class A shareholders, and 20% from our Yankee CD program. Complemented by ample availability of bilateral credit lines from a wide range of corresponding banks and by continued access to the global capital markets where Bladex is a recurring issuer, mainly but not exclusively in the US and Mexico as well as the global stinted loan market.
Turning to slide 10, we summarize our results of operations. Quarterly profit for $23 million more than doubled from the previous quarter, and was up by 63% from last year. As I mentioned in our last quarterly call, during the second quarter we are seeing the full impact of strong loan growth experienced at the end of the first quarter, a tendency that has continued during the second quarter combined with a sustained trend of margin enhancement.
As a result, top line revenue growth was mainly driven by solid NII performance, up 27% Q-on-Q and 56% from last year, while fee income from letters of credit denote a positive trend. Indications activity has picked up and should be more relevant in the second half of the year as we have three mandated transactions in execution right now.
In terms of asset quality, provisions for the second quarter were substantially lower at $0.8 billion, compared to the $8 million provision charge in the first quarter of this year, mainly associated with a $1 billion or 14% sequential increase in the credit portfolio balance at the close of March.
During the second quarter, efficiency improved to 35% as strong revenue growth more than offset an increase in operating expenses, which totaled $13 million. As mentioned by Jorge earlier, the new variable compensation structure closely tied to strategy execution and financial performance, together with new hires supporting the underlying business growth, drove an annual increase in salary-related expenses.
In any case by design, strategy execution expenses are programmed, so that they can be covered by incremental revenues all along, as has been the case in this quarter. As we scale up the business under this new strategy, we expect to further — to see further improvements in efficiency in the medium term.
Let’s now move on to slide 11, presenting more detail on the quarterly evolution of NII. Strong combined loan and credit investment portfolio average growth of $1.9 billion year-on-year and $851 million from the previous quarter accompanied the related increase in financial liability and proactive liquidity management, resulted in a positive net volume impact on NII of $7.3 million from last year and $4.3 million from the previous quarter.
At the same time, the positive trend in net interest margin reaching 1.54% in the second quarter resulted in an additional net rate effect increase in NII of $4.4 million year-on-year and $2.7 million with respect to the previous quarter. As presented in the graph at the bottom right of slide 12, average base rate of loans and liabilities, which are mostly set on reference US dollar market rate, has been increasing at a similar pace, given the short-term nature of the bank’s interest rate gap.
Moreover, the all-in rate differential between loans and financial liabilities shown in the graph to the left denotes a quarterly positive trend, mainly due to increased lending spreads, as shown in the graph at the top right, reaching 2.38% during the quarter, up 40 basis points from a year ago and 18 basis points from the previous quarter. This lending spread expansion reflects higher demand for US dollar financing across the region, based on superior trade volumes and higher commodity prices, coupled with Bladex’s increased lending to the corporate segment, relative to financial institutions, the latter usually paying lower spreads and to our focus on extending the average debt maturity profile of our lending book, when and if followed by higher profitability. As a result, spreads have increased in all sectors, countries and business segments in which we operate.
Moving on to slide 13. Bladex asset quality remains solid. First, unchanged level of NPL or a Stage three credit remain at close to 0% of total loans. In addition, Stage two credit exposure with a reserve coverage of close to 10% was down by $21 million with respect to the previous quarter, releasing $1.1 million in credit provisions during the second quarter. This reduction reflects both, the continued collection of scheduled maturity and risk profile client improvement, allowance for reclassification to Stage 1.
In addition Phase one exposure which accounts for 98% of the total increased by $295 million during the quarter on new loan origination, requiring $1.8 million in credit reserves at an average coverage of 41 basis points.
Please let’s now move to slide 14, which shows our capital position. As I mentioned, we have achieved a more efficient use of capital, having invested in loan growth at increasing returns, while sustaining a strong capital position. At quarter end, Basel III Tier one ratio reached 15% and the Phenomena regulatory’ capital adequacy ratio stood at 13%. Both feel well above regulatory minimum and in excess of international standards. The bank’s capital strength remains a pillar of our business model and a critical factor recognized in our ratings.
In this respect, we remain open to capital management alternatives, to support a continued trend in loan growth going forward. With respect to quarterly dividends, the Board recently declared $0.25 per share unchanged from preceding quarters now representing 40% of second quarter earnings.
Here, I would like now to turn the call back to Jorge. Thank you.
Jorge Salas
Thank you Ana. Great job. As I said before, we are very pleased with the traction we are gaining, both in the financial front and also in the operational front. As we continue to build on our capabilities we are also benefiting from the current environment and maintaining a robust asset quality, while delivering enhanced profitability.
I look forward to continue to share, with you all the progress on the execution of our five-year strategy and provide you with a deeper insight on the strategy later in the year on the Investor Day that we’re planning to launch in Q4.
Now, I would like to open it up for the Q&A section.
Question-and-Answer Session
Operator
Thank you very much for the presentation. We will now move into the Q&A part of the call. [Operator Instructions] Thank you. Our first question comes from Mr. Jim Marrone from Singular Research. Please go ahead, sir.
Jim Marrone
Yes. Well, thank you for taking my call. I trust that you can hear me well.
Operator
Yes Please go ahead.
Jim Marrone
Okay. Great. So a very good job. It seems – capitalizing very well from higher interest rates. So I think that’s a job very well done, and I don’t want to put that away from you. So if I can bring the attention to just in regards to lap some headwinds that, mainly inflation and how that’s impacting clients perhaps, with regards to lower consumer spending as a result of the inflation going forward and that impact to Bladex currently as well as going forward with regards to inflation and perhaps a softening of the consumer spending with respect to the clients.
Jorge Salas
All right Jim. Thank you. This is Jorge Salas. Very good question. As I said, at the beginning of the call, we feel that the current environment is overall positive for Bladex. Having said that of course if this turns into a recession which it looks like and we in that recession prolongs itself in the region we might of course see aggregate demand diminish that will affect for sure our loan book size, and our margins. We do not foresee, however, material any material asset deterioration, especially considering after what happened during the COVID storm.
I mean, we came out of the storm after a complete standstill of the whole world with a stronger asset quality that even before the storm. So, short answer is so far positive potentially challenging in terms of asset size and margins, but not necessarily in terms of asset quality. I don’t know if that answers your question.
Operator
I think we have lost for a second investor. We will perhaps come back shortly once again. [Operator Instructions] And in the meantime, I’ll read two questions that came via the text message in the meantime. Congratulations on the very strong quarter. Two questions regarding capital allocation. Please expand on your decision not to bring the dividend back in line with pre-COVID levels in light, with significant NII growth expanding NIM and negligible nonaccruals that’s number one. Number two, how do you think the BLX should trade relative to book value? Why is the company not actively buying back stock at nearly 50% of book value?
Jorge Salas
Yeah. Thank you for the question. Questions regarding capital allocation, we’re clearly in a new asset size level. Bladex has not been here before. Our capital ratios have been obviously shrinking. We remain well capitalized. And I have to say that, of course, the Board is managing, all asset-capital allocation decisions to make sure that we return the best value possible to our shareholders and that involves of course our dividend policy. I don’t know Ana, if you want to add anything?
Ana Mendez
Yes. That pretty much sums it up in terms of our valuation of course. We’re definitely undervalued at the current level and having a book value of close to $29. You asked about, what would be the level that we aim at and of course it’s way over that.
Operator
Okay. Thank you very much. Our next question comes from Mr. Pedro Escudero from DOMA Perpetual. Please go ahead sir. Your line is open.
Pedro Escudero
Hi everyone. Following the prior questions, I don’t think you all understand the relationship between price to book and return of equity, because if you are lending without a return of equity calculator and obviously you’re lending doing that because your return on equity so far is 9%.
How do you expect that you’re going to return to a price to book over one? The reality is that, that is not feasible. So while you’re lending to 40% of the book to financial institutions are outsourcing your credit decisions to someone else basically.
That’s what it is to lend unsecured to financial institutions. What are we doing here? You’re expecting to increase the price to book you said that, your net value but the reality is that your return on equity is a disaster because of your lending basically a strategy.
It just doesn’t make any sense. Additionally, my question is, you have a massive dividend policy in terms of percentage of earnings which decreases the good value further which is a disaster as a capital return strategy to shareholders.
This should be actually used to be buying back loss of the stock which actually increases book value and increases the return to shareholders. So I think the strategy is flow. It comes from the Board is flow.
And actually your lending is standards by the way, your lending is standards. You claim that you have basically zero — I would say zero percent or something like that nonperforming loans. But even if you have less than 1% of nonperforming loans you can wipe out your entire net income.
So your whole strategy is being flowed for a long time. And I hope actually as a shareholder, that the Board actually starts to change all of this, but I don’t think they even understand what is going on.
So my question to you all is what’s going on the lending side? And why are you lending to financial institutions at super basically spreads? The reality is that it creates a very low return on equity. And while you have that low return on equity, you can really create a price to book that is going to justify the price of the stock going up. So those are my questions.
Jorge Salas
Thank you, Pedro. I find it curious that, your point is the opposite of the previous caller. I would mention a couple of things. One is, as regards to lending to financial institutions, we have been decreasing that precisely the storm, on the COVID storm went by to increase our margins. And we have seen that happening in a sustainable fashion.
As far as the return on equity, we don’t see many wholesale banks with this strong capitalization in such a clean book that return between 9% and 10% which is where we are today. And we’re planning to increase that. In short, we have different views on, how we manage this. I don’t know, Sam you’re in charge of lending if you want to complement.
Sam Canineu
Sure, Jorge. This is Samuel Canineu, the Chief Commercial Officer. I would say you have to look here at the trajectory, right? This is — I think there is — I agree that there is definite space or upside for us to improve the profitability on our lending.
But at the same time, you don’t change this from one quarter to the other you establish a direction because we are still very committed to our credit underwriting discipline.
And if you analyze the previous quarter, you do see that upward trajectory on margin you see that downward trajectory in terms of lending to financial institutions which is that there’s nothing wrong, but there is we can place our capital with more profitable and not necessarily riskier sector which is what we’re doing. And that’s the direction that we’re going. I believe there is still a space to continue with that shift without materially changing our credit standards and challenging our NPLs. So, I agree that there is upside and we’re executing on it, but of course responsibly.
Operator
Thank you very much. Our next question comes from Mr. Tom McGuire [ph], Private Investor. Please go ahead, sir. Your line is open.
Unidentified Analyst
Good morning and thanks for taking my question. You explained well how inflation is currently helping your business in terms of short-term loans and accelerated repricing plus commodity prices are high. But if it continues it could lead to a recession. And my question is what does that do for business? Do you have a recession playbook? And would you be increasing reserves in a poor economy or do you just put in reserves as new loans are originated?
Jorge Salas
Thank you, Tom, for your question. For answer is yes, as we do foresee a recession scenario in the near future that will of course affect aggregate demand and we closely monitor all countries and sectors and we will anticipate potential downgrade and some of our countries and perhaps clients. And we do foresee if that is sustainable that we will increase provisions accordingly.
Unidentified Analyst
Okay. Now one other question on the new Manager and Investor Relations and the Analyst Day that you’re going to have will that Analyst Day be in New York or will it be in Panama?
Jorge Salas
A good question. We’re still deciding. We are reading plans to be in New York, but we’re also continuing to do it virtually. We’ll let everybody know when the time comes.
Unidentified Analyst
Okay. Good. And then secondly, would you guys consider hiring an outside IR firm to schedule meetings with investors either virtually or in person? Because I do think your story is worth telling and it’s not well known.
Jorge Salas
Carlos Raad, our new IRO handles that and we do have an external adviser that will help us set up calls and meetings if necessary.
Unidentified Analyst
Okay, good. Thank you very much.
Jorge Salas
Thank you.
Operator
[Operator Instructions] Our next question comes from Mr. Adam Hegarty [ph], Private Investor as well. Please go ahead, sir. Your line is open.
Unidentified Analyst
Thank you. Hello gentlemen. Congratulations on the quarter that showed a lot of growth and I’m excited as a long-term shareholder to hear your plans for the company and the future. I would like just to make a quick comment and then ask my question. I also had a little bit less harsh terms than some of your previous callers.
I would love to see some share buybacks continuing as well. You guys reduced your share count by almost 10%. And you could see the effect on the share price and they realize there’s a different environment then. But at this book value level, I would love to see that.
And then second my question for you is, can you speak more to the roughly $1 billion in debt that you have on your balance sheet not the debt that you’ve issued? But there were some comments made last quarter about how you’re going to use it to balance the loan book. And I just had some concerns there with some of the lower credit quality issuers that the BB and single B they own as well as the rising interest rate environment and the effect that had on that portfolio value? Thank you.
Jorge Salas
Thank you for your questions. Regarding the investment portfolio that we have in a hold to maturity to complement our loan book, I’m going to pass the word to our Head of Treasury and Capital Markets, Ed Vivone here with me. Ed?
Ed Vivone
Hello. Good morning. In the case of the investment portfolio, I mean, this is a portfolio that as Jorge explained has been constructed with two main objectives. One is to complement the loan portfolio and the other one is to provide diversification. I mean, half of our portfolio roughly is invested in to Latin-American names and the other half is invested outside the region predominantly with US names.
Around 50% of the portfolio is investment grade. What happens is that many of the good Latin American issues have the countries selling of their respective countries, for example, the case of Brazil or Colombia, so that inhibits the possibility of achieving a higher investment, high grade for these investments even though the issuers may be pretty strong and very reputable corporate and financial firms.
But in a nutshell, we aim to maintain a very good rated bond portfolio with a short duration taking into consideration the expectation of the evolution of interest rates. And all these are liquid blob relationships that also have very, very fast access added to a bond of the repo market. And in nutshell this is a complement to our loan portfolio and is designed to both generate incremental income and provide geographic diversification inside the region to balance our overall credit exposures. I don’t know if you have any further questions, and I hope I have answered your question.
Operator
Thank you very much. It looks like we have no further questions at this point. I will pass the line back to the Bladex management team for their concluding remarks.
Jorge Salas
Yes, thank you operator, and thank you everybody for your questions, and look forward to share with you the progress of our strategic plan. Thank you everybody and stay safe. Bye.
Operator
Thank you very much. This concludes today’s conference call. We’ll now be closing all the lines. Thank you and have a good day. Goodbye.
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