Q3 2019 Earnings Call
Hello, everyone and welcome to blood exit third quarter 2019 conference call.
This 18th date of October 2019.
This call is being recorded and it's for investors and analysts only.
If you are a member of the media you are invited to listen only.
A lot access prepare the powerpoint presentation to accompany that discussion it is available through the webcast and all the banks corporate website at Www Dot blood that's dot com.
Joining us today are Mr., Gabriele Chiminski, Chief Executive Officer, and misses on address your legend and does the Chief Financial Officer.
The comments will be based on the earnings release, which was issued earlier today and is available on the corporate website.
The following statement is made pursuant to the safe Harbor for forward looking statements described in the private Securities Litigation Reform Act of 1995.
And these communications, we make certain statements that are forward looking statements regarding bladex is future results plans and anticipated trends and the markets affecting its results and financial condition.
These forward looking statements our blood exits expectations on the day of the initial broadcast of this conference call and Blottnitz. It does not undertake it to update these expectations based on subsequent events or knowledge.
Various risks uncertainties and assumptions are detailed in the banks press releases and filings with the Securities Exchange Commission.
Should one or more of these risks and uncertainties materialize or should any of our underlying assumptions prove incorrect actual results may differ significantly from results expressed or implied and these communications.
And with that I am pleased to turn the call over to Mr., John Chiminski for his presentation.
Thanks, John tell good morning, everyone. Thank you for joining us today.
Before I don't know that I see it delves into key aspects of our earnings results for the third quarter I would like to discuss with your important developments that took place during the quarter and the impact of these recent developments on our perception of risk and financial results.
I will address the global macroeconomic context, the economic and business environments in Latin America, and wells on country and indices industry specific developments affecting our portfolio.
During the last four quarters conference call, we mentioned that the credit quality apart portfolio cost structure and allowances for expected credit losses, that's the basis for our earnings generation capacity.
Our third quarter 2019 results are another step in that direction.
The global economy in 2019 is some course for its weakest your growth since the financial crisis weighed down by 10 shows that have significantly slowed international trade.
Well loan growth is now expected to full suite per cent busier. According to new estimates from the international Monetary Fund.
Down from an estimated 3.2% in July .
The argument for attributed to slow down primarily to rising trade barriers that have impacted manufacturing and investment around the world.
The I imagine now forecast that world trade volumes will expand I just 1.1% this year.
Less than half of the growth rate, but July estimate of 2.5%.
For 2019 forecast for U.S. economic growth were caught by 0.22, 0.4% forecast for the Euro area work lies Europe , when 1% to 1.2% and China's economic growth was lower by Europe , one 1% too.
6.1% from their last July report shockingly be imap expects slower economic growth in 90% of the world.
Given this macroeconomic context, we are once again downgraded our economic and trade growth expectations for Latin America for 2019.
Today, we are expecting only a 0.2% economic growth for the region down from 0.6% at the end of the second quarter and trade is expected to grow only 1% down from 2.6%.
[laughter] gross profit growth prospect masks significant disparities in income in economic performance between countries.
Large countries like Mexico, and Argentina are experiencing uncertainties and lower foreign investment funds and key driver of economic growth.
On the other hand countries like Colombia in Brazil are showing a bit picked up in consumer demand that is supporting their economy, despite low commodity prices and weak international trade.
In other words slow or no growth from that developed world and the consequences of protectionist measures on trade and commodity prices are having an uneven impact on the region, but some countries better prepare to withstand the prevailing in bar.
Brazil, the regions largest economy, it's a bright spot amongst the three largest countries with growth expectations, 0.8%.
Mexico is expected to grow only 0.3% and Argentina. It then I'm outright crisis, its economy expected to shrink 2.9%.
We will discuss Argentina in more depth later in the coal.
Although Brazil will grow significantly less than we expected at the beginning of the year. We are seeing some of the economic growth driver stabilizing and starting to show some improvement both consumer and demand and investment are showing signs of life. Both categories had sizable declines in 2015 and.
Thousands 16 and had barely recover then.
With policies aimed at the opening up the economy, such as an aggressive brother decision program and the passage of pension reform, we are optimistic on Brazilian economic growth and business opportunities there.
We see medium term risks and mess, Mexico, resulting from the prospect of potential interference in state owned entities that for the last 20 years were run independently unprofessional.
That said, we see three equally or short term priorities from the current administration that should keep Mexico arms are relatively good side of the rating agencies.
One is maintaining a small primary physical surplus to continued support for Pemex in restoring production and three keeping good relationship with the U.S.
Our base scenario is that Mexico will not be downgraded to below investment grade until 2021.
As such we maintain a short term profile 10 months of fabric slides in our Mexico portfolio.
The MDM corridor doors stands out with GE live they do one Colombia, all exhibiting good growth prospects, although growth expectations for both Chile, Ambetter would have been downgrade it because of lower commodity prices expectations for economic growth in Colombia have improved on the basis of macro stability and a region.
Ration of consumer demand, we are increasing exposure to these countries in our portfolio.
Most of Central America, and the Caribbean continued to show solid economic growth prospects. Although these have also being downgraded recently on the back of lower commodity prices for their exports.
We continued to place to pay close attention to the economic performance, Ecuador and to the political ramifications of the implementation on consignment program.
Great and then Ecuadorian administration seems to want to follow through with this program, but with basically zero economic growth. The contractionary elements of the IMF prescriptions, such as the elimination of fuel subsidies are encountering strong opposition from political groups.
Costa Rica is also in our closely monitoring category in particular, we're following the impact of the fiscal reform package passed a few months ago.
Oh, sorry got has a sizable fiscal deficit fiscal reforms, mostly on the Greece and value added tax too many years and separately durations to be finally approved.
These were aimed at reducing the primary fiscal deficit, which would then lower financing rate that exacerbate the old rural fiscal imbalance.
When the package was fast we spoke about the rating agencies skepticism on the magnitude and potential effects the effectiveness of the reform.
It's too early to tell and we have a long way to overcome a larger than 6% of GDP deficit, but September was the first first month primary for fiscal surplus in years.
Argentina.
What can I say have we seen this movie before.
Disappointment to over the primary election result, which gave the left as popular standards that significantly going into the general election resulted in Ron on the currency and the Reprofiling of some of the countries that.
Argentinians demanded U.S. dollars preferably physical notes at a rate that was fast the bleeding the central banks lower Bell Gold reserve levels.
After some currency controls interest rates north of 80% and a few planes with physical cash from the U.S.
Argentinean government managed to temporarily control the situation.
But with a dead to GDP ratio approaching 90% very few available reserves and constant demand for come hard currency, Argentina remains a critical condition.
We will not make predictions on the outcome of next week's general election, or the economic policies that a Fernandes Fernandes administration would pursue.
What is clear to us is not the country, we remain very reliant on the U.S. dollar income it can generate from its main export commodities.
Well no matter when the election, we will likely they will likely maintain overdone trade and trade related currency lines and continue to promote the development oil and natural gas rich Buck a more sales for the eventual export of hydrocarbons.
You'll hear from on I've got I see there now we have reduced our exposure to Argentina, and I'm very comfortable with our book concentrated in strategic industries and U.S. dollar generators.
We continue to believe that the garden macroeconomic context, so first no room for complacency. Furthermore, the combination of slow growth and risk aversion is exacerbating liquidity for the top names in the region.
Pressing the margin nodal with compensating for the risk. These credits represent against this backdrop, we continue to analyze the risk reward function at the country level to adjust the portfolio a call accordingly, and maintain a very vigilant threading credit underwriting posture.
As we mentioned in previous calls 76, so far commercial portfolio has less than one year of remaining life.
Like he's been a privileged position to dynamically adjust portfolio exposures, we see growth opportunities in Brazil, Central America, and the Caribbean, Colombia, they do but otherwise in Chile.
This balances out reduction in exposure to Argentina.
Like it's all about consistency in a challenging and changing context.
Our book of business is solid we're identifying new prospects, we are increasing share of wallet with our existing client base and our structuring value out of transactions with declines.
Although our focus on high quality borrower I'm persistent U.S. dollar liquidity he markets puts some pressure on on origination margin blocks that been me has been able to mundane relatively stable margins.
Our pipeline of syndicated and structured transactions died Latin American integration is also solid and should help us continued to increase the exposure we look for in our medium term loan portfolio as well as to increase our feeling.
The pause it particularly from our class a shareholders represent 62% of our funding structure. We appreciate the trust a commitment of the region Central Bank and the impact that these deposits hub in improving our cost of funds.
On the cost side expenses for the quarter continued to be under control.
As you'll hear from I'm, not going to say I notice here, though are greater than bear loans experienced a slight decrease from last quarter as well as a reduction in our watch list category.
<unk> reserve coverage and tier one capital ratio remained strong.
And our book value remains solid above $25 per share.
That is why our board of directors approved to maintain a 38 and a half sent a share dividend for the quarter.
Against this backdrop the management apply there as well as its board of directors is cautiously optimistic for the reminder of 2019 and look forward a continuation of the profitability that we embarked on in the last four quarters.
With these brief.
Commons I will now turn the goal over to our CFO I know that I see a triple baidu with more color about our financial performance in the third quarter 2019.
Thank you Andrea good morning.
I will now go over the third quarter and year to date 2019 vessels into more detail.
Making reference to the presentation noted on our website.
So on page four.
Okay for the third quarter of 2019 totaled $20.4 million or 52 cents per share.
Compared to $840.7 million laws in the second quarter 2018, when the bank recorded impairment losses on financial and non financial instrument.
Totally totaling $60 million, mostly related to impact credit.
Third quarter, 2019 profits were down 8% and acquiring quarter basis.
On account of decreased structuring it syndication fees and lower net interest income.
Profit for the first nine months of 2019 totaled $64 million compared to a 9.6 million there I've lost a year ago.
During the first nine months of 2019, the bank has maintained a relatively relatively stable level of doubling revenues, which increased by 2% with respect to the same period 2018 <unk>.
Improved efficiency with a 20% reduction in operating expenses.
Achieving a 31% efficiency ratio.
And sustain high quality portfolio origination evidenced by a substantial decrease of credit provision, which totaled <unk> point $4 million for the period.
On page five net interest income for the third quarter 2019 was down 2% year on year and 5% quarter on quarter.
Lower average loan portfolio balances, which decreased by 2% quarter on quarter and by 5% year on year to $5.3 billion.
No were average portfolio balances during the quarter reflect reduced exposure in Argentina.
Coupled with lower credit demand in certain countries in the Central America and Caribbean region.
Partly offset by increased high quality loan origination in countries like Chile, and Colombia toward the end of the quarter.
The quarter on quarter degree in net interest income was also impacted by four basis point decrease in net interest margin one point, 77%, mostly related to the effect of decreasing LIBOR based Mike market rate on the bank asset and liability interest rate gap Hussein.
Okay.
For the first nine months of 29, Dean the bank's net interest income increased by 1% year on year to $82.6 million and the net interest margin increased by three basis point to one point, 77%, mostly reflecting benefits from an increasing market ratings.
Arming throughout most of the period compared for the year before.
Now moving onto page six.
Fees and commissions totaled $2.8 million for the third quarter 2019.
Representing a decrease of 25.
Sorry, 24% year here, and a 45% ordering quarter, mainly on account of lower fees from closed transactions in this drivetrain and syndication business.
Year to date.
He's from the business remained stable at close to $3 million, while total fees fell 13% to $10.3 million due to reduced revenues from letters of credit.
[laughter] pages seven to nine we present, the evolution and composition of our commercial portfolio.
At September 30, 2019, commercial portfolio totaled $6.2 billion, we'd be sensing a stable level quarter on quarter, and a 1% decrease year on year.
Total commercial portfolio continued to be most of the short term with 76% maturing in the next 12 months as an average remaining 10 or close to 11 month.
More than half of the banks short term commercial portfolio it specifically trade related.
Financial institution suffering sunquest I suffering represented 71% of total commercial portfolio as of September 32019.
Aside from financial institutions, the largest industry exposure accounting for 55% total.
The other relevant industry sector in our portfolio is oil and gas both integrated and downstream.
With that combined total of 12% of total commercial portfolio.
They remaining exposure is well diversified among several industries with no sector exceeding 5%.
That's new Mexico, Colombia, and Chile represented the highest country exposures together totaling 55% of total commercial portfolio.
Well, Brazil, and Mexico remains relatively stable at 17% and 14% respectively.
We were able to increase our portfolio in Colombia to 13% and she led to let you 11%.
Our continued effort optimized risk reward opportunities in high quality country.
Exposure in Argentina, which reduced the 4% of the total portfolio as we continue to execute on our plans to reduce the exposure in the country in view of the macroeconomic political unforeseen change they well if you like.
84% of or exposure in the country is with exporting state owned and private Corporation with U.S. dollar generation capacity.
The remaining 16% it's with backs.
Central America, Undecorated Tee and remain relevant regional exposure to the bank at 26% of the total mostly focus in dumped your bank suffering and quite say suffering accounting for 65% of the exposure in that region.
The remaining 35%, it's with dumped your private local corporation, which are neither in their respected industry and with regional players or what's the lumpiness.
On page 10 credit impaired loan or NPL totaled $61.8 million.
Down $2.9 million from the previous quarter.
Related to the sale of an exposure that was 100% was there.
In this transaction the bank collected zero point $5 million and the remaining $2.4 million were written off again exceed can reach there.
At September 30, 2019, Npls represented one point, 11% of total loan with a research coverage of 1.7 time and accounted for a single client exposure in Brazil, with and I have for its name stage three individually allocated allowance of 80.
8%.
Reflecting at book value of around $8 million.
Thanks to exposure decreased by $55 million during the quarter, mostly due to the payments scheduled maturities on our watch list portfolio.
Quite reserves allocated to these things to exposure increased by $3 million.
Impacted by downgrade on internal client rating.
All of the exposure and just get back we remain current.
Origination in hours page, one portfolio increased by $66 million.
Why do we made great research decreased by $2 million, reflecting improved quality on the equally portfolio origination in countries like Chile and Colombia.
These stage, one exposure, which relates to the performing portfolio with greatest conditions unchanged think origination continued to be the most relevant with 95% stilton exposure at quarter end.
On page 11.
Third quarter, 2019 expenses amounted to $9 million, representing a decrease of 17% year on year and 18% quarter on quarter.
During this third quarter, we recorded an expense levels somewhat below the run rate of expenses recorded in recent quarters.
It should partially revert in coming quarters.
Nonetheless, the back sustained effort and focus on expense control and process improvement has been affected.
Evidence by decreasing trend in expenses and efficiency levels below 31%, both on a quarterly and on a year to date basis.
For the first nine months of 2019 expenses were down 20% from the year before totaling $29.4 million.
This reduction mostly relate to lower salary base and other employee related expenses, resulting from the personnel restructuring profit in the first half of 2018.
Reductions in other expenses, partly relate to the adoption of I for Essex team doing 2019.
Whereby the back office space lease expenses are now accounted for as depreciation and interest expense.
Other expenses were also reduced on the absence of extraordinary charges recorded in 28, Dean as with all their cost savings across the organization.
On page 12, we present, our capital return with a positive positive trends in Nairobi, reaching 8% for the quarter and 8.5% year to date.
On a sustained level.
[noise] capitalization above 21% at quarter end.
So thats your whole <unk> shareholder return was supported like I did mention by the quarterly dividend payment announced today.
The board game at 38, and a half a cent per share representing 870, 75% payout ratio over quarterly and earning.
I will now turn the call back does that mean to open to do any section. Thank you.
Thank you will notice here, though sunbelt why don't we open up the two when they session. Thank you.
Thank you very much ladies and gentlemen at this time to we'd like to open the floor for questions. If you would like to ask a question. Please press star one on your telephone keypad now.
Again that is star one on your telephone keypad it to ask a question.
Well pause for just a moment, while we wait for questions to Kim.
[noise].
Once again as a quick reminder, you can press star one on your Touchtone phone to ask a question.
[noise] I first question will come from Robert Tank Global rational capital.
[laughter] I got rail and Ah. Thank you very much a I was just wondering if you could just.
Just elaborate on what factors you think may lead to an improvement in late in the net interest spread.
Over time.
Ah yes. Thank you Robert for the question.
What we see from and I'm Gonna go approach. This from a top down perspective is the is the very challenging global and regional environment.
In which we have to be very diligent than kerfuffle with respect to our on credit underwriting and a we are in a happy position to be able to maintain our credit spreads were they are we are.
Looking for value added funds options with key customers and Ah that is essentially what should be able to make us sustain those credit spreads on a go forward basis, we are identifying some upward.
On the D. As we mentioned in the Andean region in Chile, and Colombia, or if they do and I think that we are about to see more opportunities, particularly in Brazil, it's very difficult as of yet to do.
Terminate the potential there, but we see very good signs starting with the fact that they are opening up the economy with the an aggressive privatization program and very importantly, as it relates to the impact on overall.
No credit demand is the fact that this administration is not keen on maintaining the subsidy that previous administrations have with respect to the involvement all from National development Bank in lending to industry as a whole.
So as we see that prevented position program progressing we should see credit demand go up and if the.
Private sector is the one that needs to fulfill discredited demand that should be a good sign in terms of margin improvement up, particularly given that short term rates in Brazil have come down to a very a lowest article level.
Oh, the Selic rate right now is about 5.5% and we we believe that that should stimulate credit demand growth and a and we could see a pick up in margins as the private sector ban or start.
Fulfilling that demand for credit.
Right.
Thank you very much and just noting that.
And bezel three capital ratio is quite high at 21%.
Do you see the opportunity to make use of more leverage over time and you mentioned that.
We're optimistic.
Business over the remainder of 2019 do you think that.
Return on equity of close to 10% is achievable in say that the next 12 months in lots of your optimism.
Well present continues to be our goal on a long term basis, but we will grow exposure portfolio leverage Oh on what we consider to be a prudent and solid credit underwriting strategy.
Great and as such we will approach it opportunity by opportunity and as you well known we we don't give projections somehow or different ratios will evolve over time, but we are very happy with our portfolio.
We're very happy with our capacity to maintain relatively stable margins and we continue to find good opportunities to deploy on capital. If it's okay. We should open it up for more questions. If there are any.
Thanks, very much once again, if you would like to ask a question you May press star one on your telephone keypad now.
Again that is stellar one to ask a question.
[laughter].
And I.
Our next question will come from Robert Maltbie singular research.
Oh, Gabriel I'm here for Jim Moroney today.
Well I wanted to ask a little bit about the impact of Oh the rate cuts in the U.S. short term, Oh fed funds et cetera, and their trends there and how you see that impacting your your forward margins.
Thank you Robert that is a very good question and <unk>, let me start or with the is saying that Oh scores lower U.S. dollar interest rate.
We'll have a a name stopped on on our margin not said, we believe that we will be able to maintain our on margins with incremental origination exposure on a go forward basis and be able to.
Who to counteract that now for a more granular perspective, let me turn it over to a I'm not going up here not to answer. Thank you the real hi, Robert Yes, I have mentioned before.
With respect to you know our interest rate cap position like I mentioned in this particular quarter.
We were negatively impacted because of the.
Creeping rate environment, but that should correct, because we are usually able to.
I mean, where we have a very short tenure book both in our asset now maybe only be site. So with respect to the repricing. We don't see it continues oh deterioration there on the country. We should you know we should benefit from also lowering rates on our funding side, which eventually.
What happened in this particular quarter is that because the way we were position our lending book repriced, a little quicker, but that should correct itself in the coming quarters with that you know perspective, we in the overall, it even increasing or decreasing it rate environment, it panties able to reprice assets.
Liability or within a short period of time, a and yes, I mean, the lower rates at the end of the they would the high capital balance that we have obviously has an impact on the returns that capital invested in you know assets.
Oh. Thanks, your follow up question on operating expenses.
So she's done a very good job, reducing your operating expenses Oh.
And I'm wondering in terms of that trend.
The next 12 months she she that.
The ability to continue or remain about either in or [noise].
A little bit or color on on that.
Oh, well like have you mentioned, we don't necessarily give 'em you know prospect of our figures are going forward. What I can tell you is we are seeing the average trend in the recent quarters at about 10, 10.2, then and a half a million dollars ER and bad.
Yes, what we call today, the run rate of expenses understanding bad during the fourth quarter. We may see some quick cyclical impacts expenses, but if you see the year overall, we should be around 10, and a half million dollars in quarterly expenses on average.
Thank you.
Thank you very much once again as a quick reminder, if he would like to ask a question. Please press star one on your telephone keypad now.
Again that is star one to ask a question.
Thank you at this time, we have no further questions in the queue that would like trying to conference back over to management for any final remarks.
Thank you very much Intel and thank you everyone for joining US today, we look forward to talking to you guys. Again, one we are you sure results for the fourth quarter on the full year 2019 in the meantime for any questions. We always remain open on the bell.
Okay. Thank you very much and have a good day.
Thank you. Thank you. Thank you very much ladies and gentlemen at this time. This now concludes today's conference you may disconnect your phone lines and have a great rest the week. Thank you.