Q3 2021 Foreign Trade Bank of Latin America Inc Earnings Call

Hello, everyone and welcome to Biotics third quarter 2021 conference call on this the 20 <unk> of October 2021. This call is being recorded and is for investors and analysts only if you remember the media you are invited to listen only <unk> has prepared a powerpoint presentation to accompany their discussion it is available.

Through the webcast and on the bank's corporate website at Www Dot <unk> dot com joining.

Joining us today are Mr. Jorge Stylus, Chief Executive Officer, and MS. Ana Graciela de Mendez, Chief Financial Officer.

Their comments will be based on the earnings release, which was issued earlier today and is available on <unk> corporate website.

These statements is made pursuant to the safe Harbor for forward looking statements described in the private Securities Litigation Reform Act of 1995 and section 21 E of the Securities Exchange Act of 1934.

In these communications, we will make certain statements that are forward looking such as statements regarding <unk> future results plans and anticipated trends and the markets affecting his results and financial condition.

These forward looking statements are biotics expectations on the day of the initial broadcast of this conference call and <unk> does not undertake to update these expectations based on subsequent events or knowledge where knowledge.

Various risks uncertainties and assumptions are detailed in the bank's press release and filings with the Securities and Exchange Commission should one or more of these rich or uncertainties materialize or should any of our underlying assumptions prove incorrect actual results may differ significantly from results expressed or implied in these communications.

And with that I am pleased to turn the call over to you Mr. Solace first presentation.

Okay.

Thank you Stephanie.

And good morning, everyone, joining us to discuss our third quarter results.

And here once again with <unk> our CFO.

In a few members of my executive team.

Before discussing our quarterly performance, let me just give a.

Very high level overview of the region to provide some context.

There is no doubt that economic recovery is underway in Latin America and the Caribbean.

Having said that yes.

The pandemic still cats dogs, and Shadows I'm part of the region.

The recovery was robust in the first quarter of 2020 one.

But lost some momentum in the second and third quarters.

COVID-19 cases rose again.

In several countries.

According to the IMF real GDP is projected to grow six 3%. This year, followed by a more moderate rate of 3%.

In 2022.

From an overall perspective <unk> foresees.

A mixed recovery across Latin America.

The two biggest economies in the region, Brazil, and Mexico growing at five two and six two <unk>.

Expectedly this year.

There are broadly favorable favorable external conditions.

High commodity prices.

And pent up demand support.

Short term growth.

At the same time monetary and fiscal policy reversals work on the opposite direction.

Remittances.

Our our record high for countries like Guatemala on Lauder, and sorry about the order and the Dominican Republic.

Yeah.

But their main downside risks.

Need to be mentioned.

The emergence of a more transmissible and deadly or COVID-19, Marion just one of them.

Potential backing them.

Global financial conditions, and also potential social unrest.

As of year with heavy election schedule lose with presidential elections in Chile, Colombia, Brazil Costa Rica.

Just the next 12 months.

All in all we remain cautiously optimistic and well positioned to keep growing and taking advantage of the opportunities that keep arising in the region for black.

Now on slide three let me share our third quarter highlights.

They're well summarizing the head of this site.

Positive trend in quarterly earnings and credit growth with impeccable.

Asset quality.

Our profits grew 12% with respect to the prior quarter and were up 2% from last year.

Continuing the positive growth trend for both our credit portfolio and our investment portfolio.

Increased quarterly profits relate to revenues improvement both from higher interest rate income and higher fee income.

I mean from our syndication business and our letters of credit business that is having a record year.

Asset quality remains pristine with close to zero N P O and expenses remain under control.

Also the share buyback plan announced last May.

In the open market program continues to be executed as planned.

And finally, the board decided once again to maintain the quarterly dividend of.

Of 25 cents per share for this quarter.

Moving on to slide four.

This is a typical waterfall graph that we show a solid disbursements.

Close to three $6 billion up 8% from an already strong prior quarter.

We collected 3.4 billion of scheduled maturities for a net portfolio growth of 3%.

On quarter.

During the quarter loans were loans disbursed, where on average 17 basis points above the spreads.

Of the loans that mature.

During the quarter.

This is an inflection point as it reverts.

The recent downward pressure in spreads experience since the beginning of the year.

Higher spreads for the quarter I explained.

By two main factors one.

Increase in medium term disbursements up to 800 million this year.

Some of which are related to the reactivation of our syndication business.

And then secondly, the slight quarterly reduction in short term lending to financial institutions.

Which typically carry lower spreads, but particularly now given the abundance of liquidity in the regions.

Financial sectors in general.

Now moving to slide five.

Our portfolio continues to be well diversified.

By country with quarterly growth focused on investment grade countries now accounting for 46% of total exposure.

We increased exposure in Mexico, and Uruguay during the quarter, mainly in the oil and gas and metal manufacturing sectors closely tied.

To increase trade volume.

And pricing.

On slide six we show the same graph now presented by industry.

We see quarterly growth, mostly tied to increasing trade flows and prices, particularly in commodities.

So in absolute terms metal manufacturing oil and gas sectors continued to capture most of the growth mainly in investment grade countries.

Other sectors with positive trends were.

We're agribusiness such as coffee and energy generation.

And as I mentioned before exposure to financial institutions was down 7%, mainly in Brazil and Colombia.

In General Latam trade flows continued to perform well and are expected to grow 26% in 2021 and almost 10% in 2022.

Moving on to slide seven as I mentioned during last quarter's call. We continued to build our credit investment portfolio.

This portfolio increased by $252 million during the quarter.

More than doubled totally.

$573 million.

As of Q3.

43%.

Our investment grade companies.

This portfolio has an average rating of a double b plus and <unk>.

Duration of 2.5 years.

63% of the portfolio is invested with Latin American insurers well no my blogs and the remaining.

Almost 37% is mostly with U S issuers.

This portfolio is mostly intended to be kept to maturity with the main objective of obtaining revenues from yield accrual as a complement to the loan portfolio.

In addition, we complement this portfolio with a relatively stable high quality liquid assets portfolio, which is 100% investment invested in investment grade issuers. They qualify as high quality liquid assets. According to Basel III definitions and is designed to enhance.

Liquidity yields.

Moving on to slide eight.

Our asset distribution on the left and our liability mix on the right.

On the left side.

Of this slide you can see how assets continue a positive quarterly growth trend, reaching close to $7 billion at quarter end.

It is worth mentioning that both the loan book and the investment portfolio have now five quarters of consecutive growth.

With a combined total of more than 6 billion surpassing <unk>.

Pre pandemic levels.

On the funding side on the right.

You see the deposits remained 60% of our of total.

With an important participation from our class a shareholders and institutional clients throughout the region.

Together with the success of our Janky C. D program that now totals $550 million.

We continue to have ample access to global capital and in Dubai interbank market with plenty available bilateral lines.

And from an from an ample base of correspondent banks around the world.

With this I will now turn it on the call to any who will walk us through our P&L for the quarter.

Honey.

Thank you Jorge good morning to everyone.

Let's now dive into the third quarter, we saw starting on slide nine.

As you can see in the top left table.

Profit for the quarter was up by 12% on a sequential quarter basis.

And up 2% year on year, reaching close to $16 million.

Driving these results were topline revenue up 5% quarter on quarter and 7% year on year.

With fee income from syndication speaking now.

And a positive quarterly trend on net interest income or NII.

In turn NII quarterly growth.

<unk> continues to be supported by higher portfolio balances.

The bank loan and investment portfolio and by higher lending spread at Jorge I thought I just mentioned.

Offsetting the negative impact of lower labor market rate.

Mostly accountable for the 2% annual decrease in quarterly NII.

I will further expand on this in a moment.

These also maintained a positive trend up 11% quarter on quarter and 82% year on year.

As it back.

Alright, so increased activity.

And it's transaction based structuring and syndication business.

I'm, assuming from practically nil market activity throughout 2020, and the beginning of 2021 during the peak months of Danny.

Quarterly profit also reflect relatively stable quarter on quarter operating expenses.

$2 million from last year, no pandemic levels, when the back to cost savings measures.

In addition, the 0.8 million dollar credit provisions for the quarter.

Relate to credit portfolio growth and reflect the banks sound asset quality.

With close to zero percent NPL.

And the remaining exposure performing well.

With no loan modified on the account of the pandemic.

For the nine months ended September 32021.

Profits for $43 million were down 11% from the same period of last year.

Mostly impacted.

By the downward repricing of loans from.

From lower LIBOR market rate.

Putting pressure.

On the net interest margin.

Down 15 basis points to 128% and.

And we do think NII by 12% in the same period.

Okay.

On slide 10, we present NII variation segregated by volume and rate effect.

Quarter on quarter, NII was up $11 million, I'm, sorry, $1 million or 5%, reflecting both.

Higher lending spreads and lower cost of funds.

Combined with the contribution of a 37% increase in the bank's average investment portfolio.

Why the net lending rates resulted in a six basis point increase our net interest margin to 133% for the quarter.

Greenberg in prior quarters decreasing trend.

Year on year, NII was down by <unk> $5 million or 2%.

As increased average quite portfolio volumes, both in the loan and investment portfolio.

Coupled with reduced low yielding liquidity balances back to normalized level.

Practically compensated the substantial negative rate variation effect.

Mostly attributable to the 53 basis point downward repricing alone.

Again on the account of lower LIBOR market rate.

Slide 11 on the evolution of asset quality and allowance for credit losses.

Continued to reflect the bank's high quality credit exposure and its commercial and investment portfolio.

As I said npls remain unchanged from the previous quarter at $11 million or 2% of total loans.

Ah you're first nine stage two credits representing loans with increased risks since origination only represented 3% of total exposure at quarter end.

With the remaining 97% if they go right our stage, one or no risk credits.

Moving on to slide 12.

The bank's quarter end Basel III tier one capitalization remains solid at 21%.

For this ratio credit risk capital requirement is calculated under the advanced internal based ratings approach or IRB.

And resulted in risk weighted assets up by 9% quarter on quarter and by 222% year on year.

On higher portfolio balances.

For the same period.

With the levels were down by 2% and 1% respectively.

Mainly due to the banks open market stock repurchase program.

The which one 8 million class a shares for close to $29 million has been purchased up to September 30.

Since the program was allowance in mid May of 2021.

In addition, our board recently declared a quarterly dividend of 25 cents per chair.

Stable from preceding quarter, and representing a 64% payout ratio with respect to quarterly earnings.

In the graph to the left we also present our capital on the equity ratio of 17% as mandated by Panama banking regulator.

Well above the 8% minimum and for which credit risk weighted asset calculation follow bassil standardized approach.

With this I would now like to turn the call back to Jorge Thank you.

Thank you Amy.

Before we open it up for questions I would like to highlight.

The best effort.

S. G issuance that we did earlier this year together with Goldman Sachs was completely deployed in a couple of commercial transactions.

One you know clean energy, Oh, and the clean energy sector in Guatemala.

And the other one with a participation in the Brazilian bank facility supporting women entrepreneurs.

<unk> sponsored by the World Bank.

I said at the beginning of this presentation.

Uh huh.

We have been operating in Latin America for over 40 years navigating many crisis <unk> remains cautiously optimistic and uniquely well positioned with an agile business model and a robust balance sheet to take advantage of the opportunities that keep arising.

In a region that we know very very well.

So with that I will like.

Now to open it up for questions.

Thank you Stephanie.

If you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker function a speaker phone. Please on mute.

Again that is star one to ask a question. Our first question comes from Jim Marrone with singular research.

Yes, good morning.

I have two questions. The first one is for Jorge and then the second question I'll direct it to Andy if I may.

I saw Jorge you began your prepared comments just mentioning some of the headwinds.

The COVID-19.

Maryann you mentioned is a headwind I I didn't hear you mention anything in regards to an inflationary pressure.

And I know are with regards to South America and Central America.

And it has a reputation a hitch.

History with <unk>.

Inflation, and particularly hyperinflation so I'm.

Just trying to get.

Got it so on how our inflation mate.

Impact blade axe.

As well, perhaps are you hearing anything from your borrowers in regards to inflationary pressure.

And how it may be affecting their business.

I know some of the other companies that are reporting recently, they're providing lower guidance based on inflationary pressure based on supply chain breakdowns.

And so I'm, just getting a sense if youre hearing from the companies that you lend to and with regards to supply chain issues and inflationary pressure.

Sure let me answer that.

Next question is a very it's a very good question.

Uh huh.

Inflation is rising oh for several reasons.

Commodity prices one of them.

Demand recovery and then as you mentioned that the supply chain disruption. So we.

We are seeing a central banks in Latin America, we're sure our shareholders basically.

Our strongly are responding to two.

So inflationary pressures.

We are seeing.

Tighter monetary.

Does he throughout the region.

Brazil, Mexico, Chile, Peru.

<unk> already adjusted.

Words are interest rates now this.

In turn what we're seeing is that there is increasing.

Demand for our.

Hard currency financing obviously.

<unk> was flat.

Hum.

Uh huh.

As far as trade disruptions.

Yes global goods.

Trade volumes have rebounded.

Sharply this year.

Now supply side.

Poses a significant risk.

The shortage of the whole semiconductor.

Disruption in supply chain in many industry is a significant risk.

Also COVID-19 induced disruption and transport shipping.

Right.

Through record levels, but with that said.

We see Latin American trade flows.

Continue to perform well.

And I expect it to grow as I said, 26% this year.

And nearly 10% next year do you want to.

I have here.

Some of them are coming now are.

Chief commercial officer May want to add something.

Yeah, no. Thank you Jorge.

Just complementing on what we've been hearing from our clients I would say that the inflationary pressures.

Of course they have.

They can that is that is also leading to an increase in rates, which favors our some of our clients and that is.

And that we'll see in their results.

I would say also on the.

On the inflation on the let's say on the Friday, and then even the disruption another trend that we're seeing is that clients are looking to build inventory.

To preempt any lack of a future or delay in deliveries and that also triggers a higher demand for working capital.

I would say it's also positive for us.

And I mean by by choice, we would do work with companies that are well capitalized.

And prepared to deal with.

The disruption.

And I think in that.

This good.

If this continues to trigger a higher demands for four for working capital I think overall.

It more positive.

The negative for us.

Yeah.

I don't know if that answers your question.

Yeah excellent I think just as a recap what I could take away is that our inquiry.

Increased interest rates baseball on monetary policy.

Ken actually favor a blot acts.

And then in terms of borrowers nothing really materialize them. Yeah. It has really hit your balance sheet or income statement is that a fair comment I can make.

Yeah.

That's a fair comment I mean as long as inflation I mean, a little bit of inflation is good obviously out of control inflation will be a dangerous, but we don't see a risk of that now.

Okay. Thank you and for my second question is directed to Andy its like any I noticed the operating expenses were about <unk>.

Oh look considerably higher year over year I think you did.

Spell out some of the drivers to that operating expense, but can you just provide a little bit more.

Color in regards to why the.

The sizable increase in the operating expenses.

Sure Jeremy Yeah, I mean, basically last year like I said, we took certain cost saving measures that included.

A decrease in in our variable compensation.

For instance, and that's why you see some of the decrease in the line item of salaries and other expenses.

And at the same time, you know general General expenses in you know, we we reward from home practically most of last year. So that had some expense reductions we would leap paralysed all traveling we started too.

On that this year and several other you know we also put a hold on certain investments, we really focused last year on this front.

And business continuity and and and and.

And on the pandemic, which we actually did the let me start.

Very well from it and basically what you see now is is our expense levels that are similar to prior years levels. That's what we are showing for this quarter.

Okay. So basically it's a tribute to all of them.

Salaries as well as.

Just a G N a as a result of work from home and and the like right.

Right right exactly.

Okay. That's all the questions I have them. Thank you.

Thank you Jeremy.

Thank you again that is star one if you like to asking audio question. We do have a question from the web from Michael Galvez with principal financial group.

The question is thanks, a lot have you identified any specific countries on which you would like to reduce exposure and and on which are you looking to increase exposure for word.

Okay.

Sure Let me, let me, let me get that one.

Yeah.

Riskier countries, where we're looking to reduce exposure in and we've done so.

We'll be number won't be of course, Argentina.

Uh huh.

Government is dealing with the incredibly difficult situation of economic crisis.

And COVID-19 impact.

Deep external liquidity challenges physical deficit.

Ah we're monitoring the.

Potential deal with the IMF and its being negotiated now Oh so.

Salvador.

Probably dead it's now.

90% of GDP and growing.

Also need for a significant physical reform.

Also following up on the potential agreement with the IMF believe yeah.

Prolonged deterioration of physical and external accounts.

10.

Social and political environment, and then to a lesser extent I would say, perhaps Costa Rica.

A healthier.

Foreign exchange generation.

The challenge is of course.

The physical side.

And implementing.

The IMF agreement calls for significant.

Those reforms.

And also we have general elections in Costa Rica.

I think February of next year, so those I would say.

Countries that we're monitoring.

Closely and.

We're being very cautious.

On the on the other.

Other countries are.

In Central America, I would say the Dominican Republic Guatemala.

In Panama.

These are all countries favorite buy there.

U S.

Recovery that have had.

Careful.

Vaccination campaigns.

And they're also favorite by remittances.

Guess, what the mine life and the D R.

Uh huh external.

Nobility risks are contained.

Good internationally, which serves level proven track record of.

Access to the markets and even in difficult.

Times as we've had.

No.

But of course, we have Chile, Colombia, but I've seen.

Mexico, and even Peru, I mean, despite the reason political chat.

Challenges these are resilient economy.

With important markets related to foreign trade our exposure there is most of the short term.

Yeah.

Related to either financial institutions or top notch explorers and we feel comfortable there.

Smaller countries, Paraguay and Uruguay.

With great performance in macro stability. So that's.

I don't know if that was.

But that's that's how we're seeing it.

Next question.

Thank you there are no additional questions at this time.

Okay.

Okay.

Alright, and thank you very much for the opportunity and stay safe.

Thank you.

Thank you.

Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.