Q1 2022 Foreign Trade Bank of Latin America Inc Earnings Call
Hello, everyone and welcome to <unk> first quarter 2022 conference call on this fourth day of May 2022.
This call is being recorded and is for investors and analysts only.
If you are a member of 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 blade axe Dot com joining.
Joining us today are Mr. Jorge Salas, Chief Executive Officer, and Mrs. 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 the corporate website. The following statement is made pursuant to the safe Harbor for forward looking statements describe.
In the private Securities Litigation Reform Act of 1995, and section 21 E of the Securities Exchange Act of 1934.
In these communications, we may make certain statements that are for looking such as statements.
Statements regarding blade Xs future results.
And anticipated trends and the markets affecting its results and financial condition.
These forward looking statements are blade axe as expectations on the day of the initial broadcast of this conference call and blade <unk> does not undertake to update these expectations based on subsequent events or 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 risks or uncertainties materialize or should any of the 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 Mr. <unk> for his presentation.
Thank you very much Shelby.
And good morning to everyone I'm here today with our CFO .
Any mendez.
<unk> commercial officer Penni now is also on the nine and.
And a few other members of my executive team to discuss Q.
Q1 results.
For the 2022.
Yes.
Let's go straight to slide three.
Okay. So this quarter was once again, a record breaking quarter in terms of asset growth.
We reached eight $4 billion in our credit portfolio at the end of the quarter that is up 14.
10% from our.
This quarter.
Eight.
From a year ago.
The commercial portfolio grew 12% quarter over quarter and 28% in the last 12 months and it's now close to the historical peak of plastics.
Seven 4 billion.
This is now the seventh consecutive quarter of continued growth.
This time boosted mainly by the increase in commodity prices.
And.
Those.
Net interest income for the quarter was up 4%.
Two last quarter and 36% year on year.
Having said that interest income.
<unk> not reflect the full impact of the increased volume of commercial assets observed during the period as most of the growth took place in the last week.
With last week's I should say of the quarter and the bank maintained a higher liquidity levels at the beginning of the year in anticipation precisely of this expected increase in the credit portfolio.
Yes.
However, this robust asset growth will provide strong basis for a sustained improvement in the bank's revenue flows.
In the forthcoming months.
Nevertheless.
Profit for the quarter were down 13% year on year.
Due to additional credit provisions based as you know in FRS nine directly related to the significant growth of the credit portfolio during the quarter.
Once again, all the growth has been our compound by strong credit asset quality and nonperforming loans remain.
Close to zero.
Andy will later elaborate a little bit more on this in.
And she will talk about the dividends.
Recently declared from our board.
Of course, no changes there as you saw.
Moving onto slide four.
In this slide we show the usual waterfall graph to illustrate the facts turnover of our portfolio during the quarter.
In Q1.
We had more than half of our commercial book maturing.
And it's almost $3 5 billion of maturities.
And we were able to disburse one four.
$4 3 billion.
At significantly higher spreads in new loans for as much as 36 basis points on average therefore lending spreads continue its positive trend.
On slide five we show the breakdown of our loan portfolio.
Both in terms of geographies and sectors.
The commercial team now led by some kind of new.
Has been actively taken advantage of the positive freight train in trade volumes such.
Such as downstream oil and gas in Peru, and Panama.
And the food and manufacturing sectors in Mexico.
Ladder closely tied to the U S.
Mexican.
Good quarter.
The exposure to financial institutions remained relatively stable in nominal nominal terms are $3 1 billion quarter on quarter, but decreased its relative participation to 42% of the total down 6%.
From the previous quarter.
In slide six we see the balance sheet quarterly evolution during the last year.
On the asset side.
To the left of the slide we show consistent growth in both our loan and our investment portfolio.
Accounting for a combined total.
Almost 90% of <unk>.
Total assets at quarter end.
Let me mention a couple of things about our fixed income investment portfolio that has now.
Greg the 1 billion Mark.
At the end of the quarter and has been growing steadily for the last six quarters here.
Yeah.
This portfolio complements our commercial assets.
And provides further diversification to our credit exposures there.
The main component is a credit investment portfolio of over $900 million.
Which increased $288 million during the quarter.
At the end of the quarter, 48%.
This credit investment portfolio was invested with non Latam issuers, mainly from the U S.
We also have a smaller liquidity portfolio of close to $170 million, 100% of which qualify as high quality liquid assets. According to Basel III.
Finishing place on multilateral and <unk> issuers and aimed at providing diversification to our liquidity investments are working best.
Mostly with New York.
On the right, we illustrate the evolution of deixis funding structure.
Deposits were up during the quarter, reaching close to $3 $3 billion recovering from a typical seasonal behavior of last months of the last months of the year.
In Q1, we also so.
Eight almost $450 million increase in long term borrowings and debt, having close several relevant transactions such as the reopening of the debt placement in the Mexico capital markets for 3 billion Mexican pesos approximately $150 million.
And a 300 million global syndicated.
Transactions done by our Treasury unit.
These new resources will allow us to keep funding our commercial growth, while maintaining our cost efficient diversified and very resilient funding base.
I'm going to leave it here for now.
Turning to <unk>. So she can walk you through the P&L and its strength and then after any comments on the P&L I will share our view on the current macro scenario.
The impacts from Latin America in General and <unk>, specifically and then we will open it up for questions.
Tony.
Thanks, Jorge and good morning to everyone.
Let me now give you a little more color on our first quarter results.
<unk> on slide number seven.
Profit for the first quarter of 2022 for $11 million.
It was down 13% year on year, and 45% on a sequential quarterly basis.
As Jorge commented this lower bottom line results, mainly reflect increased collective credit provisions during the quarter.
If excluded.
Profit would have been close to fourth quarter 2021 level.
I thought just also commended.
<unk> has capitalized on the strong demand for trade finance.
Boosted by higher commodity prices and trade growth.
Loan growth was particularly strong during the month of March.
So the related revenue stream was not fully reflected in first quarter results.
And remains to be seen in full in top line revenues in coming months.
While I FRS nine credit provision charges.
Our record recorded upfront as you know.
Notwithstanding.
Revenues during Q1 were up by 38% year on year and remained relatively stable.
Up 1% quarter on quarter.
Mainly on higher net interest income I will shortly expand on this.
And on a sustained growth trend in letters of credit fees.
With increases above 30% year on year.
And in the mid single digit quarter on quarter.
Syndications fees were $2 million short of fourth quarter 2021 levels.
Flexing the uneven transaction based nature for this business.
There is however, an attractive pipeline of transactions ahead for 2022.
As we have seen this activity pick up since the second half of 2021.
Operating expenses increased 21% year on year, and 7% quarter on quarter, mainly on higher personnel related expenses.
We have been strengthening our workforce through new hires in order to support increased business activity.
Also impacted impacting the quarter over quarter expense comparison.
Was a onetime salary related expense reductions during the fourth quarter of 2021.
Now moving on to slide eight.
I'd like to dive into the drivers on the quarterly evolution of net interest income or NII.
The $6 8 million or 36% annual increase in NII, mostly relates to the $1 7 billion expansion in the banks combined average loan and credit investment portfolio.
Considering as well the $1 8 billion or a growth in average funding.
The net volume effect.
So that is an increase of $6 million in NII when compared to the first quarter of 2021.
In addition.
The net rate effect added another <unk> 8 million.
NII year on year.
Mainly as the all in rate differential between loans and financial liabilities.
Increased by 11 basis points.
On higher credit spreads, reflecting growth in medium term lending and market rates starting to pick up.
Wind with expected fed actions.
Now when compared to the fourth quarter of 2021.
NII was up by <unk> 9 million.
Again strong portfolio growth with average loans exceeding prior quarter balances by $492 million.
And credit investments by another $142 million.
Was partly offset by the cost of increased liquidity position during the quarter up $366 million on average.
Which in turn resulted from increased average funding for over $1 billion.
As the bank secured incremental funding towards late 2021, and early 2022 in anticipation of strong loan growth.
Which ended up fully deployed by March of 2022.
These average asset composition with increased liquidity levels relative to total interest earning assets.
Had an impact on overall asset yield during the quarter.
Which in turn caused a 10 basis points quarter on quarter decrease in net interest margin b, noting net interest income to total average earning assets.
132% for the first quarter of 2022.
By the end of March however.
Cash was reduced to $654 million.
So overall liquidity, including the high quality liquid assets bond portfolio.
$825 million.
In line with LCR regulatory requirement.
As a result net interest margin for the month of March recovered to 149% a quick reversal from the downward trend in the first two months of the year and improving by seven basis points from the fourth quarter 2021 level of one.
42%.
Moving on to slide nine.
The bank maintained a high quality credit exposure.
It's commercial and investment portfolios.
As evidenced by the low level of Npls or stage three credits close to zero percent of total loans.
And by the relatively stable overall portfolio reserve coverage of <unk>, 7%.
Considering npls alone research coverage exceeds five times.
Provisions for credit losses during the quarter amounted to $8 million.
As total credit exposure increased by over $1 billion.
Most of this credit exposure precisely 98% remains classified as low risk or stage one.
<unk> nine.
Sage two credits.
With increased risk since origination remained.
At 2% of total exposure relatively.
Stable with respect to the preceding quarter.
And bound from 5% a year ago.
Please let's now move on to slide 10, showing our capital position.
As of March 31, 2022.
Basel III tier one capitalization stood at 16%.
Down from 19% in the preceding quarter and from 21% a year ago due.
Due to the higher credit risk weighted assets base.
58% year on year, and 20% quarter on quarter.
In fact, it by increased loan and investment portfolios.
While equity levels remained relatively stable at over $1 billion at the end of the quarter.
In the same manner.
Still well above the regulatory minimum of 8%.
The regulatory capital adequacy ratio reached 13, 4%.
Just to highlight both these ratios follow Basel III methodology, but the first one takes the advanced internal risk based approach.
Calculated in credit risk weighted assets, while the regulators applies the standardized approach.
With respect to quarterly dividend. The board recently declared the same <unk> 25 per share in line with preceding quarters.
Representing 82% of first quarter earnings and our yields to current stock prices in excess of 6%.
With this let me now turn the call back to Jorge Thank you.
Thank you and great job.
To share a few high level thoughts on the current macro scenario.
The impact from Latin America, and and <unk>.
First of all with respect to the effects of.
The Russia innovation on Ukraine.
Let me start by saying that <unk> does not have any direct.
Our material indirect exposure to Russia, Belarus, Ukraine.
Moreover, Latin America does not have meaningful trade flows nor financial linkages.
With those countries, although create flows for certain products may be more substantial on a specific basis, such as fertilizers and meat products.
It is however, also does not have a material credit portfolio exposure in any of these sectors.
Based on our analysis, which obviously included close communication with our client base, we see minimal effect.
The impact of this conflict on our clients' operations.
Having said that.
The region is feeling the ripple effects of the conflict.
Some of which may even play to the regions advantage.
There is no doubt that the surge in commodity prices exacerbated by the conflict.
Has resulted in a positive great shock for Latin America.
With the exception of Mexico.
Manufacturing based economy, and most of Central American region.
Net importers of commodity.
All other major Latin American economies are key commodity exporters.
Now while the commodity price increase is payroll.
For the commodity exporters in Latin America.
The lower growth and higher inflation are clearly not.
As a result growth forecast for the region were revised down slightly in.
Inflation rose.
And official interest rates are now expected to move further into restrictive territory.
Irrespective of that foreign creating the region should still grow almost 10% for this year.
And close to 5%.
For 2023.
With all this said and.
And given the quality of our customer base in the short term nature of our portfolio.
<unk> remain optimistic with our prospects.
As illustration.
Part of the healthy increase in our loan portfolio. This quarter was due to the fact that <unk> was able to capture demand for financing.
From large importers and exporters.
That was left off by the typical global commodity banks that either had their line stopped.
Our focus on managing the Russian.
Crane exposure.
We believe that such window of opportunity for blacks should continue at least through the second quarter of this year, allowing us to continue on a trend to increase our lending margins.
The same way we did during the onset of the pandemic, we will continue to lever on our agile business model our expertise in the region and focus our lending in activities.
On winning sectors countries.
And clients.
Finally.
As we reach a more efficient use of our capital we are confident in our ability to increase the profitability.
Of our credit portfolio given its high turnover.
As well as favorable market dynamics that will benefit our business model.
I'm going to leave it there. Thank you and we will now.
Open it up for questions.
Thank you at this time, if you'd like to ask an audio question. Please press the star key on your Touchtone phone now you.
You may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question, we'll pause for a moment to allow questions in the queue.
We have our first question from Chris Sakai with singular research.
Hi, good morning, I'm in for Jim Marron.
<unk>.
Just had a question on inflation in Latin America, how concerned is flat X with inflation.
Which country do you see to be the most problematic.
<unk> inflation.
Yes.
Great question.
First thing I have to comment as we see.
Very favorable.
<unk>.
The reaction of the most important central banks.
In the region all shareholders of <unk> by the way.
That active.
From proactively even before the fed did to.
To contain.
And plus generic pressures.
In flash we are not really.
Concerned in the short term.
There has been an increase.
In local.
Domestic real interest rates that obviously favours.
<unk> two is the extent that the demand for for hard currency financing.
Increases.
Now that should bring a slowdown.
And some in some economies.
And given the short term nature of our portfolio.
We think we can.
Navigate.
To that.
We are I mean, if you asked me the countries.
Particularly Argentina.
We're worried to a lesser extent, but also.
<unk>.
Brazil.
It's not necessarily something that.
Sure.
Keep us up at night, we are monitoring it closely and we feel comfortable with the.
Exposures that we have mostly.
Yes.
Exporters.
And in hard currency.
Yes.
We don't see it.
I don't know if you want to add something <unk>.
No I think it's very clear in terms of particular countries I think.
In Argentina with <unk>.
Very much impacted by a higher inflation, which by the way we reduce drum.
Dramatically our exposure there.
$800 million at some point a few years ago too.
Less than 100 million today.
That's right.
Okay.
Great. Thanks, and then.
One question I guess on your investment portfolio.
It's growing it's growing pretty well over the last year.
Do you have any sort of idea.
How it is going to grow for the rest of the year Whats do you have any target there.
Yes. Good question, Jim as I said in the opening remarks that portfolio is designed to to complement.
Our commercial.
Our loan portfolio so to.
To the extent that we have increased demand in the loan.
Folio, we see the investment portfolio.
Slowing down but the work.
They work together so so if.
When and if we see less demand on the commercial side when that happens then you'll potentially see an increase in our investment in our investment portfolio.
So.
Today.
Demand for commercial.
And the commercial side is very strong so we see.
A slowdown in the growth of our investment portfolio.
Okay, Okay, great. Thanks.
Youre welcome.
We'll take our next question from Tom Mcguire private Investor.
Good morning, and thanks for taking my question.
A question and a good conference call and good results.
The one thing I don't understand is.
I see a disconnect between the market price of your stock and your book value and it seems to me it's.
It's 40% or greater and.
Your book value is a reflection of your balance sheet, which is a reflection of your loans, which is.
You have good loan quality short term in nature.
Very low nonperforming all of that so what do you think there is such a wide disconnect between your stock price and your book value.
Thank you Tom.
Yes, you did.
Absolutely right.
And we are very much.
Conscious of that.
In that respect.
We really want to enhance.
And going forward you should be looking at that hour.
<unk>.
In.
<unk> and capabilities.
Then.
And be able to better convey the group.
The prospects for <unk>, which we are very enthusiastic about.
And hopefully.
See that reflected in the share price.
You did mentioned our book value is.
Well above the market recognizes right now.
And we do have.
A super clean book.
Which pretty much reflects.
At present levels the book value of the bank so.
Yes, so complementing.
Youre absolutely right I mean, there is.
A disconnect.
For us there is no.
Fundamental reason.
For that to happen and we expect this share price.
<unk>.
Sooner than later reflect our true value.
Okay.
Good thank you.
So to paraphrase you, you're saying there isn't anything wrong.
Investors are concerned with its more.
A whole bunch of customers don't know about you and you've got that you've got re job exactly.
That's part of it and I mean, you see Latin American.
Banks, not necessarily peers, but because.
Sure.
Perfect.
With a different.
This is model in a different.
Our shareholder structure.
But do you see.
Latin American banks trading.
Nearly above.
Above book value and and we see no.
No reason why we shouldnt be at least there.
But.
We're confident of that.
<unk> going to happen.
Sooner than later.
Okay.
Thank you very much like I said very good call.
Thank you. Thank you Sam.
We'll take our next question from Brad Golding with CRC.
Hi, Jorge.
Protecting my call.
Hi, I have a handful of questions first is on the loan book are you seeing increased.
Funding.
Increased volume funding or are you seeing your loan book go up because people are funding the same <unk> of underlying commodity prices here underlying commodity prices are going up.
Good question.
Sam do you want to take that one.
You're on the line.
Sure.
Alright.
Yes.
I think the answer is both.
Of course, we see.
A lot more coming from commodity inflation in the sector were financing.
The big importers and exporters of commodities in the region that they increase their working capital needs. So.
Happy that we can follow that because we had some lines available for them.
But there is also an underlying increase in gist.
Our origination.
New loans with new clients as well as with existing clients.
So I apologize you need the.
Material is.
Given the higher commodity prices.
My answer to your question of knowledge.
Well, absolutely I guess my next question is.
Do you see that continuing can you.
With stable commodity prices will you continue to grow the loan book.
Yes, I think it will depend on when do you compare this information, which I do see again, if commodity prices we're not.
Ah we're stable since last year I would.
Still see an increase.
Of course, not being the same magnitude because we are also being asked.
Selective somehow increase we're not increasing just for the sake of increasing but it should help us to increase our profitability.
Help us to expand a little bit the average life of our portfolio. So we're selective in that aspect.
But.
Based on the information that I have right now.
Current market today.
I do think there are good opportunities for us to continue to grow despite.
The underlying book.
The commodity let's.
Let's say to a higher demand for commodities, but it does it does we're talking about peak volumes that are driven by increased commodity prices and of course they can.
Altered the numbers depending on the magnitude.
Of course, and I assume the higher commodity prices are enhancing the credit quality of your of your borrowers.
Yes broadly.
On a net basis, yes.
Again, we find nice bolt in.
Importers and exporters. So also the Latam region of the exporters are producers of commodities. So that it has it does help.
Their business or their profitability of course there is.
The product also that we're talking about.
Orders in the Big extent, we're talking about the national oil companies that date of course that is not higher commodity prices not necessarily.
Hi.
Positive for them because they are paying more for a raw material for finished goods.
In terms of gasoline for example, but we're talking about.
A majority of the sovereign entities are large very large corporations.
Yes.
No concerns there.
So.
Importers are tend to be already better credits exporters lesser on they will improve that challenge.
Looks like.
Very.
Nice situation to be yet.
How much can you.
Grow your loan book given the current.
Capital and can you continue to buy back shares.
Anything you want to take that or should I take.
So as I said.
We are a strong.
Capitalized bank, we will continue to be.
Given.
Volatile.
Nature of the region.
<unk>.
Everything related to capital management dividends.
Stock repurchase it's up to the board.
And its continuously.
This cost.
At the board level I prefer not to speculate.
<unk>.
Future dividends.
Or buybacks, what I can tell you is.
We're going to be.
Strongly capitalized.
We're not going to.
Risked out and now we're entering into a territory.
As our capital ratios.
Yes.
Our tire.
Just to make the portfolio.
More efficient.
And more profitable.
I don't know.
Sam do you want to add something feel free.
Oded Jorge that of course, the business model that we have which is did not meet the short term driven trade driven.
It does benefit us in the moment, but we see a rise in.
And demand for working capital as well as rising interest rates, because we are able to trying to book past and capture that so.
We'll take that the vast majority of our portfolio has a maturity of less than a year.
Capital.
Should not be a concern.
Okay fantastic.
Sure.
A couple of final points.
We're always happy to have you visit New York, certainly rollout to Red carpet when you get out to promote.
The bank and it also looks like Youre essentially stable.
Great job of.
Managing the rate risk on the on the fixed income portfolio.
Thank you Brad.
Constantly go to New York, and we love Red carpet.
Okay well please.
Please call me when you do so thank you very much congratulations on another great quarter.
Thank you.
As a quick reminder, that is star one to ask an audio question. We do have a submission from the webcast you indicated that net interest margin recovered in the month of March to a level of 149% do you see this as a sustainable level going forward.
Yeah.
Short answer is.
Yes.
We do believe that the net interest margin fell to $1 50 in March is sustainable going forward.
As we said before the growth is fueled by mostly by a significant trade related demand and also the.
Very significant in some cases rate hikes in local currencies in most countries in the region has increased.
The demand for dollars.
Currency financing and that obviously helps.
Sure.
Thank you and a follow up question, how will expected fed actions to increase interest rates impact the bank's margin and overall net interest income.
I'll take that.
Like with mentioned.
Previously and as you may know due to the nature of our lending business, which is predominantly made up of short term floating floating rate notes.
<unk> interest rate gap is very moderate.
In addition.
During the last couple of years, we have been entering into fixed rate medium term debt capital markets transactions to provide protection against the risks that could be derived from our fixed rate assets also in the longer tenor.
Well I can comment that what we are observing so far is that the net base rate variation effect has been neutral to positive to our NII.
And in addition.
We're $1 billion of interest in the assets.
Financed by noninterest sensitive equity.
So as the process of repricing on both sides of the balance sheet materializes.
Bottom line, we'll also benefit from the increase in gross yields of its assets.
I'd like to put this into perspective, giving you high level numbers.
With over $1 billion in equity.
Let's say 250 basis points increase in rate would add $25 million to NII on an annualized basis or approximately 30 basis points to net interest margin.
That's of course, one all repricing assets and liabilities has finalized.
Of course as interest rates increases our gradual and ongoing these.
This full impact may take several quarters.
After a rate actions.
Right.
Thank you we do have another question from the web site.
Early results and comments attributes $8 1 million provision for credit losses, approximately 22 per share on the expansion of the portfolio.
You noted that the portfolio portfolio growth was concentrated at the end of the first quarter. These items imply that the second quarter should generate a higher NII without an offsetting increase in loan loss provisions correct.
Correct.
Yes, that's correct as we said.
A reflection of that is the net interest margin that we already sold in March for $1 close to 160%.
And obviously everything else being equal with stable portfolio, assuming a stable portfolio in the next quarter.
What you would see is.
Increased revenues from that growth and stable provisions.
Yes, that's absolutely right.
Thank you again, if you would like to ask a question. Please press star one we'll pause for just a few moments to allow everyone an opportunity to signal for questions.
It appears we have no further questions at this time I will now turn the program back over to today's presenters for any additional or closing remarks.
Alright, I just wanted to.
Thank you everybody.
For their questions. We are extremely excited with the performance of the bank.
Looking forward.
To increase.
Growth and profitability.
You very much and take care. Thank you.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
Okay.
Yes.
[music].
Okay.
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