Q2 2022 Foreign Trade Bank of Latin America Inc Earnings Call

For a description of this risk, Please refer to our filings with the? U's securities and Exchange Commission and our earnings release.

eightating on today's call is our CEO for hatanas, who will provide an overview of the second quarter and our strategic priorities.

An end this. Our CFO will then discuss the quarter's financial results in more detail, and after that we will open the call for your questions.

Also joining us today is misterter San cannino's, our Chief commercial Officer, and the rest of the acticive lalax team.

All will be available for the Hey. With this, let me turn the call to houdting. Please go ahead. Thanks Carlos, and good morning everyone joining us today to discuss our second quarter results.

Today our start of cararing 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 cleure objectives enhance 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 a strategy behind this plan in more detail soon.

Before let me give you an overview of our second quarter results.

This was without doubt a very strong quarter for bladck.

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.

Our managinterest' margin continued a positive trend observed in the last five consecutive quarter.

Net income basically doubled compared to last quarter, reaching $23 million.

That is an increase of 63% year-on-year, resulting in a nine point one return on equity for the quarter.

anie will talk about these results in detail later on on this presentation.

The point I want to make today is that these strong results are driven by two main factors and internal 1- the new strategic plan. In an external 1- their current uncertain global macro environment.

The current context of high inflation rating, interest rates and high demand for commodities offers many opportunities Li.

Let me share our views.

On this second point first.

three Many 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 commodity.

And finally, that this proportional 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 to additionally 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 limitation.

In short, the current onuncertain macro environment is, in many ways, a perfect opportunity for thatic.

Having said that obviously, this context carriried 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 remained.

Overall the current macro scenario is favorable for L 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 planing the process we only took to build our new strategic plan over the last year.

After successfully in navigating the strongest part of the covidt storm blox 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 in aims to increase the bank's profitability to show consistent double-digit returns by significantly enhancing the stability and their resiliency of our underlying this.

The plan includes a series of initiatives aimed at exexpanding both our customer base and our product offering.

The planant also calls for an upgrade on our it processes and processes infrastructure to support the incremental transaction volume we are anticipating.

New key coment has been added as part of our tongue acquisition and retention program. Have also established a new performance-based compensation structure that further high management and shareholders' interest.

In this context, we also upgraded and relaunched our IR function, now led by cmorad, our new irro, who start with building a team to enhance Investor outreach and Communications.

eight six two 5, five

As I mentioned earlier, our new strategies anchored in glass's competitive advackages.

The plan has three main group of initiatives.

First group of initiatives to optimize and scale the commercial strategy to the expansion of our client base.

With the stained load risk profile that we have traditionally targets.

two initiatiative.

To expand our product offering and three initiatives that we call enabers.

That have to do with talent processes in it.

Firstly, let me share a couple of thoughts on the commercial strategy, just in terms of geographies.

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 dedicating 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 now today.

Our product offerred primarily consists of syndicated loans, short term bilateral trade-related financing, vendor finance and letters of credit.

Lax enjoys a very loyal customer base that has consistently demanded a series of products.

And services that we do not yet upper.

I'm talking about basic treasury hedging products, local currency financ, ing- 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 arbitrage between clients and suppliers through structures that generate better margins with our increasing credit risk.

All of these products are currently being developed as part of our plan.

Finally attracting an 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 score cards with KPIs directly tied to metrics in the strategic plan. The new compensation structure has been key to attract top talens 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 a 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 brought oversight of our ESG practices to the Board level through the newly named compliance and sustainability committee.

We'll be on to state six.

And this sites we show.

The four main changes that have taken place in lar's Executive commtee during the year.

Number 1: we created a strategy office.

What I see. laisma, with extensive experience in strategy and design, is the Head of this office.

orlil also manages a newly created PMO unit that has turned large into a project-based organization.

We also hired a new Chief commercial up.

I'm welcome. Nail also in the call exed of NG in Brazil has done a wonderful job expanding our client base in keeping a strong price discipline.

We also hired a new Chief audit Officer.

lea, who brings extensive experience in sts controls, in charge of ensuring that our bank maintains its strong commitment to the observance of the best AR practice standards.

And finally, as I mentioned, we decided to upgrade the IR function and now the Board reports directly to me and headited by kmolaab. 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 deepper ive, 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 implementingin this plan.

All of my colleagues come with significant experience and best-in-class credentials.

But our team has not only strengthened at the most senior level, we have also hired new middle management talent in three main areas.

treressury.

Sales of course, in it.

With that. I will now turn the call to anie and then I will make some closing remarks before we open it up to questions.

Thanks toorria, 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 yearso. Let's Please move to Slide number seven.

Once again. This quarter's grth disbursement of over $4 billion exceed collective maturities that we represented more than half of the commercial portfolio.

This denotes the FAS turnover and short-term nature of the portfolio characteristic of our business model, with venty-one percent matater within the next 12 months and the average remaining Tenner at approximately one year.

Lending spread on new loan exceed those maturing by 26 basis points, reinforcing the positive trend of recent quarters.

In Slide eight we can see that quarterly growth continues to be evenly distributed across countries and sectors.

Exposure by con remains relatively stable, except for brazil- 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 points from the prior quarterdue 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, have been in the graph to the left on the back of tosustain 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? U's, representing 51% of the total.

As presented on the graphfood 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 CV program.

Complemented by ample availability of bilateral grid lines from a wide range of corresponding banks and by continuous access to the global capital markets. Or bladx is a recurrent issuer, mainly, but not exclusively, in the? U's and Mexico, as well as the global steated loan market.

Turning to Slide 10, we summarize our results of operation.

Quarterly profit for $23 million, more than doubled from the previous quarter and was up by six to 3% from last year.

As I mentioned in our last quortter call, during this second quarter we are seeing the full impact of strong loan growth experience at the end of the first quarter, a tendency that had 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 NI performance.

Of 27% Q M Q and 56% from last year.

While FE 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 mundated transactions in execution right now.

In terms of asset quality, provisions for this second quarter were substantially lower at zero- $8 thousand- compared to the $8 million provision charge in the first quarter of this year, mainly associated with a $1 million or 14% sequential increase in the crred 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 totalled $13 million.

As mentioned by jor 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 Ann. An annual increase in salary-related expenses.

In any case, by design strategy, execution expenses are program 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 on the disnenew 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 NI.

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 through active liquidity management.

Resulted in a positive net volume impact on NI 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 one point 54% in the second quarter, resulted in an additional net rate effect increased in NI 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 Twelve.

Average F, a average base rate of loan and liability.

Which are mostly setent on reference U's dollar market rate have been increasing at a similar pace given the short-term nature of the bank's interest rate gap.

Moreover, the only in rate differential between loans and financial liabilities shown in the graph to the left denotte a quarterly positive trend.

Mainly due to increased lending spread.

As johwn in the graph at the top right.

Reaching two point 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 U's dollar financing across the region, based on superior freight volumes and higher commodity pricescoupled with blass' increased lending to the corporate segment relative to financial institutions.

The latter usually paying lower bread.

And to our focused on extending the average debt maturity profile of our lending book when and if followed by higher profitability.

As a result, spread have increased in all sectors, countries and business segments in which we operate.

Moving on to Slide 13, black asset quality remains solid.

First unchanged level of NPL or a Stage three credit remain at close to zero percent 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 schedule maturity and risk profiled prilient improvement, allowing for recursive reclassification to Stage one.

In addition, Phase one exposure was accounts for 98% of the total, increased by $295 million during the quarter. On new loan origination.

Requiring $1.8 million in quired reerve, at an average coverage of 41 basis points.

Please let' now move to Slide 14, which shows our capital positionas. I mentioned, we have achieved a more efficient use of capital, having invested in loan growth at increasing return, while sustaining a strong capital position.

At quarter end, bustle three Tier one ratio reached 15% and the panaminian regulators capital adequity ratio GRE at 13%.

Both feel well above regulatory minimum and in necess 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 alternatves.

To support a continued trend in long growth going forward.

With respect to quarterly dividends, the Board recently declared 25 cents per share, on unchanged from preceding quarters, now representing 40% of second quarter earnings.

Here I would like now to turn the call back to Ho. Thank you. Thank you on any 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 robust asseta quality while delivering to 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, 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.

Thank you very much for the presentation. We will now be moving to the QA part of the call. If if you are doubted by the telephone, I would like to ask a question. Please press start two on your keypad. That' start two on your keyad.

If you doubt by the web, you may also ask a voice or a text question.

We'll now give a moment also for the questions to come in.

Thank you. Our first question comes from MR Jim maroni from singular research. pleasego headhereir.

Yes So Hello things. You ve TA my call. I talust, you don't hear me well.

It's yes, been no head to.

Okay great, and so very good job, it seems.

saythat's is capitalizing very well from higher interest rates, So I think that's job very well done it, and I don't want to take that away from you.

So if I can bring the attention to just in regards to DP some headwinds thats namely inflation and you know.

How that's impacting clients, perhaps with regards to lower consumer spending as a result of inflation going forward, and that impact to Bladex currently, as well as going forward regards to inflation and problem perhaps a softening of consumer spending with respect to the clients.

hiagainan. Thank you. This is forhasesala.

A very good question. As I I said at the beginning of the call, we feel that the current environment is overall positive.

For bladevickx.

youknow having said that of course if this.

Turns into our 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.

tize in our margins. We do not proceive, however material, any material asset deterioration, especially considering after what happened during the Co torm. I mean, we came out out of the storm after a complete standstill of the whole world with a strongerk, stronger asset quality that that even before the storm. So short answer is so far positive, potentially challenging in terms of asset size and margins, but not necessarily interms of asset quality. I don't know if that answers your question.

I think we have lost for a second investorwe will perhaps come back shortly once again in the meantime start two for any additional questions and in the meantime I'll read two questions that came by a the text message in the meantime. Congratulations on a very strong quarter two questions regarding capital allocation please expand on your decision not to bring the dividend back in line with precovid levels in line with significant NI growth expanding N and negligible nonaccruals at 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?

Yeah Thank you for the question.

Question regarding capital allocation. We're clearly in a new asset size level. Blood has not been here before. Our capital ratios have been.

Obviously a shrinking. We remain well capitalized and I have to say that of course the Board is managing.

All assets out of and capital allocations decisions to make sure that we return the best value possible to our shareholders, and that involves, of course, our dividend, our dividend policy. Don't know if you want to add anything.

Yet that pretty much sumset up, UH in terms of UH, our valuation of course.

Re definitely on the value at current level and having a book value of close to $29.

You asked about what would bethe level that we aim at, and of course, is's way over that.

Thank you very much. Our next question comes from this year. Pedro was good errow from doma perpetual.

Please go ahead. Your line is open.

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 your're lending, doing that because your return of equity super is 9%.

How do you expect that you're going to return to upprise the book other 1? Uh, the reality is that that is no feasible.

So while you're lending to what do you percent of the book to financial institutions are outsourcing your credit decisions to someone else. Basically that's what it is: to lend unsecure to solutions.

So.

What why are we doing here?

You're expecting to increase the price to grou. You say that your net value, but the reality is that your return of equityities is a disaster because of your lending. Basically a strategy.

It just doesn't make any sense. Additionally my question is.

You you have a massive dividthan policy, terens percentage ofoccurrence which decreases the value further, which is is a disaster as a capital overretonous strategy to shareholders is should be actually used. Should be buying back loss of a stock which actually increases book value and increases the return to shareholders. So I think the strategy flaw- it comes from the Board is flaw and actually your lending standards. By the way, your lending standards, you claim that you have basically zero- I would say zero percent or something like that- non performions. But even if you have less than 1% of nonperformions, it come wi ile your entire net income.

So your wholely strategy.

Is being flawed for a long time and I hope, actually as a such a holder, that the Board actually starts to change all of this. But I don't think that you can understand what is going on. So my question to you all is: what's going on on the Ling side and why use lending to financial institutions at super basically spreads the realities that it creates a very low return of equity.

And while you have the roll return of 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.

Thank you, Thank you Federal.

Find curures that your point is the opposite of the previous of the previous callor I would mention a couple of things one is as regards to lending to financial institutions. We have been decreasing that precisely the storm of the coit storm went by to increase our margins and we have seen that happeningin a sustainable fashion as far as a 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 and we're planning to increase that so.

In short, we have different views on how we managis. I don't know Sam, you're in charge of lending. If you want to complement.

Sure moregthan. This is Samuel, and in now 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 differentfin 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 disciplineand if you analyze the previous quarter, you do see that aupboard trajectory, or margin. You see that downward trajectory in terms of lending to financial institutions, which is that there is nothing wrong, but there is. We can place our capital with more profitable and not necessarily riskihere sector, which is what we're doing. So that's a direction that we're going. I believe there is still a space to continue with that, with that shift, without materially changing our credit standards and changing our andpl. So I I agree that there is upside and we're executing on it but, of course, responsiility.

okaythank you very much. Our next question comes from MR Tom mcguire, private Investor. Please go head CIR. Your line is open.

Good morning and thanks for taking my question. You explain well how inflation is currently helping your business.

In terms of short-term loans and accelerated repricing plus commodity prices are high up but.

If it continues, it could lead to a recession.

And my question is.

A.

What does that do for business? Do you have a recession playbook and would you be UH?

Would you be increasing reserves in a poor economy, or do you just?

Put in reserves as new loans are originated.

Thank you. Thank you Tom, for your question. Our answer is yes as a we do foresee a recession scenario in the near future. That will, of course, affect aggregate demand and we closely monitor all countries and sector and we will anticipate potential downgrade and some of our countries and perhaps clients, and we do foresee that is sustainable, that we will increase provisions accordingly.

Okay Thank you. Now one other question on the, the new manager and Investor Relations.

And the, the analyst day that you're going to have. Will that analyst day being in in New York or will it be in Panama?

A good question. We're still deciding. We are ising planned to be in New York. We're also concering to do it virtually. We'll let everybody know when the time comes.

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.

In C of dru or nro. Handle that, and we do have an external advisor that will help us set up calls and meanings if necessary.

Okay good, Thank you very much.

Thank you.

Thank you very much. As a reminder once again, start two for any additional questions that start two

We'll give another moment also.

Our next question comes from MR Adam hetherti. Private investors: what Please go ahead? surly line is open.

Thank you O gentlemen, Congratulations on a quarter that showed a lot of growth and I'm excited as a la of shareholder to herear your plan to the company and the future. I would like just make a quick comments and then ask my question. I also find a little bit less Harsh terms then some of your previous dollars would love to see some share buyback continuing as well. You Gu reduced your share comparable 10% and you could see the effect in the share price and they realize is a different environment then. But if this book value level, I would love to see that. And then the second: my question for you is: can you speak more to the roughly billion dollars and that that you have on your balance sheet- not that the issued, but there are some comments made last quarter about how you're use to balance the loan book and just has some concerns there with theyou know some of the lower credit quality issuers that you know the ouw, B and Sing will be a own as well as rising interest rate environment.

And the effect that PAT on that portfolio value. Thank you.

Thank you for your Thank you for your questions regarding the investment portfolio that we have in a hold maturity to complement our loan book. I'm going to pass a word to our ahead of treasure in capital markets and we want to share with me.

Hello, good morning. In the case of the investment portfolio, I mean this is a portfolio that, has coursere explained, has been constructed to main objectives: one is to to complement the loan portfolio and the other one is to provide diversification. I mean half of our portfolio roughly invested in to largein American names and the other have is invested outside the region, fammin with U's names.

Are around 50% of the portfolio is investment ratewhat happens is thatmany of the good Latin American issueshave the counes cealing off. Their respective countries, for example, is of Brazil or Colombia, So that inherits the possibility of achieving a higher investment. High grate for these investments, even though the issues may be very strong and very reputable corporate and financial firms. But in a anscial need we have to maintain a very good rated bond portfolio with a short duration, taken into alsidation, the expectation of the evolution of interest rates.

And the all these are liquid globalrelationscies that also have very, very fast access, other to a bond of the reicco market and in nature this is a complement to our loan portfolio and is designed to both generating incremental income and provide diversgeographic diversification onside the region to balance our over overall credit exposures. I don't not have any further questions and I hope I have answered your question.

Thank you very much. It looks like we have no further questions at this point. i'will pass the line back to the bladiex management team for their concluding remarks.

Thank you operator, and thank you everybody for your questions and look forward to share with you the progress of our strategic Gu. Thank you body, and safe bye.

Very much. This concludes today's conference call will now be closing and organized. Thank you and have a good day goodbye.