Q3 2022 Foreign Trade Bank of Latin America Inc Earnings Call

Okay.

You hear us.

Good morning, and welcome to <unk> third quarter 2022 earnings call.

A slide presentation is accompanying today's webcast and is available in the investors section of the company's website www dot <unk> dot com.

There will be an opportunity for you to ask questions at the end of todays presentation.

This conference call is being recorded.

As a reminder, all participants will be in listen only mode.

Now I would like to turn the call over to Mr. Carlos Rat Investor Relations Officer. Please go ahead.

Good morning, everyone and thanks for joining our third quarter 2013 earnings call before we begin our presentation allow me to remind you that certain.

Make during the course of the discussion may constitute forward looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially there, including factors that may be beyond the company's control.

For a description of these risks please refer to our filings with the U S Securities and Exchange Commission and our earnings release.

Speaking on today's call is our CEO autopilot.

Who will provide an overview of performance for the quarter and we view the drivers behind these results.

Advances on the execution of that renewed strategy.

<unk>, our CFO will then discuss the quarter's financial results in more detail.

And after that we'll open the call for your questions.

Joining us today are some of my colleagues from the <unk> that will be available for Q&A.

With this let me turn the call to Jorge Please go ahead.

Thank you Carlos and good morning, everyone.

That continued to deliver strong results in the third quarter.

We execute our strategic plan and advance on our goal of driving profitable growth.

Economic activity in Latin America has remained resilient with foreign trade close reaching record high.

The economic activity in the region together with tight credit markets.

And the successful execution of our strategy.

Has contributed to higher commercial volumes as well as an expansion in lending spreads for black.

Net income maintained a positive momentum we delivered in prior quarters up 70% year on year to almost $27 million.

This new level of net income along with a more optimized capital structure resulted in an expansion of ROE.

With 10, 3%.

Our strategic initiatives contributed to sustained growth in our credit book to nearly $9 billion at quarter end, maintaining a very healthy healthy asset quality.

With Npls at nearly zero percent.

I want to point out that we have accomplished this strong performance, while consistently improving our efficiency ratio.

Andy will talk more about this.

Shortly.

Now, let's turn to slide four for a brief update on our progress on our strategic plan.

As I mentioned last quarter, we aim to capitalize on the strengths we have consolidated in over 40 years of banking in Latin America with the goal of enhancing profitability.

During long term sustainability and of course increased the overall value creation for all stakeholders are flattish.

Today I would like to highlight that the strong results. We are presenting are largely the product of this strategic plan.

And to a lesser extent driven by the current macro environment.

The plan has been in place since the start of the year and this nine months. It is already delivering very positive results.

During the first phase of our plan.

We optimize the balance sheet allocating our capital.

More profitably.

We began the year with a core equity tier one ratio of 19, 1% and we closed the third quarter with an optimized capital ratio of 14, 4% as we expand our loan book while maintaining.

A very good asset quality.

We also increased penetration with existing clients.

While we continue to expand our customer base.

During the first nine months of the year, we increased new active customers by 13%.

With over 50% of the book growth driven by new customers.

In addition, our profitability focus along with the overall higher rates have allowed us to expand net lending spreads.

At the same time, we have continued to optimize the portfolio mix, both in terms of industries and geographies.

All while maintaining a deep deep focus on cross selling.

Just as an example in just nine months the penetrations of our net of letters of credit products increased by 10% within our client base.

We're also pleased with the progress achieved in terms of driving fee income from our loans indications.

That keeps showing good momentum.

As a matter of fact this week, we announced another syndicated deal.

$130 million.

Senior secured amortizing facility for February into fruit, a carbon neutral corporation and one of the largest banana exporters in Ecuador.

<unk> acted as sole lead arranger and book runner for this deal.

I'm going to leave it here for now.

On the call back to Andy our CFO , who will walk you through.

Our quarterly results in more detail.

After that I will make some closing remarks before we open it up for questions.

And that's it for now any can you. Please go ahead.

Thank you Jorge good morning to all.

Starting with slide five.

Total assets continue their growth trend up another 4% during the quarter, reaching over $9 billion.

On the back of sustained loan growth complemented by an investment portfolio, which allows us to further diversify our exposures by country, including investments in non Latam each way mainly from the U S representing 52% of the total.

Our cash position, mostly invested with the New York fit stood at 11% of total assets.

Reflecting our rigorous liquidity management, which follows Basel III liquidity standard as required by the Panama banking regulator.

The bank's core business, namely our commercial portfolio.

Is constituted by the loan portfolio, which totaled $7 1 billion at quarter end.

Together with contingencies or off balance sheet asset.

Another zero point $8 billion.

The latter mainly consisting of the issuance and confirmation of trade related letters of credit.

We continue to expand the loan book, mainly reflecting the increase in cross sell and deeper penetration with the existing customer base.

The addition of new client.

As contemplated in the initial phase of our five year plan.

We have also experienced higher demand given sustained economic activity and trade flows in Latin America.

Further on we will explain in more detail. How this asset growth has been consistently supported by a well diversified funding structure.

As shown on slide six our geographic geographic exposure remains diversified.

With Brazil, maintaining the largest share.

At 16%.

Hello by Mexico at 12%.

Commensurate with the size these economy, while we plan to continue focusing on expanding our client base.

We remain and will remain well diversified in other countries throughout the region.

With an important portion in non Latam investment grade exposure.

Mostly in the U S Europe and Asia.

Related to transactions carried out in Latin America, and the Caribbean.

Overall exposures in investment grade countries represented 43% of the total commercial portfolio.

In terms of sectors financial institutions represent 43% of the portfolio.

Up by two percentage points from the prior quarter as.

As we capitalize on business opportunities arising from the liquidity constraints in the region.

All while keeping our stringent focus on maximizing credit spreads.

Exposure to top tier corporate throughout the region continue to be influenced by growth in commodity related sectors such.

Such as oil and gas mainly downstream.

Which now represent 16% of the total.

Hello by manufacturing industry at 8%.

Electric power and food and beverage accounted for 7% of total exposure.

Turning to slide seven again, this quarter credit disbursements of over $4 billion.

Exceeded collected maturity and represented over half of the commercial portfolio.

This the note the short term nature of our portfolio characteristic of our business model.

With 70% of loans maturing within the next 12 months.

The average remaining tenor of the portfolio at approximately one year.

These provide agility to rebalance our book through economic cycles in the region.

Lending spreads on new loans exceeded those of maturing by 14 basis points.

Reflecting our focus on optimizing our portfolio mix to maximize net lending spreads and margin expansion.

Moving on to slide eight.

Sustained asset growth is supported by a well diversified funding structure.

Our resilient deposit base accounted for 42% of blacks is funding sources.

While 48% of deposits.

From our Central Bank class a shareholders.

This strong deposit base is complemented by an ample availability of bilateral credit lines from a wide range of correspondent banks.

And by the continuous access to the global capital markets for <unk>.

<unk> is a recurrent easily.

Mainly but not exclusively in the U S and Mexico.

That's why that the global syndicated loan market.

All of which represent the remaining 58% of the bank's funding sources.

In August <unk> closed a new public issuance in the Mexican market.

Which amounted to $5 5 billion Mexican pesos or the U S dollar equivalent of $275 million.

With two tranches of three and a half years and five years.

Turning to slide nine.

Bank capital strength remains a pillar of our business model and a critical factor recognized in our ratings.

In recent quarters, we have taken advantage of increased demand for short term trade financing.

Widening lending spreads allow.

Allowing us to achieve a more efficient use of capital.

We remain committed to maintaining a sound capital position.

Anticipate a deceleration in loan growth in the coming quarters.

Unexpected slowdown of economic activity and commodity prices.

In this sense, we expect an inflection point in capital ratios, having breached our Basel III tier one ratio of 14, 4%.

And the Panamanian regulators capital adequacy ratio of 12, 2%, both well above regulatory minimums.

In addition, the board recently declared a dividend of 25 cents per share for the quarter unchanged from the preceding quarters.

Representing a payout of 34% of third quarter earnings.

We continuously analyze capital management alternatives to optimize our capital structure and to support growth opportunities.

Please turn to page 10.

Top line revenue growth remains mainly driven by solid NII performance.

Which in turn is backed by strong net interest margin and net interest spread expansion.

Net interest spread representing the rate differential between interest, earning assets and financial liabilities.

We have been continuously expanding on the account of increased lending spreads.

As mentioned earlier.

In turn net interest margin, which also can see theres a portion of assets financed by our equity was supported by both higher net interest spread.

And by the impact of increasing market rate on the overall yield of assets financed by the banks equity.

Let's now move on to slide 11.

Presenting in more detail the quarterly evolution of NII, which increased by $7 5 million sequentially.

The continued positive trend in net interest margin that I, just discussed up 23 basis points sequentially and reaching 177% in the third quarter.

We saw that in our rate effect increase in NII of $5 3 million in the period.

At the same time, the average loan portfolio increased by 423 million.

Shelley.

Accompanied by the related increase in financial liabilities.

Continued proactive liquidity management.

This resulted in a positive net volume impact on NII of an additional $2.2 million for the period.

Moving onto slide 12.

Fee income from letters of credit remained stable from previous quarter and up from last year.

Representing a consistent support in fee generation comps.

Complimented by loan structuring and syndication fees.

And activity picked up during the quarter.

With four transactions executed.

Resulting in a sequential increase of $2 million.

Syndications activity is transaction based.

So its trend should be analyzed on an annual basis.

After a period of nearly no activity during the pandemic.

We started to see transactions again since the second half of 2021.

In the trailing 12 month period.

September 32022.

Fees from syndication activity total $6 million.

As shown on slide 13.

<unk> maintained strong asset quality level.

Provisions for this quarter increased to $4 8 million.

Compared to <unk> 8 million in the prior quarter.

Stage, one exposure, which accounts for 98% of the total.

Increased by $204 million during.

During the quarter, our new loan origination.

Requiring $1 million in credit allowances at 841 basis point reserve coverage.

Lower stage two credit exposure was offset by the increase in reserve coverage at close to 15%.

As the result of a $3 9 million credit provision requirement.

With a couple of isolated credits with increased risk since origination.

In addition, NPL or stage three credits remained unchanged at close to zero percent of total loans.

Reserve coverage increased nine percentage points for this loan compared to the previous quarter.

Compensated by recoveries from loan loans written off in previous three years.

Bolton in minimal.

Provisions.

Moving on to slide 14.

During the third quarter, the efficiency ratio improved to 31, 6% as strong revenue growth more than offset an increase in operating expenses.

Which totaled <unk> <unk>.

$14 6 million.

The new variable compensation structure.

Mostly tied to strategy execution and financial performance.

Together with new hires supporting the underlying business growth.

Remained the main driver behind the $2 8 million annual increase in salary related expenses.

The increase in other operating expenses, mostly relate to strategy implementation costs.

By design strategy execution expenses have been program. So that they can be covered by incremental revenue throughout this process.

I think continues to be the case in this quarter.

As we scale up the business under the new strategy, we expect to see further improvements in efficiency in the medium term.

Turning to slide 15.

We delivered this quarter and annualized ROE of 10, 3%.

Up from nine 1% in the second quarter, and six 1% a year ago.

These improvements in profitability was driven by several factors.

Including the sustained trend in margin enhancement.

Continued loan growth, resulting in a more efficient use of capital.

This together with topline growth, including higher fee generation.

Ongoing capture operating efficiencies.

And upset increasing expenses and credit provisions.

All of which resulted in a profit of $27 million for the quarter.

Up by 17% sequentially and 71% year on year.

I would now like to turn the call back to Jorge for closing remarks. Thank.

Thank you.

Tony.

So we are pleased to report another quarter consistently delivering on improved operational and financial results capitalizing on blacks. This unique position with operations in over 30 countries.

Across the region.

Prior to closing this call.

I'd like to remind you that we will be hosting a virtual investor day on November the 14th.

Good day, we will take a deeper look in our strategic plan.

Several members of my management team will join me in sharing with you more details about the different phases of our plan and our progress on each front, we will discuss how we are focusing on attracting and retaining the required talent and improving our processes and infrastructure.

Victor.

Effectively scale our operations.

Moreover, we will provide near term and mid term operating and financial goals and Kpis to track progress over time.

We look forward to sharing our plans with you.

In the meantime, our Investor Relations team is available to you to answer any questions and now I would like to close the call and open it up for Q&A.

Okay.

Thank you we will now move to the question and answer section. If you would like to ask a question. Please press star two on your phone and wait to be prompted if you are dialed in by the web you can either type your question in the box provided or request to Oscar voice question.

So our first question comes from Ricardo <unk> from <unk>.

There are actually two questions question. One can you. Please give us specific numeric goals for the five year plan for instance, our ROE.

Capital ratios and lending margins, where do you see the range for all of these at the end of the five year plan and question. Two can you share the rationale behind the decision by the board of directors to not raise dividends the latest EPS of not $704 Gibson projected annual EPS run rates.

Of approximately $3. The current payout ratio is 33%, which is the lowest <unk> has had for more than 15 years.

Yeah.

Yes. Thank you Ricardo for your two questions.

Let me tackle the first one first.

We will talk extensively about our metrics in the guidance and the rationale.

<unk> behind them in the upcoming virtual Investor day as I just mentioned it's November 14th.

I can say, however that we plan to achieve sustained sustained our ROE in the mid teens by the end of 2026.

<unk>.

Additional value added products on the commercial side and the Treasury side.

We'll be discussed extensively and that will be key for that increased our Roe.

I can tell you that the pace of growth will not be as fast as you have seen.

This year, the focus will be profitability and our base case is to grow organically through retained earnings accumulation.

And the second question was about.

The evidence in the fact that we have the lowest.

Payout ratio in years.

It is true it is the lowest payout.

Payout ratio in years.

But it is also true that for year supplies has experienced very.

Mine or changes.

Very limited growth and frankly.

Par returns.

Certainly below our cost of capital.

<unk> has entered a new phase.

The plan we.

We have put together is delivering and we will be delivering growth and higher returns going forward.

And in this volatile context, the board is having active discussions on capital management.

I can tell you, though that one principle that is not going to change.

This strong capital allocation will remain.

It's a pillar of our ratings.

I know that.

That will not change going forward.

Thank you.

Second question is a voice question and it comes from James Adam from Solutions. James. Please go ahead.

Hi, James I'm not sure if you're on mute, but we cant hear you argue that.

I think it will have to come back to James So our next question is.

Text question and it comes from Brown.

Patrick says congratulations on the good results you explained well how blood X has done a good job of taking advantage of the current context and implementing the new strategic plan, but just in regards to perhaps some headwinds that's mostly a slowdown in growth due to a deterioration in the regional and global economic context My quest.

<unk> what does that do for your business are you going to be able to keep the margin expansion.

Thank you.

Patrick.

There's deals out that rising rates combined with <unk>.

Inflation and the quick tightening of monetary conditions have made the world.

More volatile and more uncertain.

It is also true for Latin America, the economic outlook.

Has deteriorated we see.

Fiscal pressures.

Boeing financing costs have risen and E C.

A lot of countries.

Currency devaluation pressures, but.

Our model has allowed this bank to successfully navigate.

Through challenging environments like this before.

The performance during the pandemic as perhaps.

The clearest and most recent example.

And I can say certainly not the only one.

We did have.

Said before.

Active.

Risk management.

Able to reshuffle the portfolio.

And keep.

Asset quality.

Under control actually improving now that the flip side of this is that historically in Latam in moments of crisis or a recession like this one.

Blacks competition from global Bank.

<unk> reduces.

Also the debt capital markets alternatives become less available and more expensive.

For our clients corporate and FX as well so.

That combination has historically favor.

Because it allows us to increase our margins as we are doing today.

And we do not expect this time around too.

To be different.

I would also like to mention that the pricing discipline that has been installed by our new Chief commercial officer is here to stay.

And we will favor margins, even if that means we.

Reducing.

Our volumes going forward.

Yes.

Thank you.

Our next question is a voice question. It comes from Jim from singular research. So Jim. Please go ahead.

Yes. Thank you Sunil can can you hear my question in here My voice.

Yes, we can well okay great.

So, yes, very encouraging quarter.

The results are a clear indication that.

You are managing the business very effectively and prudently.

He will also explain well in regards to the risks.

That <unk> faces, particularly in the Latam region.

However, I am I'm just curious in regards to just future direction in terms of preparing for any type of headwinds.

So as you mentioned you know we have a high inflationary environment.

Our currency devaluation and many of the countries in which you service.

We're facing a higher interest rates.

By many of your clients.

And so I'm, just kind of trying to get an understanding.

What are some of the actions.

That you are looking to do going forward to address that so I know that you have.

Carlo.

Strength in the loan portfolio.

But what about in terms of like the provisions are you going to be booking.

Higher provisions going forward.

And just any other things that youre going to do in terms of managing that business. Thank you.

Okay.

Turning the call to start cutting our chief commercial officer.

Thanks, James Thanks for the question.

I would say first and foremost a.

The answer to.

When we look at from a credit standpoint.

When we look at the headwinds.

We believe that we can strong.

And in terms of our portfolio composition in terms of the type of clients that we have.

We are not.

I mean, our NPL.

All ratios, they really evidenced the reality, which is a low risk portfolio.

And given our portfolio is so short term, we basically tested quarter we have.

Yes.

We basically had almost $4 billion.

Payments in the last quarter and we collected all.

So I see from that side I think we can well prepared we continue to manage prudently every new client that we meet such standards.

And then when we look from the commercial side.

I think it's actually a great opportunity.

Because we are.

I think as Jorge mentioned earlier, we can reprice fast and take advantage of higher spreads I think much more than the average and in moments like this.

<unk>.

It was mentioned by Jorge we.

We managed to really.

Take advantage of increasing spreads to two I would say to hire great clients, who who.

Who normally wouldn't pay such margins, but in moments like this they want to tap liquidity they want to build a cushion and we do have.

We keep limits approved uncommitted limit so it doesn't cost as much but to be ready to take advantage of such opportunities and when we're pricing.

Such transactions, we are looking at a request of opportunity being the.

The bond prices, if the client has public instruments as well other.

Sources, so I think all in all.

We believe that this can be favorable of course, we are managing very carefully and be selective but.

I like.

From a commercial standpoint.

I think is favorable I like where it's going.

Thank you.

Yeah, that's great.

You addressed the operationally.

What your constitute forward and that's very encouraging.

Can I also ask is there any.

Is there any thought towards M&A.

M&A activity.

Like is there any kind of thought into perhaps.

Any acquisitions, or maybe a smaller bank or joint venture or.

Acquiring different.

Product footprint.

<unk>.

Retail banking or investment banking.

Or brokerage or or.

Or anything else that relates to banking is there any.

Is there any thought towards expansion in taking advantage of market opportunities that way.

Thank you for that question. The short answer is no. This plan has been put together.

On top of the competitive advantages that.

<unk> has we believe that there are lots of opportunities.

Within.

The trade space.

We will not change our.

Focus from trade will be expanding our product mix within.

Trade both on the commercial side and on the Treasury side, but.

Profile of our customers will not change it will not be adding additional product lines outside of dose within.

Yeah.

Sure.

Take that trade.

And credit related.

World just perhaps what were the only thing that I mentioned in the last call is we are.

Starting to.

Get our feet wet with.

With the project financing and we will be talking more of that in our Investor day.

Okay. Thank you Jorge.

Thank you very much I'm not seeing any more questions. So perhaps I can hand back to the <unk> team for closing remarks.

Okay.

Well. Thank you all very much for your for your questions.

And looking forward to two have you all so we can discuss extensively on our virtual Investor day on November 14.

You very much.

That concludes the call for today, Thank you and have a nice day.