Q4 2022 Foreign Trade Bank of Latin America Inc Earnings Call
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 OE.
I can tell you that the pace of growth will not be as fast as you have seen.
This year there.
Focus will be profitability and our base case is to grow organically through retained earnings accumulation.
And the second question was about.
Dividends and 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 per year supply 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 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 that one principle that is not going to change.
Is this the strong capitalization will remain.
It's a pillar of our ratings and I know.
That will not change going forward.
Thank you.
Second question is a voice question and it comes from James Adam from <unk> Solutions. James. Please go ahead.
Hi, James I'm not sure if you're on mute, but we can't hear you.
I think we'll have to come back to James So our next question is.
As a text question and it comes from Patrick 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 question.
Is what does that do for your business are you going to be able to keep the margin expansion.
Thank you.
Patrick.
Their sales out the rising rates are combined with <unk>.
Inflation and they're quick tightening of monetary conditions.
I've made the world.
More volatile and more uncertain.
It is also true that for Latin America, the economic outlook has deteriorated we see.
Fiscal pressures are growing financing costs have risen.
And you see.
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 as I've said before.
We are active.
Risk management, we are able to reshuffle the portfolio.
And key asset quality.
Under control actually improving now that the flip side of this is that historically in Latam in moments of crisis servers or a recession like this one.
<unk> competition from global Bank.
<unk> reduces.
Also the debt capital markets alternatives become less available and more expensive.
For our clients corporate and enterprise as well so.
That combination has historically favor.
Because it allows us to increase our margins as we are doing today.
And and we do not expect this time around two.
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.
Reducing.
Our volumes going forward.
Yeah.
Thank you. So our next question is a voice question comes from Jim from singular research. So Jim. Please go ahead.
Yes. Thank you cleaning can can you hear my question here My voice.
Yes, we can well okay great.
So, yes, a very encouraging quarter.
The results are a clear indication that.
You are managing the business.
Very effectively and prudently.
You also explained well in regards to the risks.
That blood ex faces, particularly in the Latam region.
However, I am I'm just curious in regards to just <unk>.
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 in 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.
<unk> camo.
Strength in the loan portfolio, but what about in terms of like the provisions are you going to be booking now.
Higher provisions going forward.
And just any other things that youre going to do in terms of managing that business. Thank you.
Okay.
Okay.
He called through some cutting our chief commercial officer. Thanks.
Thanks, James Thanks for the question.
I'll say first and foremost.
The answer to.
When we look at from a credit standpoint.
When we look at the headwinds.
We believe that we come strong.
And in terms of our portfolio composition.
Of the type of clients that we have.
We are not.
I mean, the our NPL ratios, they really evidenced the reality, which is a low risk portfolio.
Given our portfolio is so short term, we basically tested quarterly we have.
We basically had almost 4 billion.
Repayments in the last quarter and we collected all.
So I see from from thus far this equal well prepare we'll continue to manage prudently every new clients that we add meet such standards.
And then when we look from the commercial side.
I think it's actually a great opportunity because we are seeing 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 and also is.
It was mentioned by Jorge we will.
We managed to to really.
Take advantage of increasing spreads to two I would say through higher grade clients, who.
Who normally wouldn't pay such margins, but in moments like this they want to tap liquidity day, one build a cushion and we do have a.
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're looking at our cost of opportunity being the <unk> the <unk>.
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.
I like.
From a commercial standpoint, it's I think is favorable I like where it's going.
Thank you.
Yeah, that's great.
You adjust to operationally what.
What your constitute forward and that's very encouraging.
Can I also ask is there any.
Is there any thought towards and yammer M&A activity.
Like is there any kind of thought into perhaps.
Any acquisitions, or maybe a smaller bank or joint venture or.
You know acquiring different.
Product.
Print like perhaps.
Retail banking or investment banking.
Or brokerage or.
Or anything else that relates to banking is there any.
Is there any thought towards any expansion there taking advantage of market opportunities that way.
Thank you for that question. The short answer is no. This plan has been put together.
Yeah.
On top of the competitive advantages that are.
<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 our <unk>.
Trade bolt on the commercial side and on the Treasury side, but.
Profile of our customers.
<unk> not changed and will not be adding additional product lines outside of those within a.
Sure.
Let's say that trade.
And Trey 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.
Where the project financing and we will be talking more of that in our Investor day.
Okay. Thank you Jorge.
Okay.
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.
Thank you all very much for your for your questions.
And looking forward through two have you all so we can discuss extensively on our virtual investor day on November 14th.
Thank you very much.
That concludes the call for today, Thank you and have a nice day.
Thank you. Please hold it represented 40% of total funding.
45% of which came from our Central Bank class a shareholders and.
Another 39% from our client banks and corporations.
And the remaining 16% relate to our Janky CD program.
Apart from deposit blacklist funding comes from several sources across the globe.
Including ample availability of bilateral credit lines from a wide range of correspondent banks.
And the continuous access to the debt capital markets as well as the global syndicated loan market.
Turning to slide nine <unk>.
<unk> remains well capitalized.
Reaching a Basel III tier one ratio of 15, 3%.
And the Panamanian regulators capital vacancy ratio of 13, 2% at year end.
During 2022 bladder achieved a more efficient use of capital.
Having increased its loan portfolio at higher margins and returns.
As we commented on our last quarterly call.
We saw a deceleration in loan growth during the fourth quarter.
Having favoured margin expansion of our balance sheet growth.
While remaining committed to a sound capital position.
Pillar of our business model.
In addition, the board recently declared a dividend of 25 cents per share for the quarter.
Unchanged from preceding quarters, and representing a payout of 29% of fourth quarter earnings.
Turning now to slide 10.
We present, the continued positive trend in net interest margin and spread.
Driving strong top line performance.
Net interest spread representing the rate differential between interest, earning assets and financial liabilities reached 163% in the fourth quarter 'twenty two.
An increase of 20 basis points from the previous quarter, and a 37 basis points from a year ago.
Mainly on account of increased lending spreads.
In turn <unk>.
Net interest margin, representing the yield of interest, earning assets, including the portion financed by the banks equity REIT.
<unk> to 11% in <unk> 'twenty two.
An increase of 34 basis points from the previous quarter, and 69 basis points year on year.
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.
Moving on to slide 11.
We can see that the overall impact of rate increases on assets and liabilities.
Supported by higher lending spreads and market great as I just stated.
Was the reason behind about half of the $61 million increase in net interest income for the year 2022.
The other half is attributed to strong average credit growth mainly on the loan portfolio.
Which increased by over $1 4 billion or.
Or 28% when compared to the year before.
Complemented by another $536 million growth in average credit investment portfolio.
Accompanied by the related increase in financial liabilities.
And a continued prudent and proactive liquidity management.
On slide 12.
Income from letters of credit.
Have shown an increasing quarterly trend throughout 2022.
Resulting in a total of $14 million for the year.
Representing a 16% annual increase from the previous year.
The other important component of fee generation for the bank.
<unk> to the structuring and syndication business.
Given it's transaction based nature.
Its activity should be analyzed annually rather than on a quarterly basis.
So for the year 2022. It also showed stronger results, increasing by 15% to a level close to $5 million.
As shown on slide 13.
<unk> maintains sound asset quality levels.
Low risk stage, one exposure accounted for 98% of the total credit portfolio.
At $8 $5 billion at year end.
Accounting for another one 7% where credit's classified as stage two.
For a total of $147 million.
Representing closely monitored credit, which have experienced increased risks since origination but are still performing.
Finally phase III or impaired credit represent merrily, 0.4% of total exposure.
For a total of $35 million at year end 2022.
As we classified new credit for a total of $25 million as impaired during the fourth quarter.
Overall total reserve coverage is about two times the balance of impaired credit.
Total credit provision charges for 2022 amounted to 19 and a half million dollars.
Related to increased individually allocated allowances to stage III credits as.
As well as to an increase of phase one collective reserves.
On credit portfolio growth during 2022.
On slide 14, we can see a positive trend in the bank's efficiency as solid revenue growth has consistently overcompensated higher expenses by design.
For the year 2022, the cost to income efficiency ratio stood at 33% compared to 38% in the previous two years.
With a focus on strengthening <unk> execution capabilities.
Expense increases mainly reflect a higher salary base on new hires.
And a new performance based variable compensation structure.
Along with other expenses related to strategic initiatives to improve processes and technology.
Let me leave it here and turn the call back to Jorge for his final remarks. Thank you. Thanks.
Thank you very much.
The macro.
Economic and the financial outlook for Latin America is far from being settled and balance.
We see 2023 is a year of transition.
Transition towards slower growth.
<unk> towards lower interest rates and transition towards a slightly lower inflation rate, but still above the target.
Clearly inflation is likely to be more persistent than many expected not so long ago.
The space and timing for turning point in interest rate is the big question Mark our expectation is that this will happen towards the end of 2023.
Key for the region and for Atlantic.
Is the fact that foreign trade flows.
Really at record levels will grow an additional 2%, reaching almost three trillion.
By the end of 2023.
That is <unk>.
37% higher than pre pandemic 2019 levels.
There is no doubt that the surge in commodity prices exacerbated by the Russian invasion of Ukraine is the main driver of this positive trade shock for Latin America, and particularly for South America.
Having said that.
While commodity price increases are favorable.
Clearly mediocre GDP growth and high inflation is not favorable for the region.
In this context during 2023, we will focus more on profitability and less on growth.
Moving on to slide 17.
Let me mention a few words on management's focus for the year.
Unlike last year, we grew 18% in 2023, we aim at single digit growth, 3% to 4% consistent with the macro trend.
We plan to maintain disciplined credit underwriting standards as the current high interest rate environment poses.
Their risks.
Particularly for overleveraged companies, especially if we couple that with a demand shock.
Thirdly, as Andy mentioned earlier, we see a positive trend in margins going forward. The bank is currently positioned as asset sensitive in anticipation of additional interest rate hikes.
Moreover, our frontline and our treasury units are focused not only on optimizing risk reward lending spreads, but also making sure that we keep growing our deposit base.
Which is clearly our most cost efficient funding source.
Lee we.
We are convinced that we need to keep making progress on process redesign and automation and enhancing our product offering.
As I mentioned before changes made in key processes are already yielding good results, we're working hard to complement our product offering with treasury and structured trade and working capital solutions. This will not only strengthen.
Client relationship, but also favor our profitability going forward.
Moving onto the last slide Slide 18, let me share some guidance for the year.
We expect core equity ratio to be strengthened.
We are forecasting a range between 15 and 16% as our growth will be moderate and even more profitable than last year.
We expect our net interest margin for this year to be above 2022 levels.
Between two one and 2.4.
Net interest margin for Q4 stood at two 1% and that figure still does not incorporate the full impact of higher market rates.
Fees will continue to grow between 8% and 10% mostly from letters of credit but also.
From our syndication desk.
Our efficiency target will be around 2022 levels.
That means 33%.
As we expect that higher revenues will continue to offset investments and process improvements and technology.
Last but not least.
Our return on equity will likely be on the low double digits in line with our longer term guidance that we shared during the Investor Day last November .
By the way the full webcast is available in the IR section of our website.
I'm going to leave it here for now and open the call for questions.
Operator.
Yeah.
Thanks, very much for the presentation, we will now be moving to the Q&A part of the call.
If you have a question. Please press star two on your keypad that start to on your keypad. You May also ask a voice or text question. If you have dialed in via the web will now give a minute or so for the questions to come in.
Yeah.
Okay, we'll start with the first text question from Patrick Brown first of all excellent results and congratulations I have two questions. My first question is given the <unk>.
<unk> supply chain disruptions in particular with China. There's a lot of talk that Mexico has benefited from near shoring. What are you seeing on the ground has this represented any opportunities for <unk>.
And then the second question revenue growth. During 2022 has helped to compensate the material increase in expenses, but part of this revenue growth is due to markets.
How are you preparing the bank for potentially lower market scenario to sustain current cost to income ratio.
Thank you Mr. <unk> for your question.
Let me start tackling the second question first.
As we have mentioned the main objective of our strategic plan is to make sure that the bank has sustainable returns.
As we stated on Investor day, the target is mid teens.
Our returns by 2026, and we're clearly.
On track as you can see.
Barrick's share of wallet with most clients is improving but there's still clearly a big upside.
But our product offering is also limited and as I said, we're working hard on that we are developing new products that will generate additional spreads and.
And fees and that will compensate for sure for a potential decrease in rates.
This include.
Scaling our letter of credit business.
Project Finance.
Our fees.
Revenues from from Treasury products.
Expanding our deposit base.
That will for sure compensate.
A decrease in rates as we make progress.
And the bank gained scale, we were for sure maintain.
Our efficiency and potentially improve it.
I have to say, having said all of this that we do not see pre pandemic interest rate levels.
In the near future for sure not.
Zero percent.
That was.
When everything started.
In regards to the second question.
About near shoring.
Short answer is yes, we are starting to see some business opportunities.
That we believe are the result of the first phases of near shoring.
Particularly in Mexico, we're seeing companies developing industrial parks, mainly in the automated automotive and telecommunications as a matter of fact I start today, an announcement that Tesla is considering organ manufacturing.
Yes.
Production in in Mexico near Shoring for sure was strongly benefit the large latam conglomerates that are clients.
Most of our clients of us.
Any of those clients.
Are you asking for <unk>.
Capital.
For their investments.
So the short answer is yes. This should ultimately lead to increased trade flows between the U S.
In Mexico.
And that's the core of our business, so inevitably will benefit.
<unk> in the long run.
Okay. Thank you very much for that answer.
Our next question comes from Mr. Ricardo ballerina.
Individual Investor you commented on the Investor day that you've set a target size for the commercial portfolio of $10 billion to $11 billion for the year 2026.
Recently, you have commented that you expect portfolio growth to slow down to 2023 can.
Can you give us a roadmap on how you see <unk> switching the Investor day target.
Yeah.
Yes. Thank you. Thank you for your question the pace of our growth is dependent.
In large part because of the dynamics of the region. So we grew more than expected.
Uh huh.
The first year, and then we're slowing down a little bit this year.
Basically because of the headwinds of the and the economics of the reason that we're seeing now so.
11.
10 billion to 11 billion alert target on our commercial portfolio is is we're way on track and the pace again, the pace of the growth will depend largely on the dynamics of the region, but also to.
To the extent that we have additional.
Uh huh.
Getting now.
Okay.
Hey, Thank you very much for that answer.
The next question.
It is also a tax question.
This is for Mr. Jeffrey Otto from Jeffrey Auto CPA, Congratulations on your fourth quarter and full year 2022 results I had high expectations and you have exceeded them I do have a concern about your npls in the fourth quarter. They grew from 11 million to $35 million.
The bank largely involved in trade finance.
Generally short term I would like to have some color on this.
Is this result of the banks changing lending criteria are mistaken oversight on the company industry or country lending activity is this a level, we should expect to see with the volume in the bank is doing.
Okay.
Hi, great. Thank you for your question.
First of all our credit underwriting standards.
<unk> not changed and will not change.
World remain.
Very conservative.
We did have an uptick on on Npls and it's mainly due to one exposure in particular is the nonbanking financial institution in Mexico.
Reserved by the end of 2022, we have materially increased the coverage after the company announced Dr. <unk> 11.
In Mexico last last November .
So.
We're really not not concerned about our exposures in non bank.
Financial institutions.
That is one off case.
In Mexico, and our and our nonbank financial institutions do not represent more than 3% of our portfolio and it's mainly regulated companies or affiliates of financial institutions and it's mainly in <unk>.
In Chile.
So we are we are.
Not concerned and not changing our credit risk appetite.
Okay.
Okay. Thank you very much.
Our next question comes from Andrea at Westar from Bank of Columbia, Hello. Thank you for the opportunity to ask a question I would like to have more color about what youre expecting in NIM and profitability in the rates.
Begin to decrease but the expenses are stable what will the strategy to maintain solid margins be.
Let me take net CRO to the question too I mean, do you want to comment on rates sure.
Thank you.
Yes, our expectation of what you mentioned.
Just back to the NIM, what we see is.
We still have to see all the repricing of interest rate increases in our assets and liabilities. So in the very short term, we expect our net interest margin to continue expanding where he mentioned between.
2% to 4% that you can on a future fed actions and.
And.
The repricing that we see in our balance sheet.
After.
The rate increases.
Income per stop.
Like Jorge just mentioned in the previous answer we are in the process of developing.
Developing new structured products.
And tailor made solutions.
That will.
In hand.
And that's precisely what our five year plan is about so we do expect.
Is.
That to be able to compensate.
Rate increases.
And also as Tom had mentioned, we do not anticipate that interest rates are going to go back to zero percent that we saw at the beginning of the pandemic. So more normalized interest rate of around two 5%, 3% say the fed fund rates should remain constant.
So in our projections for our target of mid teens that is definitely contemplated.
So margin expansion, new E generating products and interest rates that in a normalized level should be about two and a half.
I think some summer chief commercial officer wants to say, if you're worried about that too, yes, I would just like to reinforce that even though might not be so noticeable within the numbers, but a big part of the increase in profitability that we face we've been facing quarter after quarter comes from while I would say this.
A new layer of business that <unk> has been building that is a core part of our new strategy that comes from if you heard our investor day to the various types of arbitrage that we were doing both in terms of you know clients.
Financing in different countries as well as.
All the structured trade finance pod supply chain finance receivable discounts and can do this and that layer of business has been increasing quarter after quarter and that comes with the higher margin <unk>.
As new clients.
No plans that we have been on boarding and nicely do you have the numbers for last year, we did increase that substantially and we continue to build that new layer of business and to build more optionality.
With everything that we do so we're not dependent on let's say the the legacy business of the business the business as usual that we always been doing I think that that is was building well and I think we're right on course with what we the plan that we presented last year. Thank.
Thank you.
Okay.
Okay. Thank you very much.
We have a.
Follow up question from Andrea how do you expect commissions and fees to behave in 2023 for syndication and letter of credit business.
What is your expectation of growth on this front.
Those two business because they have they are very different in nature.
The letters of credit business again, as part of the strategy that.
That we've been doing first of all adding.
New clients that are specifically doing more this type of business. So a lot of the clients that we on boarded last year. There were clients specifically for the letter of credit business as well as we then.
Focusing on cross selling letters of credit business to clients that are only lending and we've been more and more successful on that so I think the direction for that business.
In particular is to continue to grow.
Of course, we depend on the market letter of credits is very tight.
<unk> to trade in the region and if the trade flows reduce of course, the business suffers but that should be compensated for new or more clients that we are adding both in existing clients in terms of cross sell as well as new clients. So for the syndication business that is a completely different business than that.
As a business that is really.
To grow the business more substantially and it takes time.
<unk>, where we have a quite strong captive base of investors that come along with us in the most transactions that we do but we're also very careful on what we sell to the market.
So it's a business that we are we have not been more aggressive we are we continue to do as we did in the past rating.
Solutions.
Two two clients that are willing to pay an extra fee for us to fund raise for them that also as a business by to M&A activity when they require certain funds and we do I mean.
The market has been slower this year.
We added that is new is the project finance business that should also generated more structure or restructuring fees.
So I expect this year.
B J.
Very much in line with last year, hopefully looking to increase that number because we think we can increase the number but will depend on market conditions for the syndication business.
Okay.
Okay. Thank you very much. Our next question comes from Michael Rochman from G B our consulting.
How is the management and the board of directors thinking about capital capital allocation with dividends being more than three times covered and the stock at a substantial discount to book value.
Yeah.
Thank you for your question Michael.
Total allocation dividends and all the alternatives including buybacks.
Potential hybrid instrument, that's an ongoing discussion.
At the board level.
We just reported a $15 three common equity tier one ratio, which is at the lower end of the range that we have established we want to operate the banquet.
Ranges between 15 and 16.
As I mentioned, we are committed to to some <unk>.
Capital position it as a pillar of our business model and it's a pillar of our investment grade.
Rating I can say, we're focused on optimizing the banks capital allocation.
Support the growth of our long term five year plan.
We'll take the bank to between 10 and $11 billion.
Commercial portfolio. So we're focused on the long term target more than than the short term.
Okay. Thank you very much I'm seeing no further questions at this point I will now be passing the line back to the management team for the concluding remarks.
No I just want to thank you.
Your questions and everybody for joining this call.
As I mentioned before we see 2023 as of year expense issue in the region.
We.
Committed to profitability and.
Perhaps not so aggressive.
Growth.
This year underwriting standards will not change and we will focus on profitability going forward.
That's what I have to say for now and thank you everybody for connecting.
Thank you very much. This concludes today's conference call will now be closing all the lines. Thank you and have a great day goodbye.
Yeah.
Okay.
Okay.