Banco Latinoamericano de Comercio Exterior S. A. Q1 2023 Earnings Call
The other main component of fee generation for the bank related.
It relates to the structuring and syndication business.
Given it's transaction based nature this activity should be analyzed annually rather than on a quarterly basis.
We didn't see much activity during this first quarter.
In part also explained by seasonality, but.
But we do have a pipeline of transactions that should bear results in coming quarters.
Bringing annual fees at similar levels than in 2022.
As shown on slide 12 asset quality remains robust, having $8 5 billion or 98% of the total credit portfolio categorized as low risk under stage, one as defined by <unk> nine.
Accounting for another one 5% where credit classified as stage two.
For a total of $133 million.
An amount that has come down from $147 million in the preceding quarter.
And from $289 million last year.
Stage two exposure consists of closely monitored credits, which have experienced increased risks since origination.
We're still performing.
Finally stage III or impaired credits represent merely 0.4% of total exposure.
For a total of $35 million and amount unchanged.
From the preceding quarter.
Overall total reserve coverage is more than two times the balance of impaired credits.
Total credit provision charges for the first quarter of 2023 amounted to $6 $3 million.
Mostly related to increased individually allocated allowances.
Phase III credit as well as to an increase of stage two reserves on certain investment securities.
That were downgraded internally.
On slide 13, we.
We can see a positive trend in the bank's efficiency.
Reaching a cost to income level below 27% for the first quarter of 'twenty three.
As solid revenue growth has consistently over compensated higher expenses by design.
During the first quarter.
Total expenses were down from the preceding quarter on the account of slower pace in M&A strategic expenses.
With its usual during the first quarter.
The year.
Salaries and employee related expenses on the other hand remained relatively stable on a quarter on quarter basis.
And present, an annual increase due to higher salary base on new hires during 2022.
Congruent with our focus on strengthening black this execution capability as delineated in our strategic plan.
I will now leave it here and turn the call back to Jorge Thank you.
Thank you Rami.
We anticipate this 2023 to be a year of transition toward.
Slower growth.
Essentially lower interest rates and slightly lower inflation rates.
Though still above target levels.
We recognize that the timing and scope for the turning point in interest rates remains unclear.
But we anticipate this shift will occur towards the end of this year.
Our business model characterized by very short term duration and essentially a matched book.
With assets and liability sharing similar although not identical centers.
Provide a stir.
<unk> advantage in the current banking landscape.
As Amy explained before.
The fact that we are able to 50 position of our balance sheet to be slightly asset sensitive or liability sensitive depending.
On the rate environment outlook has proven to be particularly beneficial recently.
As far as the region, we operate in.
In general, we believe contagious risk for Latin American banks should be limited.
For three main reasons one.
They have minimal exposure, if any to U S regional banks.
Banks in the region have substantial level of local retail deposits.
And of course, the duration of this their securities portfolio tends to be much shorter than those of U S banks.
In 2022, the Latin American economies outperform.
Both expectations, despite the global challenges, but growth forecast for 2023.
Have been revised downwards due to financial conditions lower commodity prices.
And overall global economic uncertainty.
Despite these headwinds foreign trade levels remained robust.
The macroeconomic and financial outlook for Latin American countries is still far from being balanced and stable.
We see a challenging transition from.
Peak to below trend.
Both GDP levels.
And we see inflation decreasing but still remaining above <unk>.
Target rates just like in the U S.
Although challenging, particularly from a credit risk standpoint.
The current context also provide substantial.
Substantial opportunities for blacks for several reasons.
Hi.
Hi trade levels increased demand for trade finance.
Our core business.
The fact that domestic interest rates in Latam are in most cases significantly above.
And those in the U S has.
<unk> demand for dollar denominated financing and we are essentially.
A dollar denominated lender.
And we see larger global institutions limiting their exposure in the region in times of increased volatility, leaving us with less competitions for our clients.
We will keep taking advantage of the opportunities that this context provides without relaxing our credit underwriting standards.
Now given our recent performance and particularly the fact that we are already in the higher range of our lost net interest margin guidance that is closer to $2 four represent.
Today, we are updating our 2023 ROE guidance from an original 10% to 11% range to a new higher range that we anticipate to be between 11 and 13% by year end.
In closing we remain committed.
To enhancing profitability this year.
By prioritizing strategic investments.
And operational efficiency.
We are optimistic about the execution of our strategic plan.
I'm going to leave it here and now open the call for questions.
Operator.
Yes.
Yes.
Thank you very much for the presentation, we will now be moving to the Q&A part of the call.
If you're logged in by telephone Please press star two that start to for any questions.
If you have 1000 via the web you may ask a voice or text question. We acknowledge all the tax questions have already come in.
We will give a minute or so for your questions.
Okay.
Okay.
Okay.
Okay. The first question will be the fuel Tech's questions first the first question is from Mr. Patrick Brown individual investor Great results. Congratulations is this level of profitability a new normal for <unk>.
Is it a sustainable in a lower and a lower interest rate environment and my second question. What is the rationale behind not increasing your dividend policy back to the pre pandemic levels.
Okay.
Yeah.
Hi, Thank you for your thank you for your two questions when were the first one first.
We detail in our Investor day back in November and I remind you all that the webcast is.
In our website.
Our strategic plan is designed to tap into five major upside opportunities.
And this will yield incremental.
Visibility without changing.
The essence of our business model and these opportunities we've been.
Reporting on them.
In our in our mainly one increasing our customer base and our cross sell.
Our penetration and we've been reporting that for the last year in this quarter as well.
Two changing our funding mix to be more heavy on deposits.
Posed to other sources.
We have said over and over that deposits are our most efficient.
Source of funding and we've been growing that.
Systematically.
<unk> operational efficiency.
Reengineering some key processes have yielded.
Great results and we're already seeing that.
Four is turning basically our treasury unit.
More of our client solutions platform.
To generate additional.
Fee income that that's an important project.
Of this year and we'll be reporting on that.
As time goes by and then in faith and probably the most important one is adding structured trade finance solutions.
To our to our plain vanilla products, because this will be supply chain finance solutions that will enable us to increase margins.
Without incremental credit risk as we take advantage of.
Our refresh opportunities in the supply chain of our clients I think we think that all of this together.
With active balance sheet management will assure that we reach sustainable mid teens ROE over the long run as we communicated in our in our Investor day.
Second question was regarding.
Okay.
Two questions Greg.
Westwood's Anvil.
Yes, yes.
The second question what is the rationale behind not and continued dividend policy to pre pandemic levels.
Yes.
Good question as well consistent with the guidance that we gave as I said in the in the in.
In the Investor day that the bank is clearly in growth mode.
This year growth will be moderate given the headwinds in the region, but make no mistake. The bank is in growth mode. We are currently operating at the lower end of our capital ratio Guide.
Guidance that was between 15 and 16%.
This is the capital ratio that we feel we need.
To operate in the region, we operate and we are.
Yes.
We will remain strongly capitalized and not risk our investment grade rating by any means.
Having said that the board has.
As I always say, it's ongoing discussions on capital management.
Always with a long term view.
Alternatives on capital management.
Cord discussed at the board level include.
Issuing 81 hybrid type instruments, depending on market conditions.
So extraordinary extraordinary dividends in case, we haven't settled on returns and even additional buybacks depending on market conditions. So all of that is being.
Discuss.
At the board level.
Okay. Thank you very much worse.
Yes, we'll be proceeding to the next next question. This question is from Mr. Jeffrey Auto from Jeffrey Auto CPA.
Congratulations on your continued execution of your business plan as a long term investor I truly appreciate your work. Thank you.
Regarding net interest margin Deleveraged up in late 2021, capturing the 2022 23 increase in interest rates against prior and lower cost of funds.
Would you please give us a little bit more insight as to the timing of your debt maturities and the difference between your existing cost of funds and with the approximate cost and rate would be in today's environment.
Very good question as well thank you so much.
Since Mr related to funding and cost of funds I'm going to turn into.
Eduardo <unk>, our head of Treasury and capital markets and why do we want to tackle that yes. Thank you Jorge.
Our first significant maturities for the bank our U S bond with a couple of Mexican issuances that will take place in late 2024 and 2025.
Having said that the bank maintains and practically March book in terms of contractual maturities and we'll continue to monitor market, who sees any new opportunities that the capital markets may provide to further reinforce our already robust funding base.
As regards cost of bonds, which I believe was the second part of your question.
I'd say that considering the short average tenor of our balance sheet in terms of spreads.
Our current funding levels are a good reflection of the cost they are buying up to pace in the market in the current environment.
As regard to interest rate gap. The bank took advantage of the low interest rate environment in 2020, 2021 to enter into fixed rate medium term transactions that have resulted in a positive arbitrage gap.
Allowing assets to reprise faster than <unk>.
Eight of these GAAP approximately 25 basis points as of today is expected to narrow as interest rates reached their peak.
Having said that the bank maintained more than $1 billion of very low cost fixed rate liabilities reprise beyond the next 12 months October Henry answer to your questions.
Is there anything else. Please let me know.
Okay.
Hey.
Thank you very much we'll now take the voice voice question from Mr. Thiago <unk> from now. Please go ahead, Sir your line is open.
Hi, good morning Jorge.
Enough.
I've got a personal on net interest margins.
<unk>.
A positive surprise I would say.
You are guiding to between two and two four for the full year now you said.
Two four.
<unk>, which means that the return on equity would go instead of 10, 11, 12, and 13 huddle I need to think about.
Net interest margins during the rest of the year I know, there's a lot of moving pieces.
I know, there's interest rates and this uncertainty by leaving aside the interest rates in the states.
And especially on the lending spread a linear straight looks very good 3%, which is more than the sort of target to have.
How do I need to think about that as straight in the next few quarters I guess these risk appetite.
Optimization plan and data market environment, but if you can give us some color on how your stake.
The margins aside from the interest rate cycle and distinct thank you.
Okay.
Sure.
Thank you Hugo.
So.
We are.
Clearly a dollar denominated lender all of our.
Assets and liabilities.
Most of them are floating so.
Interest rate levels in the U S do effect.
A direct effect on <unk>.
R&R spreads.
I'm going to turn.
The.
Amy can broadly.
Give a more detailed answer and perhaps when we talk about our base rates and now we're looking at them and then when we think about spreads I'm going to turn it to two.
To sum will aid.
For more of a short term view of what we're seeing this year in terms of spreads.
In the region and <unk>, yes, Thank you and good day.
And yes, I know you you you mentioned to leave out the effect of the U S dollar interest rate, but like Jorge said.
That's a big portion.
Like Eduardo just mentioned before we did position.
The bank towards late 2021, and the beginning of 2022.
With that.
And an important amount of debt.
Place at fixed rates and debt.
Going to reprice, even beyond next year.
And.
Continuously we have seen that the increases in interest rates.
A as they are later they have had an increasing.
The impact a positive impact in our net interest margin over the last several quarters.
We actually saw that Pete.
This quarter.
And and like Eduardo you've mentioned that differential today.
Today amounts to about 25 basis points, which is.
In terms of net interest margin.
As interest rates.
Little off.
We should start to see some pickup in terms of the funding costs, but it will also take time because of the maturities of the debt that we have going forward.
And and.
In terms of the.
The base rate differentials as well as the spreads that I'm going to give the word to some now.
You have to remember that every quarter we have.
The turnover of our book of about half.
Or.
Even more than half of the book that's maturing the loan book and a lot a lot of it happens also on our liability side. So we are definitely able to pick up any trend.
Both in our base rates are market rates and in our spread.
Like I said, we do see stable spreads in our funding costs, we haven't seen any increase there even recently with the <unk>.
Recent turmoil in the financial sector in the U S and Europe and now I can give them. The word now to talk a little bit of a.
Lending spreads, which we also saw increased importantly.
Over the last several quarter, particularly in the Buena boom of commodity prices with last year, but frankly.
Yeah no sure.
I think first of all when we look at in.
And you touched on this point when we look at our business model given the very short tenor of our book.
It's hard to make any predictions on let's say medium term spreads because it can change very fast upwards as we are seeing.
And of course downward depending on the market condition, what I can say is that everything and bought back a little bit about the strategy that we've been doing.
Is about.
About creating increasing our cost opportunities increase increasing recurring fee of the in our loan book to be less subject to changes in market conditions, even for the shirt short term book.
Let's say the level of spread that we have reached up to now has a lot to do.
With those changes in the in the I would say in the in our business model and improvement of our business model all of the new clients we have added.
As well as of course, capturing the market conditions, particularly the increase in commodity prices, we saw our first quarter and this year of a lower demand across the region because of the the just economic environment a lower.
Prices of commodities, but we were still able to sustain.
Margins because of we just have more clients now to choose from I think.
When I look the next quarters, I think I don't see as much as upside in increasing margins, because we're not changing our credit.
Profile on country, we're very aware of what's going on and we're not going to take more risks than desired.
So the challenge and the objective is to sustain the current spreads that we have been.
Achieving so far and I think we.
We have been doing a good job so far Ananda expect to change materially.
Materially from them.
Hope that answers your question.
In New York.
I'd only stress that the ability of this bank given the short term nature.
The nature of the.
And the repricing too.
Shift from slightly asset sensitive to liability sensitive.
In case, we see the.
Rates pivoting in one way or another.
Okay.
Super clear thank you very much.
Thank you.
Yes.
Okay. Thank you very much. Our next question is a voice question from Andrea <unk> from Bancolombia. Please go ahead Maam. Your line is open.
Hello, Good morning, and thank you for taking my question and I just have one question on <unk>.
Regarding the.
The guidance and taking into account the positive dynamics of the results and at the beginning of 2023 can you. Please repeat the guidance.
All indicators.
By the end of the year and I also want to know if these guidance.
Contemplated in your trends and the recovery of the international trade that we are at.
Beginning to to watch in Latin America. Thank you very much.
Okay.
Thank you Andrea.
For your question I'm going to start by the.
Last part.
First.
GDP growth for Latin America will be slowing down.
This year, we expect one 2%.
GDP growth to more in the order of 2% for for 2020 before.
According to the IMF, so we see a slowdown in GDP growth slowdown in the region on the other hand trade.
Okay.
For the region inputs plus exports is estimated to grow 2% this year and almost 4%.
Next year, so so that as far as us as a region and I must say that trade levels in North America are at record highs.
Hi.
Trade in 2022 was.
Almost three trillion.
Yes.
57% higher.
What we have where we head into 2020, and almost 30% higher than what we had pre pandemic.
<unk> is a very important driver for us and is it is a record levels.
And growing.
This year as far as our guidance for 2023.
As I mentioned capital will remain between 2015.
16% net interest margin.
We mentioned between $2, one 2%, 1% we're already at the higher end of that.
That range.
Our fees at <unk>.
<unk> mentioned before growing between 8% and 10%.
Done.
Traditionally and that includes.
Syndication and letters of credit fees.
Efficiency is crime.
Bill.
Improving but.
It's even better than our than we originally anticipated because of the increases in revenues and while we did change was our ROE.
For the year, what we initially said between 10 and 11% and now we're saying giving.
What we're seeing.
Especially our first quarter our results more in line with between 11 and 13%.
For the year that that's our guidance.
Okay.
We have any additional questions.
Yes.
Thank you very much will be now moving to next question from Mr. Ricardo <unk> from individual investor Congratulations on an excellent record second quarter, two things that really jumped out to me, where the efficiency ratio of 26, 9%.
Net interest spread of 182% could you elaborate on how you see these two behaving for the rest of your strategic plan.
And then we can.
Can we focus on that yet.
On that before.
The way. The plan is is designed Ricardo is too.
To take advantage of the spreads.
Now of course, while.
While they are there.
Sure.
We have achieved a more efficient.
A capital level, we have increased our customer base we are.
Cross sale.
It's also.
Improving but the real key to the to the plan is.
What I mentioned before regarding additional fee income.
On Treasury products and also.
Our structure.
<unk> finance supply chain finance type solutions that that.
That is where we were going to have additional margins here youre going to see it.
That's why we're working on now and that should.
Compensate for <unk>.
Headwinds in the future so we do see.
We are confident.
We are executing our plan.
As we thought.
And we do believe that we will achieve.
Mid teens.
So in a sustainable manner.
2026.
Okay.
Thank you very much potential. Our next question is a voice question for Mr. Jim Marrone singular research. Please go ahead, Sir your line is open.
Okay.
Just once again, Jim Moroney from singular research we detected a question from your line. Your line is open. Please go ahead.
Yes. Thank you for taking my call you.
You may have touched upon it again, but if you could just reiterate.
You did a great job in managing the book you've explained well the interest rate sensitivities on both your assets and liabilities, but if you could just provide a little bit of color in terms of your clients' books.
You know what are you hearing from your clients in terms of higher rates.
The inflation impact.
And you know.
The ink.
Increased risk of perhaps a default.
And.
And bladder.
<unk> approach to perhaps a higher credit risk going forward with regards to your provisions. If you could just provide a little bit of color what you're hearing from clients in terms of their books as well as your approach to handling the book. Thank you.
Let me just say.
A couple of things and then I'll turn it to our.
However, commercial unit some continue.
I mean, there is no doubt that that sustained sustaining this levels.
Interest rates will have.
All right.
Credit effects on clients that are.
Or over leverage.
In the region.
And in our plan.
Accounts accounts for the Ogden and Alero operations account for that.
Good news is that we have the ability to to shift our.
Exposures to clients or a less leverage in case, we need it in different countries and in different sectors.
As as far us.
Okay.
Interest rates in the U S and our clients are accessing.
Capital markets, we're also seeing.
Some of that.
Recently.
And that's where we see our true competition is perhaps even more capital markets than than other international balance or even local banks, but I'm going to let some.
Yes, sure well I think the good news about the current environment is that in our business model. We are seeing over the years, there's always a country, which were present there is facing what let's say the rest of the globe is facing right now so there's nothing new on how we operate.
We and this is part of our selection criteria for a client sectors countries in a moment that we enter at the moment and the exit as well as the average life of our book So with that said, whereas right now we see in the region.
The combination of in a recessionary environment and high interest rates of course sectors, there are certain sectors like retail.
Among others that are suffering more we have no exposure to those two.
Due to this sector.
And therefore, we're not really seeing an issue I think we stress loss, particularly when we go to medium term, we stressed a lot interest cover ratios as well as debt leverage ratios. So.
Uh huh.
Whatever is more let's say permanent climate and your long term financing.
Our book is very healthy and all of our clients should sustain the current environment with without a problem I think of course that also I'd like to also focus on the opportunity that this brings us because right now when we see a lot of banks in the market more with concerns over the portfolio, we can focus on.
Really help.
Helping companies that have seen a good companies that I've seen a drop in liquidity from banks to have to worry about problem loans and that gives an ability to step in and that great clients. So I think this is again net positive for us. Thank you.
Okay.
Okay. Thank you. Thank you very much that's all.
Questions. We have time for today I'll pass the line back to the <unk> team for the concluding remarks.
Okay.
Alright, just wanted to thank everybody.
Or you're.
Very good questions.
We are optimistic about the future and the execution of our plan and we are confident that this positive trend.
We will continue going forward. Thank you very much.
Thank you very much. This concludes today's conference call will now be closing <unk>. Thank you very much and goodbye.
Okay.
Yes.
Okay.
Okay.
Yeah.