Q3 2024 Banco Latinoamericano de Comercio Exterior S A Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to Blavix 3rd Quarter 2024 earnings conference call. A slight presentation is a company today's webcast, and is also available on the investor section of the company's website.
Speaker Change: There will be an opportunity for you to ask questions at the end of today's presentation.
Speaker Change: Please note today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. I would now like to turn the call over to Mr. Jorge Salas, Chief Executive Officer. Sir, please go ahead.
Jorge Salas: Good morning, everyone, and thank you for joining us today to discuss our third quarter results.
Jorge Salas: I'll begin with an overview of another record-breaking quarter for Blacks.
Jorge Salas: Following that, Annie, our CFO, will provide a detailed analysis of our financial results for the quarter. Right after that, I will update you on the progress of our strategic plan and also provide a revised guidance for the remaining of the year.
Jorge Salas: After that, we'll open the call for questions. So, moving on to slide two, the summary slide.
Annie: On the balance sheet, the commercial portfolio reached $9.7 billion for the first time, representing a quarter-on-quarter growth of 5% and a year-on-year growth of 17%.
Annie: Deposits also reach a new record of $5.6 billion, growing 34% in the last 12 months, with corporate client deposits nearly doubling compared to last year.
Annie: This remarkable growth in our most cost-efficient source of funding is the result of the coordinated efforts of our commercial and treasury teams guided by clear deposit growth KPIs in their balance scorecards.
Annie: We're very pleased with the progress, but more importantly, we see significant potential for further expanding our deposit base in the near future.
Annie: On the P&L side, despite the more competitive lending environment due to increased dollar liquidity, widely open debt capital markets for Latin American stock names, and lower local interest rates in most countries, we have once more achieved record results.
Annie: I would especially like to highlight the evolution of non-interest income. Total fees for the first three quarters are up 45% compared to the same period last year.
Annie: The letters of credit business also had a record performance generating $7 million in the last three months, a growth of 8% queue on queue and 12% year on year.
Annie: Syndication fees decreased slightly this quarter, but we feel confident that with the pipeline we have, we are on track to close the year, also with record figures in both number of deals and total syndication fees.
Annie: Regarding expenses, as we have forecasted in previous calls, our costs have increased in line with the anticipated investments required by this second phase of our strategic plan. As a result, and in line with expectations, our efficiency ratio rose slightly to 27%, which is in line with the guidance we have been providing for the year.
Annie: This strong financial results culminated in a record net income of $53 million for the quarter, a 16% increase compared to the same period last year, which results in a return on equity of 16.4%.
Speaker Change: Given this stronger than expected performance, I will provide you all with a revised guidance for the year before opening the call for questions. Let me now hand it over to Annie, our CFO, for a detailed financial analysis. Annie, please go ahead.
Annie: Thank you, Jorge and good morning to everyone. Let's now move to slide three.
Annie: Quarterly profitability continues to be enhanced by sustained top-line performance, as Jorge mentioned, driving third-quarter net income to $53 million.
Annie: marking an annual increase of 16% and up by 6% quarter-on-quarter and representing a $1.44 per share.
Annie: Year to date, net income for the first nine months of this year reached over $154 million, a solid 29% growth from the same period of last year.
Annie: In the graph, you can see the growth trend since we started executing our strategy in 2022.
Annie: with year-to-date results that have more than tripled from 2021's levels.
Annie: The bank has sustained its profitability for the last three quarters at an ROE level above 16% and an ROE of 1.9%.
Annie: When compared with the levels observed at the inception of our strategic plan, ROE has tripled from the same period of 2021, while ROE has more than doubled.
Annie: Total assets reached $11.4 billion, up by 13% from last year and 5% quarter-on-quarter.
Annie: This was mainly the result of strong loan growth, surpassing the $8 billion mark for the first time in Vladez's history, up by 17% from last year and 9% from the preceding quarter.
Annie: The commercial portfolio, which includes loans and off-balance sheet items, reached $9.7 billion, as our significant loan growth was coupled by a letter of credit business continuing to grow in scale.
Annie: A liquidity position of $1.7 billion, mostly placed with the New York Fed, represented 15% of total assets and 30% of deposits, reflecting a prudent liquidity management aligned with Basel's liquidity coverage ratio.
Annie: As can be seen in slide number five.
Annie: On the left-hand side, the securities portfolio, amounting to $1.2 billion, is mostly placed with investment-grade, non-LATAM issuers, mostly from the U.S.
Annie: therefore providing further country risk diversification to our overall credit exposure.
Annie: Most of this portfolio is booked in our New York agency, and is therefore eligible to be discounted with the Federal Reserve, allowing for contingent liquidity funding if needed.
Annie: The portfolio has a relatively short duration, with an average remaining tenure of approximately two years.
Annie: The composition of the commercial portfolio on the right denotes a well-diversified country exposure across LATAM.
Annie: Brazil and Mexico represent strategic markets for BLADEC, given the size of their economies and relevance to the trade activity of the region.
Annie: They are among the bank's top country exposures at 14% and 11% of the total, respectively, along with other relevant country exposures in South America, such as Colombia at 11% and Peru at 9%.
Annie: We are also focusing our growth strategy in certain Central American and Caribbean countries, particularly the Dominican Republic and Guatemala.
Annie: both with good economic fundamentals, where we continue to execute on solid risk-reward opportunities, each representing 10% of total exposure at quarter end.
Annie: The commercial portfolio remains short-term in nature, with 75% scheduled to mature within the next year, having an average remaining tenure of 12 months at quarter end.
Annie: In fact, the portfolio has a high rotation of about two times in a year. This means that more than half of the portfolio matures every quarter and new loans are placed.
Annie: This agile business model allows us to quickly react to market conditions and be able to jump on profitable opportunities as they arise.
Annie: This agile, short-term business model, with a top-tier client base of banks and corporations across Latin American countries and industries, is the foundation of Blacks' strong asset quality as shown on slide 6.
Annie: At quarter end, 95.7% of the credit portfolio, including loans, investment securities, and off-management items, was classified as low-risk or Stage 1, as defined by IFRS 9.
Annie: Only 4.1% of the portfolio was classified as Stage 2, down from close to 6% in the preceding quarter, as we collected maturities of exposures that had been classified in Stage 2 during prior quarters.
Annie: Although Stage 2 exposures represent credits with increased risk since origination, all of them are currently performing.
Annie: Finally, only a minimal 0.2% of total exposure is classified as Stage 3 impaired credits or NPLs.
Annie: amounting to $17 million with a total reserve coverage of close to five times.
Annie: During the third quarter, a $7 million loan was classified from Stage 2 to Stage 3.
Annie: This represents an isolated Colombian exposure in the oil and gas supply chain sector, which has been in runoff mode since before the pandemic and which, in our assessment, has recently further deteriorated.
Annie: Credit provision charges for the third quarter were three and a half million dollars, mostly relating to individual reserves in stage three, partly upset by a one million dollar recovery from a loan charged off several years back.
Annie: Overall, the quality of the portfolio remains strong with a robust reserve coverage.
Annie: Now, moving to slide 7, our well-diversified funding sources continue to support strong asset growth.
Annie: Our deposit base carries on with a strong growth trend, reaching yet another record level at $5.6 billion at quarter end.
Annie: Our Class A shareholders, mostly central banks, who place part of their U.S. dollar international reserves with us, account for 43% of total deposits, a very stable source of funding over time.
Annie: The remaining 57% comes from our client banks and corporations, a source that has been showing a positive growth trend over the last several quarters as a result of our cross-selling efforts.
Annie: 24% of total deposits at the end of September came from our Yankee CD program.
Annie: which operates out of our New York agency, predominantly through broker-dealer distribution, and continues to provide both volume and granularity.
Annie: The bank's equity position presented on slide 8 continues to be enhanced by strong earnings generation, remaining within our target capitalization levels despite strong balance sheet growth.
Annie: Our board recently declared a 50 cents per share quarterly dividend marking the third consecutive quarter at this level on the back of strong financial performance.
Annie: We expect Earnings Generation to continue to support business growth, as well as dividend distribution, as decided and declared by our board on a quarterly basis.
Annie: Moving on to P&L performance, on slide 9, you can see the evolution of net interest income and margins.
Annie: Net interest income of $66.6 million for the third quarter was up by 10% from the year before and by 6% from the preceding quarter.
Annie: This top-line growth is mostly explained by the net effect of higher average loan balances.
Annie: which were up by 9% annually and by 3 1⁄2 quarter on quarter, improving the mix of average interest-earning assets and positively impacting net interest spread and net interest margin.
Speaker Change: Despite a more competitive market environment, as Jorge pointed out, we have been able to sustain lending credit spreads over the last several quarters, as we continue to emphasize on pricing optimization.
Speaker Change: coupled with improved levels of funding spreads, benefiting from increased deposits.
Speaker Change: Hence, net interest spread and net interest margin for the quarter reached 1.78% and 2.55% respectively. Year-to-date, NIM at 2.49% reflects our stated target levels.
Speaker Change: As showcased in slide 10, the bank had a solid fee income performance, reaching $10.5 million for the quarter and $32.5 million for the first nine months of the year.
Speaker Change: This represents a 45% increase compared to the first nine months of last year.
Speaker Change: Our letter of credit business continues to perform well, with fees for the third quarter of close to $7 million.
Speaker Change: As we have mentioned before, the continued growth in this business has been the result of streamlined processes and client additions.
Speaker Change: We are currently in the process of implementing our new ELSI platform, which should start to bear fruits towards the end of next year, when we should be able to further scale this important fee revenue stream.
Speaker Change: Structuring and syndication fees decreased during the third quarter to 1.5 million dollars.
Speaker Change: having closed two transactions.
Speaker Change: after a stellar second quarter when we were able to close five transactions.
Speaker Change: As this is a transaction-based business, we see some quarterly fluctuations, but in any case, we foresee a strong performance for the remaining of the year with a solid pipeline of transactions on the way.
Speaker Change: The main driver in expense growth is a higher salary base due to increased headcount aimed at enhancing business volumes through product deployment and client additions, as well as new functions supporting our strategy.
Speaker Change: Personal expenses for the quarter also increased on the account of higher provisions for performance-based compensation, given yet another year of earnings growth above our initial projections.
Speaker Change: Let me leave it here for now and turn the call back to Jorge. Thank you.
Jorge Salas: Let me now take a step back and give you a bigger strategic picture on the successive phases of our five-year plan that we started executing in 2022.
Jorge Salas: Phase one objectives have been achieved.
Jorge Salas: We've optimized our balance sheet leverage.
Jorge Salas: We've expanded our customer base, preserving the risk profile.
Jorge Salas: We have significantly increased deposits, we have strengthened our teams, and we have improved operational efficiencies.
Jorge Salas: The results have surpassed our initial expectations, unlocking more value than we had anticipated.
Jorge Salas: While we have accomplished a great deal, some of our most challenging work still lies ahead as we transition to the second phase of our strategy.
Jorge Salas: Phase two focuses on the expansion of our product offering.
Jorge Salas: This phase involves implementing two new platforms to support our trade finance business and our treasury business.
Jorge Salas: As we have highlighted, we believe that these two areas hold significant upside.
Jorge Salas: The trade platform will not only digitalize our letters of credit unit with a state-of-the-art client interface, but also add substantial transactional processing power to our working capital solutions business.
Jorge Salas: I am pleased to report that we are making solid progress in the implementation with our partner CDI announced last quarter.
Jorge Salas: Project is on target. We have already completed close to 30% of the work, and we anticipate having the platform up and running in the second half of next year.
Jorge Salas: On the other hand, the Treasury platform enabled us to offer derivative products to our clients and to further enhance our capability to provide local currency lending, always edging the resulting FX exposures.
Jorge Salas: We believe that offering treasury products to our client base will unlock a relevant source of non-interest income that BLAD-X has never been able to capture.
Jorge Salas: These products are a natural complement of the different lines of products that the bank is already delivering, such as letters of credit, bilateral, and syndicated medium-term credit facilities.
Jorge Salas: Our strong franchise provides an ample regional client platform that will leverage to foster the development of this new line of business, which we expect to gradually gain relevance as a source of income.
Jorge Salas: We are now in the final stages of our vendor selection process for this initiative. So you can expect to see a joint press release regarding this partnership in the upcoming weeks.
Jorge Salas: To sum up, the results we've reported in the last nine quarters are essentially the consequence of the implementation of the initial phase, the optimization phase that is, of our strategic plan.
Jorge Salas: The potential benefits of Phase II are not yet reflected in these numbers, which means there's substantial additional upside, particularly in non-interest income generation, as we gradually roll out these new capabilities in the coming quarters.
Speaker Change: This additional non-interest income, as Annie mentioned,
Speaker Change: will further consolidate and expand the growth trend that we have maintained in the last quarters and will be key to make our results.
Speaker Change: less sensitive to market rate fluctuations, further reinforcing Black's capabilities to deliver robust and sustainable profitability levels.
Speaker Change: As far as guidance for the year, we now anticipate our commercial portfolio to grow close to 14% given the increased demand we're seeing in most markets.
Speaker Change: In terms of deposits, we also expect to exceed our initial forecast of 12 to 14 percent.
Speaker Change: Given our performance thus far, we're now aiming at 30% average deposit growth for the year.
Speaker Change: We've also made significant strides in operational efficiency, and we now expect to end the year with an efficiency ratio of approximately 26%, a notable improvement from our initial estimate of 30%.
Speaker Change: As a result of these positive trends, we're revising our 2024 ROE guidance upward.
Speaker Change: Our new projected range is 15 to 16 percent, up from the initial forecast of 14 to 15 percent.
Speaker Change: This performance demonstrates two things.
Speaker Change: One, the resilience of a uniquely flexible business model.
Speaker Change: that, given the short-term nature of the diversified, high-quality loan book and essentially a matched balance sheet, enables management to profitably navigate to uncertain times.
Speaker Change: And two, the disciplined execution for almost three years now of a well-crafted strategic plan aimed at maximizing the upside potential of this unique bank.
Speaker Change: Once again, as we look forward to the future, we are confident that the full implementation of our strategic plan will unlock even greater potential for growth and value creation, building on the strong foundation we have established thus far.
Speaker Change: I'm going to leave it here and ask the operator to please open the call for questions. Thank you.
Speaker Change: Thank you very much for the presentation. We will now begin the Q&A session for investors and analysts. If you wish to ask a question, please click on the raise hand button. If your question has already been answered, you can leave the queue by clicking on put hand down.
Speaker Change: There's also the possibility to ask your questions through the Q&A icon at the bottom of the screen. You may select the icon and type your question with your name and company.
Speaker Change: Written questions that are not addressed during the earnings call will be returned by the Investor Relations Team.
Speaker Change: Our first question comes from Ricardo Bush Pigel with BTG
Speaker Change: You can open your microphone.
Speaker Change: Hi everyone and thank you for the opportunity of making questions. I have two here on my side.
Speaker Change: So first we saw that part of the acceleration in the commercial portfolio came from higher loans
Speaker Change: a little bit more compressed due to the higher activity in DCM, right?
Speaker Change: So I want you to understand if you are indeed seeing lower spreads in loans specifically in Brazil and if you should expect a spread compression at least in this region.
Speaker Change: And for my second question, I see that we have the U.S. election approaching.
Speaker Change: So I want to hear your thoughts on how do you believe a potential election of Trump could negatively impact trade volumes in Latam and therefore the commercial portfolio and also how was Bladex impacted when he was elected in 2016 if there was any significant impact. Thank you.
Speaker Change: Ricardo, thank you. Thank you very much for your questions. I'm going to start with the second question, the first,
Speaker Change: U.S. elections.
Speaker Change: upcoming in a few days and then I'm gonna I'm gonna pass it on to Samuel or
Speaker Change: Our Brazilian Chief Commercial Officer will better explain the margins and our exposures in Brazil.
Speaker Change: First thing I have to say, as you mentioned, it is clear that the presidential elections in the U.S. are very relevant for the region.
Speaker Change: for the overall region are hard to predict. I mean, you have short-term effects. You have long-term effects. You have direct, indirect. You have, you know, depending on the country and the economic dynamic of the country, you may have, in the trade partners, you may have a different reality.
Speaker Change: Having said that, we see primarily three impacts.
Speaker Change: One is remittances closed.
Speaker Change: especially relevant for Central American countries.
Speaker Change: Also, overall trade flows, particularly relevant for South American countries and Mexico, and of course, inflation and interest rates, which are relevant for everyone.
Speaker Change: We're monitoring the effects of remittances flows, particularly in countries where we have relevant exposures, like Guatemala, for example, where we have
Speaker Change: close to 10% of exposure and remittances there represent close to 15% of GDP or the Dominican Republic, or in Mexico where remittances are 3.5% of GDP.
Speaker Change: On a trade close, we are, you know, vigilant on the ongoing tensions with China.
Speaker Change: Keeping in mind also that in the not-so-long-term, you know, additional disruptions in the global supply chains could
Speaker Change: potentially accelerate the near-sharing trend as companies potentially move to Mexico or some other Central American countries looking for more resilient suppliers closer to the U.S.
Speaker Change: In any case, and having said all that, we feel confident that the short-term nature of the business model will allow us to navigate the potential volatility that will for sure take place and also take advantage.
Speaker Change: of the opportunities that for sure will arise given that.
Speaker Change: I don't know, Sammy, do you want to? Yeah, on Brazil, thanks for the question, Ricardo, and you are right. Brazil, we are seeing more competition, particularly from the international DCM side, and that is obviously putting pressure on spreads.
Speaker Change: Brazil is probably the most competitive market of LATAM, the one that we compete. On the other hand, Brazil is still, I would say, quite underrepresented in our portfolio given its potential.
Speaker Change: Our growth in Brazil has more to do...
Speaker Change: with the fact that we are now, as we've been
Speaker Change: rolling out our
Speaker Change: new strategy we've been we have a better or more suited
Speaker Change: product offering.
Speaker Change: for Brazil or for how sophisticated Brazilian clients are. So we are basically capturing some share.
Speaker Change: on that. And that is driving our growth. So everything to do with the new strategy, particularly on the
Speaker Change: Our growth in Brazil will not be necessarily correlated with the low market conditions as well as GDP because, again, we are, as we roll out our new strategy, we're able to onboard clients that in the past we didn't have the right product to onboard.
Speaker Change: Very, very clear, guys. Thank you very much.
Speaker Change: Our next question comes from Daniel Mora with Credit Corp Capital.
Speaker Change: You can open your microphone.
Daniel Mora: Hi, good morning and thank you for the presentation. I have also a couple of questions. The first one is regarding margins. We have seen a very positive performance not only in recent quarters but in the last couple of years.
Speaker Change: in interest rates coming from the Fed and how come we think this under the analysis that you normally present considering the volume effect and the interest rate effect.
Speaker Change: because we can initially think that we should observe a normalization of margins going forward considering the decreases in rates.
And I would like to understand what will be the effect of this also on profitability given that we currently observe us at 16% ROE.
That will be my first question. And the second one is, given the fact that we are now in the expansion phase with the
Speaker Change: with the deployment of the new two initiatives.
and increase of non-interest income. Do you have a target of...
Speaker Change: What percentage can that not interest income represent of the total income compared to what we are seeing right now? And if given the...
Speaker Change: Thank you so much.
Speaker Change: Thank you, Daniel, for your questions. On interest rate sensitivity, I'm gonna let Annie, our CFO, speak to that, and then I'll tackle the second question.
Yes, thank you. So, yes, you're right, and we have mentioned in several occasions that we are sensitive to U.S. dollar market interest rates.
Speaker Change: And to talk about the sensitivity, or sensitivity to interest rates in an interest margin is
Speaker Change: It was 100 basis points movement in interest rates. It could have like a 12 basis points impact on on our net interest mining
Speaker Change: Margin that all translates into like a hundred basis points are early as well
You know, that that's basically because we have.
a floating book on both sides of the balance sheet. And so the, you know, assets and liabilities reprised.
Speaker Change: very similarly.
Although we do have some short-term positions, and at the end, you know, the overall asset yield that diminishes and that is invested in our equity, it has an impact. And then, you know, what we see going forward is that
Speaker Change: Definitely, the strategy that we are
have in place, and that pretty much relates to your second question that Jorge is going to address, but we do anticipate...
Speaker Change: Deployment of new products, both non-interest and also margin-related.
Jorge Salas: additional non-interest income. Currently our non-interest income represents about 13% of total revenues.
Jorge Salas: and we expect this to gradually climb up to 80% by the end of 2026.
That's our target as of today.
Perfect. Thank you so much. Great to hear.
Our next question comes from Miruna Chiria with Jefferies. You can open your microphone.
Hello, thank you very much for the presentation and for taking my question. I just had a quick one on loan growth, please. I can see that you are growing your loans 5% this quarter on what looks like very good margins as well. So I was wondering, where do you see this growth over the next two years? And how do you think about the longer term growth opportunity and capital management?
Thank you.
Speaker Change: Yeah, well, loan growth for sure has been stronger than we initially expected this year. Brazil, Guatemala, the Dominican Republic have
Speaker Change: surpassed our initial growth estimates. Sam already talked a little bit about Brazil. Guatemala and the Dominican Republic are also
noteworthy. They ranked fourth and fifth today in our largest exposures, about 10%.
The Dominican Republic, in particular, portfolio growth has been fueled, I will say, by increased investments in the energy sector.
which have been supported through a recently created product finance and infrastructure unit, along with the country's overall robust growth dynamics.
Mexico represents slow and steady growth, also very much driven by the new product rollouts as part of the new strategy.
Speaker Change: The way to think about...
Portfolio or country diversification, I mean, it's.
relatively correlated obviously with the size of the economy.
There are some countries that are underrepresented in that sense, like Brazil and Mexico, like SAMHSA.
in some countries are overrepresented, like Guatemala or the Dominican Republic. But it's hard to say now what our exposures would be, you know, even by next year, given the short-term nature of the portfolio. You want to add something, Sam? I think we...
As part of the new strategy, we favor quality versus quantity, so we will continue to have our prized discipline. If we see that the opportunities are there to continue to grow.
Speaker Change: Profitably, we will continue. We've been experiencing that. We're still rolling out the new strategy, which is opening
new markets for us and we believe there is, we always strive also to use our capital efficiently.
and we see there is room to grow as we grow our capital base. That is the focus, but yet maintaining this pricing discipline as we established since the initial phase of the plan.
Please hold while we pull for questions.
Speaker Change: Good morning.
Congratulations on some superb results.
Speaker Change: But it's interesting to note that these results haven't really moved the needle in the marketplace. And I would suggest that a payout ratio of 35% is quite conservative in both your historical and peer comparisons.
and especially your focus on non-interest income growth which does not really require capital allocations. When do you intend to increase your payout of earnings through dividends?
Speaker Change: Good question. Annie, you want to tackle that? I mean, let Annie compliment,
Speaker Change: As you well know, the policy, it's an ongoing discussion.
Speaker Change: total shareholder value, and making sure that the upside on the stock price is there. That's our job, but also the dividend yield is attractive enough.
Speaker Change: I don't know, Anne, if you want to compliment anything else. Sure. And hello, Bill. How are you? Yes, right on, Jorge. It's always a discussion. Sam just mentioned about.
Anne: us always looking at profitable opportunities.
Anne: So, you know, it's a balance between growth and, you know, returning capital. Right now, we are performing very well at 16 percent ROE. And so that being the case, you know, we think that the current dividend level and that's the board's decision is is is.
Speaker Change: It's pretty good. And it's an ongoing discussion at the board level on a quarterly basis. So, you know, I think that's what we can say about that.
Speaker Change: Okay, thank you very much. That's all the questions we have for today. I'll pass the line back to Jorge Salas for the concluding remarks.
Jorge Salas: Thank you, Sofia. Before we conclude, I would just like to extend a warm welcome to two prominent cell site analysts.
who have recently initiated coverage on Glyphs.
Credit Corp and BTG Pactual.
The inclusion of these respected institutions in our coverage universe is a testament, we feel, of the growing interest in our renewed Bladdocks. We look forward to engaging with their teams and appreciate their commitment to providing valuable insights.
to the investment community across Latin America and the world.
With that, we'll leave the call there and thank you very much for joining.
Speaker Change: This does concludes today's conference call. You may disconnect and have a nice day.