Q2 2019 Earnings Call
Hello, everyone and welcome to body second quarter 2014 conference call on the 90 day of July 2019. This call is being recorded and is for investors and analysts only if you remember the media.
You are invited to listen only bought axis prepared a powerpoint presentation to accompany their discussion it is available through the webcast and on the bank's corporate website at Www Dot Biotics Dot com.
Joining us today are Mr., Gabriel <unk>, Chief Executive Officer, and Ms., Anna Christian the Mendez, Chief Financial Officer their comments will be based on the earnings release, which was issued earlier today and available on the corporate web web site.
The following statement is made pursuant to the safe.
Harbor for forward looking statements described in the private Securities Litigation Reform Act of 1995 in these communications, we may make certain statements that are forward looking such as statements regarding bodies future results plans and anticipated trends any markets affecting his results and financial condition. These forward looking statements are bloody expectations on the day of the initial broadcast of this conference call, but it does not undertake to update these expectations based on the subsequent events or knowledge various risks uncertainties assumptions are detailed in the banks press release and filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions.
Prove incorrect actual results may differ significantly from results expressed or implied in these communications and with that I am pleased to turn the call over to Mr. till chatzky for his presentation.
Thanks, Travis good morning, everyone. Thank you for joining us today.
Before I'm not going to see OLED delves into beyond that so far earnings results for the second quarter I would like to discuss with you the economic and business environment in Latin America important developments that took place during the quarter and the impact of these recent developments on our perception of risk and financial results.
During the last three quarters conference calls, we mentioned that the credit quality of our portfolio cost structure and allowances for expected credit losses, that's the base to improve our earnings generation capacity.
Our second quarter 2019 results are another step in that direction.
Well, the economic and business environment front once again, our diminished expectations for Latin America's economic growth continued to be challenged by the global macroeconomic environment as well as by Brazil, and Mexico. The two largest economies in Latin America with growth expectations for the region now hovering around 1%.
Starting with the global macroeconomic context, the U.S. dollar is strong protectionist rhetoric on trade and tariff from the U.S., It's a weekly O'connor and ambition slowed down the economic activity in China, Europe , and the U.S. became a reality in the second quarter of 2019.
After switching to a neutral mode on the direction of interest rates in the first quarter. The federal Reserve's started setting the stage in the second quarter for lowering rate in the second half of the year.
While short term rates remained relatively stable despite the prospect of lower rate lowered the yield on the 10 year us treasury to around 2%, thereby inverting the U.S. dollar yogurt.
And in an inverted yield curve, it's usually a harbinger of the news the nomics slowed down which usually weekends the U.S. dollar.
Nevertheless, further economic deceleration in Europe , and China continued to make the U.S. dollar attractive reducing fund flows into emerging markets in general in Latin America in particular.
With lower fund flows to Latin America sagging investment in key countries has become a drag on the region's economic Roe.
Today, our growth estimates for the Brazilian economy. For example are below 1%. These estimates are down from expectations of 2% in the first quarter and from about two and a half years then at the end of 2018.
Mexico is now expected to grow at 1.2% down from estimates of 116 in the first quarter and close to 2% at the end of 2018.
Argentina, the third largest economy in Latin America is still in the midst of third session. That's exacerbated exacerbated by restrictive fiscal guidelines under the IMF agreement and the impact of low growth from its neighbor Brazil.
Overall, our adjustments to economic growth are driven by lower investment.
The prospect of diminishing trade volumes, the weight of lower growth rates from developed market, but also importantly by the uncertainty over the capacity of the current leadership in these countries who either survive politically.
As in the case of margin Tina.
Follow through with the free market agenda, that's in the case of Mexico or not the necessary fiscal reforms in sufficient magnitude for reverse structural deficit. That's in the case of Brazil.
The prospect of passage of the pension reform plan in Brazil have improved.
After it was approved by the first reading in the lower house.
There was a second vote.
In the lower house of Congress before it moves to the Senate was there there was also two votes.
In that house of Congress.
Nevertheless, the President's waning popularity may dilute that bill and therefore, the magnitude of fiscal savings.
On the economic front as we mentioned in the previous call. We see the engines of growth for the Brazilian economy tied to internal demand and investment not do export industries, primarily because prices for some key export soft commodities, such as sugar and soybeans are still depressed.
Passage of fiscal reform is key to restoring confidence in growth for us he picked up in both internal demand and in investment.
In Argentina, we are adjusting our exposure down as we get closer to the August primaries and the October election.
Although both candidates appear to be espousing free market positions the uncertainty of a popular backlash against physical the restricted policies from B. I'm broke ground and high levels of debt could sway the new administration for restructure existing obligations always a messy outcome.
We continue to believe that the macroeconomic and regional content.
Well first no room for complacency. Furthermore, the combination of low growth and risk aversion is exacerbating liquidity for the top names in the region compressing the margins not always compensated compensating for the rich east credits represent.
Against this backdrop, we continually analyze the risk reward function at the country level to adjust our portfolio accordingly.
As we mentioned in previous calls with 79% of our commercial portfolio less than one year off remaining life like says in a privileged position to dynamically adjust portfolio exposures.
We continue to see opportunities to grow our exposure in some countries the Central America and the Caribbean as well that's in Colombia, there too, but I've why emptiness.
Our book of business is solid.
We are identifying new prospects, we're increasing share of wallet with our existing client base and our structuring value added transactions with key clients.
Although our full focus on high quality borrowers and persistent U.S. dollar liquidity in the market with pressure on our origination margins bugs Gordon TGR to originate at stable lending spreads and with a better asset mix improving the lending spread over the all of the overall portfolio.
Our pipeline of syndicated and structured transactions tied to Latin American integration is also solid and should help us get closer to the 40% exposure. We look for in our model portfolio for medium term loans as well as increasing our fee income.
The positive, particularly from our class a shareholders now represents 55% of our funding structure. We appreciate the trust and commitment to the region Central Bank and the impact of these default that these deposits have on improving our cost of funds.
On the cost side expenses for the quarter continued to be under control.
Worried doritos statement for them from the last two calls that net of restructuring and other non recurring charges and seasonality.
Our recurrent expenses continued to decline.
As you'll hear from I know that I fear them, our credit impaired loans are unchanged from last quarter, our credit reserve coverage and tier one capital ratio continued to be very strong and our book value remains solid above $25 a share.
That is why our board of directors approved to maintain a 38 and a half cent a share dividend.
Against this backdrop the management apply there as well as its board of directors is cautiously optimistic for the second half of 2019 and look for a continuation of the profitability path, we embarked on on the last two quarters.
With these initial and brief comments I will now turn the call over to our CFO and I see enough to provide you with more color about our financial performance in Q2 2019.
Thank you that Maria good morning to everyone and thank you for your participation in our call.
I will now review the results for the second quarter and first half of 2019, making reference to the presentation that we have uploaded on our website.
So on page four you can see the continuous improvement in our profitability.
Hold on a quarterly and on a year to date basis.
This performance was achieved with the contribution of virtually all line items.
With revenue growth supported by a positive quarterly trend in net interest margin fees and commercial portfolio balances.
Nowhere year on year expense level.
Stable NPL and high quality portfolio of the nation, which in turn resulted in low credit provisioning.
And finally, the absence of losses on non financial assets accounted for in the second quarter of 2018.
The bank's second quarter, Tony 19 profit of $22.3 million or 56 cents a share.
Represented 834% increase with respect to the year before and were up 5% on a quarter on quarter basis.
For the first half of 2019 profit amounted to $43.5 million, a 40% increase compared to last year.
With these results we were able to achieve a 9% return and advocates we keep a 1.4% return on average assets and an efficiency ratio of 31%, while maintaining a solid level of capitalization at 20% tier one less than three range.
Now I wouldn't be fair to the evolution of net interest income and the impact of financial margins and known trends on page five.
Net interest income for the second quarter of 2019 remained relatively stable at close to $28 million.
With respect to both the first quarter of 2019, and the second quarter of 2018.
The banks loan portfolio. The main driver of net interest income remained relatively stable for the quarter with an average balance up 1% year on year and down 2% quarter on quarter to $5.4 billion.
No originations remained solid at $3 billion during the quarter upsetting maturities by over $90 million.
Translating into a quarter on quarter end of period loan balances increased 2% to $5.6 billion is similar level from a year ago.
Net interest margin of one point, 81% for the second quarter of 2019 represented 87 basis point increase with respect to the previous quarter and was stable year on year.
My kids were positively impacted during the quarter by lower average funding costs.
And the continued decrease of average liquidity to historical levels and improving the mix and yield of financial assets, while lending spreads and average loans remained relatively stable.
For the first six months of 2019, the bank's net interest income increased by 3% year on year.
To $56 million.
And then any interest margin increased by two basis points to one point, 77%.
Reflecting the bank effective management of its interest rate gap position in a period of increasing market rate.
As the bags LIBOR based loans rate reprice at a higher level than the libel base rate of funding.
More than offsetting a decrease in lending staff on the account of higher quality loan origination and which has been stabilized in recent quarters.
Now moving on to page six.
Fees and commissions increased to $5.1 million for the second quarter of 2019.
Representing eight quarter on quarter increase of 118%.
On the account of two syndicated transactions closed during the quarter compared to none in the previous quarter, reflecting the uneven nature of these transactional business.
Fees for the quarter stood at a similar level year on year.
The bank continues to be an active and relevant player in the structuring and syndications Latin American market.
Supporting clients with their growth plans and cross border operation.
For the first six months of 2019 fees totaled $7.5 million.
An 8% decline over the previous year due to lower later 10 feet, partly offset by a better performance and field level from the syndication fees.
Some pages seven to nine we present, the evolution and composition of our commercial portfolio.
At June 30, 2019 commercial portfolio totaled $6.2 billion.
Representing a 3% increase quarter on quarter as well as year on year.
Total commercial portfolio continued to be mostly short term with 79% maturing in the next 12 months and an average remaining tenor of close to 10 months.
56% of the banks short term commercial portfolio is specifically trade related.
The bank's high quality origination is evident by the overall exposure to financially solutions severance and quite say something.
Which represented 70% of total commercial portfolio as of June 32019.
Financial institutions alone represent the largest industry exposure with 56% of the total at quarter end.
Oh, they are relevant industry exposures are to integrate it and downstream oil and gas sectors.
With 7% and 4% respectively of total exposure as of June 32019.
These sectors exposure to repeat then the bank's historical participation in credit related to strategic oil and refined product exports and imports to sovereign and quad play suffering entities across the region.
Through the issuance and confirmation of letters of credit as well as financing.
The remaining overall exposure is well diversified among several industry sectors with no wonder industry exceeding 5% of total exposure.
At June 30, 2019 receives exposure decreased to 16% of total portfolio from 18% in the previous quarter on the account of the banks view of risk not being compensated by the adequate returns in this market.
Under continued airport to a more diversified country exposure.
Nonetheless, Brazil remains the largest country exposure the average remaining tenor of the country's portfolio is lowered a nine month.
With 84% maturing in the next 12 months.
Oh exposure in Mexico remains relatively stable accounting for 14% of the total portfolio compared to 15% in the previous quarter.
And it remains focused on strategic state enterprises, and private sector exporting Corporation.
Boy its participation in the North American trade flows.
We continue to closely monitor the country's evolution in terms of the new government policy GDP growth and investment themes that Pemex proposed restructuring program as well as the pending approval of the U.S.M.C. eight by U.S. Congress among other issues.
Given the uncertainty we continue to favor and shorten origination approach in the country.
72% of Mexico's portfolio matures in the next 12 months and the average tenor is approximately 11 months.
Argentina's exposure is down to 6% of the total portfolio compared to 9% in the preceding quarters.
Executing on our plan to reduce the country's exposure in view of the uncertain outcome.
Of the coming presidential elections, which are critical to the country's overall risk profile and they need it ongoing availability of external financing.
We maintain and short term approach with strategic state entities and top tier international banks and exporting Corporation.
64% of the portfolio in Argentina. It matures in the next 12 months and the average tenor of the portfolio is approximately 13 and a half one.
We have successfully increased our portfolio in Chile, where we continue to see good risk reward opportunity.
At June 32019, chilis exposure accounted for 8% of total portfolio compared to 4% in the previous quarter.
And we also maintain a 30% exposure in the central American and Caribbean region, the banks natural market for it geographic proximity of which 72% is with back suffering and costs like something.
76% of this portfolio in this region maturing in the next 12 months and the average tenor of the portfolio is approximately 10 months.
On page 10, now we present, the evolution of credit impaired loans or npls and allowances of credit losses.
NPL balances remained unchanged during the quarter at $65 million.
Representing one point, 16% of total loans.
With a reserve coverage of 1.6 times.
I have first nine stage three individual allowances allocated to these NPL portfolio increased to $57 million during the quarter, representing 8% an 88% of NPL balances.
In view of this credit restructuring evolution.
I have first nine states to allocate it research.
Decreased during the quarter on the account of reduced credit exposure in this category related to collections in our watch list exposure as well as reductions in exposures to countries impacted by internal country rating such as Argentina.
All of the exposure in this category remained current.
Our first nine stage, one exposure and its associated credit allowances increased on the account of higher portfolio origination relative to maturity.
Reflecting an improved composition of our commercial before you.
This stage, one exposure, which relates to the performing portfolio with credit conditions on changed things origination continued to be the most relevant with 94% of total exposure at quarter end.
On page 11.
The bank continued to improve its efficiency with a sustained focus on expense control and process improvement.
As evidenced by the declining trend in year to date expenses and biting improvement on the banks efficiency ratio for the second quarter and first half of 2019% to 31%.
Second quarter 2019 expenses amounted to six point.
I'm, sorry $10.6 million.
Representing a 7% decrease year on year, and a 7% increase quarter on quarter.
While operating expenses for the first half of the year were down 20% from the year before totaling $20.4 million.
The year on your expense reduction, mostly relates to lower variable compensation and other employee and expenses related to the personnel restructuring process that the bank under went in the first month of 2018 as well as to the resulting lower salary expense base.
The quarter on quarter increase is mainly attributable to higher business related expenses, when compared to a seasonally low first quarter.
On page 12, we presented positive IRO, we evolution, which reached 9% in this past quarter was the bank when thing so the capitalization of over 20%.
Like I mentioned the board of directors cap the dividend payment on changed at 13, and a half cents per share.
Which represents a 68% payout over quarterly earnings.
I will now we'll turn the call back to Gabriele to open the queue any patient. Thank you.
Thank you I notice you alone.
Travis you can now open the call to the Q a nice session.
If you would like to ask a question. Please press the star key followed by the Waikiki.
On your Touchtone phone now questions will be taken in order in which they were received anytime you want to remove yourself from of course. Thank you. Please press star two again to ask a question. Please press star one now.
[noise].
We have no questions in the queue at this time.
Thank you everybody.
Oh I believe that there is a question coming in yes, we did have someone queue up we have a question from Robert paid.
Global rational.
Capital.
Hi, Brian .
Hi, Gabrielle and Sandy.
And.
Really well this quarter again.
Just wanted to congratulate you on the good results.
Thank you. Thank you Robert Yes.
Very much appreciate it.
Hi, Steve how are you.
So Adam mentioned you've done this year despite the headwinds.
The track to achieve.
Yes, 10% were double digit return on equity.
And I was just wondering so and you move on.
Good stuff dangerous, how how are you able to do so well.
Despite the difficult environment and why why are they not and more.
Good performing loan.
Given that.
And you mentioned in the first part of your call.
Okay.
Thank you for your question Robert I.
Some of it.
Your comments were cut off because of the bad communication, but I think.
I got the Gist of the question and let me start answering by saying that.
In a in this environment, we need to of course have very.
Sturdy and strict credit underwriting standards.
And.
And we do so and also a good attention to overall portfolio locations.
We were reducing exposure in countries like Argentina because of the potential for.
Volatility, particularly from the political side.
But were able to increase exposure.
In Central America, and the Caribbean, where our margins are very good and we have very good presence in those countries. So from a big picture portfolio allocation, we're able to navigate.
Latin America based on where the appropriate risk reward is.
And from a more micro level, we have been doing very good transactions.
And I feel I mentioned that we've done.
Two.
Significant syndicated transactions at good margin levels.
That is additive to our portfolio overall, we are able to still find are good spots within what we consider an overall challenging environment.
Challenging doesn't always mean that it will translate to.
NPL. It just means that we need to be careful on how we underwrite.
The bulk of our portfolio is short term in nature.
As we mentioned before around 79% of our exposure matures within a year that means that we have the capacity to move around and stay away from.
Difficult situation very much a product of the de risking that we took on starting in 2017, all the way to 2018 and are able to really have constructed a portfolio that we feel very comfortable with and and able to adjust exposure accordingly based on changing Matt my macro and micro wins.
Right Yep.
Thank you again.
And that's just a question for you both the.
Page two exposure.
In terms of.
Okay.
That's quite a an important.
Category, I think and perhaps one that.
Hi, there.
I was just wondering if you could just describe the general composition.
Are they doing.
Okay, Yes.
Hey, Steve.
Country.
Yes, Hey, Robert Thank you, yes stage two exposure does is that it could take Laurie.
Andre increased nine as I mentioned and basically.
The accounting standard let it asks is that in any case, where we see.
That.
Exposures.
All the conditions of the exposures changed with respect to a one day were originated.
It implies that we have to move from.
Allocating.
Credit reserve.
On a one year basis, rather than on lifetime. So when we put a exposures from stage one to stage two it means that some conditions have deteriorated to this portfolio.
Seems they these loans were originated.
Now what does this translate to is that whenever we risk area determines that there have been certain deterioration in a country or an industry.
That means that or we give an internal downgrades.
To the country risks.
All the exposure that are.
Closely associated to this country exposure is analyzed and then it's fluid on this stage still category until it matures because it was originated in different breast conditions.
But it it.
I emphasize that this exposure is performing and in our perspective. It continues to be very good clients and it continues to follow very strict.
Great procedures in terms of the underwriting that Hey, Gabriele mentioned, so it's just an accounting rule that we have to follow a we do have a small portion of this portfolio, which we have in our watch list like I mentioned, we continue to get paid on that.
And it's a very small portion of that I think it.
At the end of the quarter totaled.
This is $30 million.
So in general terms.
It's nothing that we.
Particularly worry about in terms of its just an accounting standard that we have to follow I Dunno drive view.
I'd say that summarizes it very well thank you.
Yeah.
And entered into the.
Industrial countries.
At all in that category.
I presume it would be countries like maybe Argentina and.
Industries, perhaps.
Sugar.
Maybe oil and gas.
That's correct.
What a industries and countries within that category of of.
Asia.
A significant amount of the exposure there is Argentina Costa Rica, both countries that were downgraded in the last.
Few months and.
That is the the bulk of the increase.
But the underlying credit.
Ours, not only performing those are good credits with absolutely no delays and and we don't have any concerns as to the capacity of these borrowers to repay their debts.
Okay, Okay great.
Uh huh.
Just on the.
The.
The provision for the for the National networks.
Hey, Chris.
Three of last year I think the.
Excellent. Thanks.
It's three exposure and from overnight.
No impact.
But particular line went from 75% in quarter four of last year.
To aid in quarter one.
Yeah, I think it's about 85% now just looking at your number.
Okay perfect.
Oh, well, yeah, we'll kind of loosing you Robert.
Im sorry, Robert we we've lost you.
Okay.
Okay, and then they the impairment of the sugar loan I think it's at 85%.
Provision.
Is that a is that about right at the moment that that's about right. Yeah. That's correct.
Okay. Okay.
And then I think.
Yes.
No Robert I'm, So sorry, we were going to have to maybe pick this up.
Outside the call because we are unable to hear on probably the rest of the participants in the conference call are unable to hear you. So we're happy to entertain your questions directly Travis if you want to.
Open up for more questions or wrap the call.
Please take over thank you.
Thank you Sir.
Just a reminder, if you would like to ask a question. Please press star one now again that is star one to ask a question.
[noise].
Okay. If there's no questions in the queue at this time I'll turn the call back over to you Sir.
Thank you. Thank you everybody and we look forward to talking to you.
In.
After we report numbers for the third quarter and have everyone. A very good day bye bye. Thank you.
Thank you, ladies and gentlemen conclude todays teleconference. You may now disconnect.