Banco Latinoamericano de Comercio Exterior, S. A. (BLX) Q1 2012 Earnings Report, Transcript and Summary

Excuse me, everyone, and welcome to the Bladex Conference Call. As a reminder, this call is being recorded. It is now my pleasure to hand the call over to Melanie Carpenter. Ms. Carpenter, please begin.

Thank you, Lindsey. Hello, everyone. Thank you for joining the Bladex First Quarter 2012 Conference Call on this, the 19th of April 2012. This call is for investors and analysts only. If you're a member of the media, you're invited to listen only. Joining us today from Panama are Mr. Jaime Rivera, Chief Executive Officer; and Mr. Christopher Schech, Chief Financial Officer, along with other members of the senior management team. Their comments will be based on the earnings release issued yesterday. A copy of the long version which is available at www.bladex.com. Any comments that management makes today may include forward-looking statements. These are defined by the Private Securities Litigation Reform Act of 1995. They're based on information and data that is currently available. However, the actual performance may differ due to various factors, and these are cited in the Safe Harbor statement in the press release. With that, I am very pleased to turn it over to Mr. Jaime Rivera for his opening remarks. Please go ahead, Jaime.

Thank you, Melanie and good morning, ladies and gentlemen. And again, thank you very much for allocating some of your valuable time to our conference and spending time with us. As usual, I will try to address my comments from the big picture's perspective. I'll let you know what my opinion regarding the performance of the company from a purely strategic point of view and then ask Mr. Christopher Schech to do his usual great job in running through the details of the quarter and providing you with the information regarding a line-by-line analysis of the way our financials performed during the period. Following that, we'll go onto my favorite part of the call, which is listening to your questions and answering them. So let me start by some general comments which I will, I guess, start from shortly after the big bang and tell you certainly something about -- certainly, something about the environment that we faced during the quarter and as we moved forward. I'm sure much of these is nothing new to you but I think it's still worthwhile to summarize what was going on and what is going on in the market and what we're being faced with. The word that applies the most to the environment we're facing is volatility and uncertainty. There's uncertainty coming out, as you know, of what is happening in the European Union. There's uncertainty on account on CBS and interest levels. There's some uncertainty on account of what might or might not happen to China's economic growth and the impact it might have on trade flows and commodity prices. There's also uncertainty, and we have identified this last year, as to the way the Chinese Communist Party internal elections are going to turn out. Something that is going to be…

Thank you, Jaime. Hello and good morning, everyone. Thank you for joining us on the call today. In discussing our first quarter results, I will focus on the main aspects that have impacted our results and I will put them in context with the previous quarter, and also the same quarter of the year ago. The first quarter of 2012 closed with net income of $32.2 million, a substantial increase of $7.4 million or 30% compared to the $24.8 million that we achieved in the previous quarter and very nearly doubled the net income reported for the first quarter of 2011. Let's get into more detail regarding the performance and results of each business segment before discussing other aspects of the bank's financial performance. And we begin with the Commercial division where net income was $25.7 million in the first quarter, compared to $17.7 million in the fourth quarter of 2011, and compared to $10.4 million the first quarter of 2011. The quarter-on-quarter variance in the net result was primarily impacted by net interest income growth as a result of higher loan rates which compensated for somewhat lower average loan balances during the quarter that followed the traditionally lower levels of activity during the summer period in South America as Jaime already explain. Commission income came in slightly lower compared to the previous quarter, again as explained by Jaime, due to limited activity in the Letters of Credit business. The provision for credit losses line showed a decrease this quarter, as a function of several drivers that resulted in a shift of the composition of the Commercial portfolio towards transactions with lower inherent risk. For example, this quarter, trade related balances amounted to 61% of Commercial Portfolio balances comparing to the 59% at the end of the previous quarter. And…

Thanks, Christopher. Ladies and gentlemen, we'd be delighted to take your questions. Please, go ahead.

[Operator Instructions] Our first question comes from Jeremy Hellman with Divine Capital Markets.

Two questions for me, if I might. First, I just wanted to get -- have you elaborate a bit on where you think things are headed in Argentina, as you might suspect. And then secondly, going back to last quarter's call, there was a sense that you were going to have, I guess, "a final solution," if you want to call it that with respect to the Asset Management business. Whether that meant changing the strategy or sale or something like that. So I'm just kind of curious where you're head is on that now as well.

I thought you weren't going to ask. Argentina first. Let me address what I imagine is probably the most important thing that you want to hear. We are quite comfortable with our exposure in Argentina. That having been said, some background on it, we started following with special care what was going on in Argentina, actually starting August of last year, which we are -- because of several reasons, we thought the reason that rate levels were increasing and we've been following up very closely on it. Our exposure? The good news is that our exposure is all trade-related. It's either short-term and/or extremely well structured with payments received offshore. We have reviewed all of the accounts involved. We did so again during the Board of Directors' meeting that took place a couple of days ago. The situation in Argentina is fluid and is risky but our portfolio is doing just fine. The second part of the question is probably one which concerns us more fundamentally. Argentina is one of the most important, largest economies in the country. It behooves and it would be important for the region as a whole, that a normalization of relationships between the Argentinian government and the Spanish and foreign investors in general take place as soon as possible. There's a heavy, as you know, heavy, heavy element of politics involved in all of this and it's difficult to project or predict what politicians will do in Argentina, in Spain or anywhere else in the world. That all being said, we do have a special insight into the country. We've been there for a long time. We have an office there. We have long time clients there. We have a director from Banco National Argentina, who sits in our board. Our well founded hope is that the noise will abate and a mutually satisfactory solution will be found because it's to everyone, everyone's advantage that, that takes place. That having been said, we are ready to continue living with volatility and noise for a couple months at least, but our portfolio is fine.

Just a follow-up on the Argentinian aspect. Is there -- are you seeing any opportunities within the trend to maybe -- Christopher noted being that purchasers of securities. Are you seeing any real good pricing distortions that you feel like you're able to take advantage of in the Treasury division on?

No, not in Argentina. What -- the paper that we generally vie for, available-for-sale purposes, we buy when there's a general market disruption, the liquidity dry-stop and even the price of the best papers in the regions drop, and that's what we do. We buy the best papers in the region and then wait for the situation to normalize and sell them. In the case of Argentina, we consider those high-priced papers and therefore, that is not something that is within the realm of what Treasury does now.

Okay. And then on the Asset Management business, where -- what was the strategic thinking on that right now?

We have moved ahead, I made a mistake, and I freely admit it last time. I thought there was going to be a solution coming up within a quarter. The bad news is that I made a mistake regarding the timing, but I can confirm to you that, one, our strategy has not changed and we are moving forward with the objective of, one, reaching a solution where we can, A: reduce the volatility that the Asset Management division has been imposing on the bank and that will probably come in the form of a lower exposure to the business; secondly, we are trying have our cake and eat it too, in that we're trying to preserve the upside of the business in terms of management fees in particular. There are conversations going on with at least 2 parties that we believe -- we know are seriously interested -- had been considered and have proposed structures to us that we are working on at very high levels, spending a long time in trying to come up with an agreement. The conversations are moving forward. It will take us some time to negotiate the details. And it probably will take us even more time to -- once we get the lawyers involved to discuss -- to document the deal if we reach that stage. But we are moving forward. And again, the decision on the part of the bank remains the same. We -- our aim is to, one, reduce the volatility that, that business impacts on the company. But secondly, if we can keep the upside potential of the business at the same time, let's do it. And it looks as if we just might be able to get away with it. I hope to have more news on the subject during the next quarterly call in July.

Our next question comes from Chris Delgado with JP Morgan.

Just 2 quick questions. First, given the strong quarter you guys just had and you're just -- and your comments on the dividend, I just kind of want to get an expectation if it's changed pretty much for the ROE for this year. And kind of going forward, I think you mentioned previously that you guys kind of saw a core ROE of around 12% for 2012. My second question is, you guys have been pretty much been carrying some excess liquidity and maintaining that larger funding pool now for a few quarters and I guess you guys really haven't seen any funding pressure recently, which is always good. But I just kind of want to get an idea of what you guys are looking for before you kind of change the structure of that and kind of look to shift it into higher-yielding assets?

I think that we've already made a decision and Christopher alluded that to start lowering our liquidity balances because not only has the strain in the international markets eased but also as a result of the medium-term funding that we obtained in March, that had a tremendously beneficial effect in the strengthening that is the source of our liquidity. So yes, as the -- in fact, starting this quarter, you would probably see -- in fact, you will definitely see the liquidity balance will start coming down to more normalized levels. On the question of the ROE, again from the point of view of the core business, we expect growth in the volumes to remain in the order of 2x to 3x underlying growth in the region, margins to remain relatively stable, fees to increase and expenses to remain steady. That will give you an update on improvement of ROE levels last year and will probably reach or exceed the 12% that we had mentioned. There are some upsides to that. However, there are some upsides to that in terms of potentially increased margins in -- particularly the corporate sector as we extend longer-term credit. There's also upsides to that in terms of fees to the extent that a higher percentage of the leads that we now have in the syndications pipeline work out and there's also some downside ridge, particularly in terms of global growth. If global growth is also down, then we might not be find it -- we might not find it prudent to grow at the way that we had estimated. But so far, we seem to be on track or slightly ahead of where we thought we were going to be last time we spoke, particularly because this quarter was stronger than we expected.

Our next question comes from Nate Weisshaar with The Motley Fool.

I just was looking for a little bit of clarification on the makeup of your loan portfolio. Loan up 2% from last quarter but your risk-weighted assets were up over 5%. I'm just trying to see -- get some color on what's going on there.

Christopher, will you take it?

The increase in total assets is -- as you look at the composition of the portfolio, while loan growth and loan book has grown only 2%, as you mentioned, our liquidity levels were substantially higher than in previous periods and, of course, the risk weighting of those types of assets is much more lenient compared to the loan book. And so from a risk-weighting perspective, we actually had a lower capital with these overall assets. And then we might had it if our loan book were larger and the liquidity and the bond portfolio were lower. I don't know if that answers your question.

Yes. It goes a good way to answering my question. Also, you mentioned looking to increase the tenure of some of your corporate lending. What type -- how far out are you talking about?

Our -- firstly, our -- the average tenure of our portfolio remains somewhere in the order of 1 year. The tenure that we generally extend because most of these tend to be trade-related transactions, depends on 2 things. Firstly, the country that we're talking about. You can imagine how -- we feel more comfortable with extending tenures in a country like Chile than in a higher risk country, but we generally -- trade-related terms transactions generally go -- will begin at 2 years and go as far as 5. That's the average of the tenures that we generally talking about and they're generally were structured. And we extend them to companies that are involved in trade finance of -- before we had a percentage of our portfolio in term financing and have done so successfully.

Our next question comes from Bill Jones with Singular Research.

Most of my questions had been answered. I just wanted to clarify the bond issuance under the EMTN is not reflected on the $331 million balance sheet but secured issuance is, correct?

That is correct. Yes.

Okay. And then sorry if I missed this, but in terms of the leverage ratio, it dipped a little bit sequentially. Where do you see that directionally by year end, sir?

We want to become more leveraged. I think -- I hope, there are 2 things that are going to drive the leverage higher. Firstly, our loans are going to grow. And secondly, as I said, to the extent that we improve profitability, we'll probably increase the dividend. So in relative terms, our capital will not grow as fast as the loan balance and therefore, our leverage will increase.

[Operator Instructions] Our next question comes from James Ellman with Ascend.

I've 2 sets of questions. First one would be on the gain or loss on foreign exchange line on the income statement. Note that the dollar amount there has been growing significantly. Can you comment on why it was large gain in the fourth quarter of '11? And why it was a large loss in the first quarter of 2012? And is this line item likely to become more volatile over time?

Yes, I'd like to take that question, if you allow me, James. I mentioned in my notes that we -- the bank pursues the policy of not exposing itself to any FX expenses. And so even you -- if you may see an increase in gains or losses in the FX line, you will see a counteracting amount in other P&L lines that convey the impact that our hedges actually have in obtaining the coverage that we seek. And so yes, these amounts have increased but those are really attributable to distinct transactions in the wake of -- or in the months leading up to the issuance in Mexico. We secured short-term financing in the meantime, that was in Mexican pesos and we covered that with the appropriate hedges which were not accounted for on -- as hedge accountings for the U.S. GAAP criteria, but still achieved the economic benefits that we hope from having deep hedges in place. Those you should not expect to see going forward as our funding has now -- the funds from the issuance have come in. We have redeemed or released these -- the interim financing. In the meantime, so while I wouldn't rule out the possibility of some transactions being reflected in these accounts going forward, we don't really expect these to be very relevant nor hugely impactful.

Very good. Second question would be regarding the European bank competitors. First of all, could you give us the outlook for their share trade finance in Latin America? Do you expect it to recover or do you expect it to continue to come down? Secondly, the European banks because of their capital difficulties -- I'm talking about moving to a more capital-light, originate in sale model for trade finance and receivables, do you think that would work? And how would that affect your business either positively or negatively?

Our experience, James, is that inevitably what is going on in Europe particularly in regard to the European banks need for capital has in fact, in general, resulted in them being able to extend less credit in Latin America, including trade. It doesn't apply to every bank in the same manner. There are some that are still doing their tax in conducting the business and they're still represent competitors of ours. Regarding as to where they would be able to engage in a lighter capital rouche structures and become competitors of ours, yes, that is possible. However, in most cases, it is the case that clients expect you to provide financing in several forms. So unless you provide a low-capital-use structure at extremely low rates, in which case you will lose volume in the transaction, it's unlikely that they will -- you will become their house bank unless you also provide them with the more capital-intensive instruments, which we do. So yes, it's -- we'll probably see them in the market. We haven't seen them at all. It took us 2 years to establish a strong position in the market starting from a very strong position with our clients. So I expect that these Europeans will pursue that strategy. Firstly, it will take them a long time. And secondly, they will have to literally win market share from us which is, of course, much more difficult than for us, it will be to defend our market share. I don't think that's -- it is a factor but not something that concerns us at the moment.

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

I thought James' question was particularly astute and I want to follow up on that. I think he was asking a different question, is that the European banks are having higher -- with the new Basel III trade finance requires a 100% risk weighting and a lot of the European banks aren't doing very well. So I guess the question I think he was asking was what share did the European banks have in Latin American in trade finance and do -- as Peter said, is gaining share from this?

We don't know what share the Europeans have of Latin American trade finance. Those statistics have never been available in our day-to-day activity as we conduct business on a day-to-day basis. We have just -- we've seen many of the names that we used to compete with. In some cases here, and in some cases become much less aggressive than they were in the past. There are still a couple of European banks competing in the region and doing well but they're a much less a factor than they were in the past.

Do you have any sense of magnitude, if you had to guess, are they major competitors now or are they minor competitors now?

I would call them, with the exception of a couple of names, minor competitors.

Okay. So if they disappear completely, would they benefit for you?

I'm sorry, what was your...

So if they disappeared completely, would it be a major benefit to you?

Absolutely, yes. And we've already realized much of that benefit in the last year but they have slowly been winding down their credit in Latin America.

So you think you've already achieved that benefit, in other words?

Yes, we've already achieved that benefit already. That's probably less to be gained because most of that has already been realized.

Got it. And my other question is what type of a dividend payout rate do you target?

If you allow me, I'd like to take this question. In the past, we have -- every quarter we present our dividend proposal to the board. And as we do that, we provide a benchmark information as to what payout ratio we would be looking at. And so in the past, we've always used the benchmark of around 50% payout over the core income, which as you know, excludes the income that we derive from the Asset Management business. So that is a benchmark, not a commitment necessarily because as you -- this quarter, we are fairly below that, that payout ratio of 50%. But I think there's always the intent to look at this payout benchmark from not a quarter-to-quarter basis but on an over an entire year basis and you saw us taking adjustments with the dividend just as frequently as in the fourth quarter of 2011 and that took into consideration the entire performance of the entire year not just 1 quarter. And I think the board if -- I don't want to speak for them, of course, but I believe the board is on board with that type of perspective.

And what would you say your core number was this quarter, by your definition about $0.60?

I don't have it quantified in per share amount but I calculated the payout of the $0.25 to be somewhat in the neighborhood of 35% of our core income. That is the analysis I do recall at this moment. So that would put it in the neighborhood of 60% as you...

So this shows $0.70 then would be the number of core income by your -- by that logic but $0.35 would be a 50% payout today?

I think that's more like and more or less like that, yes. I don't have the numbers right in front of me. But I think that's in the neighborhood of what we're looking at, yes.

Got it. So if else was equal, and you maintained this level of core income for, let's say, the next 3 years, you would see most likely that trend up to a $0.35 dividend?

That is correct. The only thing that would determine -- and the determining factor is if you've been with us for a while, the board quite rightly waits until we are absolutely sure that the quarter-to-quarter results are sustainable before moving the dividend up. But yes, that -- what you're saying is absolutely right and that is the reason why I believe why I made my comments in the opening statement. If -- as we continue improving profitability -- core profitability, the dividend, according to what the board has committed to, should increase and that should benefit both the yield on the stock and the ROE indirectly by accumulating the [indiscernible]. And again, I think that if you want a further and clearer explanation of that, it's well laid out in the Message to the Shareholder of our Annual Report. We dedicate a whole paragraph to the dividend issue.

Our next question comes from Gary Lenhoff with Great Lakes Advisors.

I believe you just addressed my question but just to elaborate, the loss on foreign exchange of $8 million in the quarter, are the related gains, if you will, in the transactions related to the losses, are they falling primarily in the securities and fund trading -- I'm sorry, the trading gains lines in the income statement?

Absolutely, yes.

Just to make it absolutely clear. We have a policy in the bank. We run no foreign exchange positions. And now, of course, we do fund ourselves in local currency. We fund ourselves -- we've funded ourselves in local currency in Mexico recently. In every case, we either lend them in local currencies which gave them the position in shopping or we hedge and them and move them to dollars. The accounting is such that some of the gains or losses of the underlying instruments appear in one line and the offsetting gains or losses appear in other. But they should tend to offset each other almost exactly.

[Operator Instructions] Our next question comes Adolfo Fuente [ph] with MetLife.

I have a specific question on Argentina. I know you already talked about in general about the portfolio and how it's behaving there but can you comment a little bit more specific on YPF? Do you have direct exposure to the company? Is it secured, unsecured? What about the potential acceleration of the syndicated loan of $3 billion. Is it -- does it cross with your debt? Can you comment on that please?

I'm not at liberty to discuss our independent or our visual exposures either in Argentina or in any other country for that matter. But what I can tell you, and again bring assurances to you is that we have reviewed our portfolio in Argentina, which again, is all trade. And we are very well aware of what's going on between Argentina and YPF and have concluded that yes, it is a difficult situation for the country, unfortunately. But our portfolio is solid and we have no particular reason to be overly concerned about it. We're following up on it, of course, extremely carefully. But, no. So far, so good. We don't think it's going to be a problem. Again, I do want to emphasize, however, I think for Latin America as a whole, it's critical and it will be tremendously important for Argentina and the Spanish government and everybody else to come to terms and get that situation resolved. It is -- in our estimation, from everything that we know, it is going to eventually be resolved and some sort of agreement is going to take place. But there will be a lot of noise, volatility and uncertainty while that happens. And that's -- we're just going to have to live with that.

Thank you, sir. I'm showing no further questions at this time. So I'll hand it back to Mr. Rivera for closing comments.

Well, ladies and gentlemen, again thank you very much again for your time. Particularly, thank you very much for your questions. They were extremely interesting. We're very glad to answer them. They reflect a very big note of our company and that's what we love. We love to have shareholders and analysts that understand our business because -- to the extent that you do -- as you do understand our business, you can appreciate the benefits of our business model and it becomes easier for you to project our results. And in fact, if you do that, we are sure you will come to share our excitement about the company's prospects. So thank you very much for your time. Thank you very much for your support. And on behalf of the board, I want to thank the shareholders. Most of you are Class E shareholders, who show -- overwhelmingly supported the propositions that were put forth in our Shareholders Assembly a couple of days ago. I personally want to thank you for supporting my nomination too. I think I got something like 98.7% of the Class E supporting my nomination. My wife joked with me. She said that this is a type of result that somebody like Fidel Castro would expect. And I was going to find out who the people that voted against me were, but in the end, I called the SWAT team off. Again, thank you very much for your support of the company in general. And best of luck during the coming quarter and success and we'll talk in 3 months. Again, thanks a lot and we'll speak in July.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.