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Banco Latinoamericano de Comercio Exterior SA Bladex (NYSE:BLX)
Q4 2018 Earnings Conference Call
February 28, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Hello everyone, and welcome to Bladex Fourth Quarter and Full-Year 2018 Conference Call on this 28th day of February 2019. This call is being recorded and is for investors and analysts only. If you're a member of the media, you're invited to listen-only. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and is on the bank's corporate website at www.bladex.com. Joining us today are Mr. Gabriel Tolchinsky, Chief Executive Officer and Ms. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on the earnings release which was issued earlier today, and it's available on the corporate website.

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 Bladex future results, plans and anticipated trends and the markets affecting its results and financial conditions. These forward-looking statements are Bladex's expectations on the day of the initial broadcast of this conference call, and Bladex does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties, and assumptions are detailed in our press releases and filings of the Securities and Exchange Commission. Should one or more of these risk 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. Tolchinsky for his presentation.

Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Travis. Good morning, good morning everyone, thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the fourth 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 events on our perception of risk and financial results.

During our third quarter 2018 conference call, we mentioned that the credit quality of our portfolio, cost structure, and allowances for expected credit losses, set the base to improve our earnings generation capacity. Our fourth-quarter results are the first step in that direction. On our last call, we also identified key events that were impacting emerging markets, Latin America, and commodity-related industries. Namely, the effect of higher US interest rates and a strong US dollar, protectionist rhetoric on trade and tariffs from the US, along with political and macroeconomic uncertainty and overall lower growth prospects for key countries in Latin America.

Some of these trends from the third quarter 2018 continued into the fourth quarter. In December, the Federal Reserve raised interest rates for the fourth time in 2018 responding to strong US growth, low unemployment and core inflation readings above 2%. Higher interest rates brought about weaker financial market conditions with 10 year US treasuries over 3% and LIBOR reaching its highest level in the last 10 years; equity markets started showing signs of stress. In fact, December 2018 was the worst US stock performance of any December since the Great Depression.

Europe was also showing signs of significant deceleration which coupled with the stronger US dollar and weakening commodity prices, led to slower fund flows to emerging markets in general and Latin America in particular. China was also a source of uncertainty as the government's effort to curtail corporate debt-driven growth are slowing the Chinese economy. Macroeconomic global risks are intensifying. We now need to add the prospects of slowing economies in Europe and China, and maybe also the US to attempt from the protectionist trade environment.

Today we know that the Fed is taking deep developments into account with a more dovish outlook on the potential for future rate increases and a slowdown in the unwinding of its $4 trillion balance sheet. It is our expectation that a more cautious head will reduce the strengthening pressures on the US dollar, always a welcome development for emerging markets. We should also acknowledge some positive news out of the region in the fourth quarter. Although a highly controversial candidate, Jair Bolsonaro hit the ground running with several market-friendly announcements to open the Brazilian economy and introduce fiscal adjustments particularly focused on pension reform. Positive investment and portfolio fund flows ratcheted up growth expectations to close to 3%, growth rates Brazil hasn't seen in more than four years.

The USMCA was another bright spot in an otherwise grim picture from Mexico, but more about that later in the call. Continuing with the positive news from the fourth quarter, Argentina completed the final agreement with the IMF, and although it significantly tightened monetary policy and established strict fiscal spending controls, it did not lead to the social unrest some feared. Importantly, the budget that was compliant with the provisions of the IMF agreement was approved with the supportive of moderate members of the opposition Peronist party, a welcome sign of unity to implement needed reforms.

Even Costa Rica which stretched the patience of the rating agencies managed to approve in their famous Sala IV, a fiscal reform package. Although the package was deemed actions insufficient by the rating agencies which proceeded to downgrade its credit rating, the colon recovered a significant part of its devaluation, and the government managed to repay an extraordinary loan it took from the central banks. All these developments are setting the stage for some growth out of the region for 2019. Although still subpar, growth rates of 2% or slightly higher are now possible for Latin America. That said, problem spots persist.

Mexico, for example, seems to be on a path of reversing or at a minimum challenging established macroeconomic policies. Recent developments such as the cancellation of the new airport project, uncertainty over the fate of energy reform threatening to curtail bank fees and potential government intervention in the writing of its independent entity, or a stark departure of what investors have come to expect from Mexico over the last 20 years. Another potential source of volatility is Argentina with significant political uncertainty as the recession generated by restrictive IMF policies, is hitting Argentine purchasing power. We have elections coming up in October, but the primaries in August will also be important as these will determine if we will see a less than market-friendly candidate from the Peronist block.

What does this all mean for Bladex? A macroeconomic context that offers no room for complacency as risks of major economies slowing and trade sanctions continuing our partially counterbalanced by a somewhat better macroeconomic picture from some key countries in Latin America. We still see tepid growth in credit demand in sufficient liquidity in most countries in the region. Nevertheless, our book of business is prudently growing. We are identifying new prospects, we are increasing share of wallet with our existing client base and are structuring value-added transactions with key clients.

Although our year-end headline margins were impacted by low yielding liquidity due to higher-than-expected central bank deposits, Bladex continues to improve its origination. We have a better mix of medium to short term loans, lengthening the average life of our portfolio and increasing our origination margin. On the cost side, net-op restructuring and other nonrecurring charges, our recurrent expenses continue to decline. As you'll hear from Ana Graciela, our NPLs declined significantly due to asset sales, restructuring, and partial write-offs. Our Tier 1 capital ratio remains strong, our book value remains solid above $25 per share, and that is why our Board of Directors approved to maintain a $0.358 per share dividend.

Against this backdrop, the management of Bladex as well as its Board of Directors is cautiously optimistic for the first quarter of 2019 and look forward to an improvement in profitability throughout the year. With these initial comments, I will now turn the call over to our CFO, Ana Graciela to provide you with more color about our financial performance in Q4 2018.

Ana Graciela de Mendez -- Chief Financial Officer

Thank you, Gabby. Good morning and thank you for joining our conference call on the fourth quarter and full year 2018 results. I will make reference to the presentation uploaded on our website.

First, let me highlight on page 4 the banks return to profitability, recording a fourth-quarter 2018 profit of $20.7 million or $0.52 per share in the improvement of quarter on quarter top line revenue by 13%, mainly on account of increased loan average portfolio balances and higher fees as well as the normalization of credit provisioning. These results represent a significant improvement from third-quarter 2018 results and an increase in quarterly trends denoting the absence of nonrecurring charges and were relatively stable year on year.

For the year 2018, profits of $11.1 million reflect impairment losses on financial instruments and nonfinancial assets for a total of $68 million. These impairment losses relate to the bank's credit per loan, which we also refer to as nonperforming loans or NPL. In addition, and to a lesser extent, impairment losses also relate to charges associated to the disposal of obsolete technology in line with the bank's objective to optimize its operating infrastructure.

Now I will refer to the evolution of net interest income and financial margins on pages five and six. Net interest income for the fourth quarter of 2018 increase by 2% quarter on quarter to $28 million, mainly driven by 4% increase in average loan balances in the absence of NPL's interest reversal, partly affected by higher low yielding liquid assets. Here in liquidity balances were above historical levels as the bank scheduled its funding sources anticipating a potential temporary decline of its deposit space. Although average deposits declined by 12% quarter on quarter, this trend was reverted by the end of the year resulting in a 7% quarter on quarter increase.

Consequently, liquid balances represented 22% of total assets at December 31, 2018. The bank expects to bring back the ballad of liquid assets to normalized levels during the first quarter of 2019. Our estimation is that this temporary excess liquidity had a negative impact of approximately 17 basis points in net interest margin for the quarter. Hence, the 13 basis points quarter on quarter declined in net interest margin to 1.61% is mostly attributable to these effects. Excluding this impact, financial margins for the quarter were supported by a quarterly increasing trend in average lending balances and lending credit spread, the latter of which started to revert its negative trend during the fourth quarter of 2018.

Throughout the year, lending spreads were pressured downward on account of better quality loan origination as the bank increased its lending share to financial institutions, sovereign and quasi-sovereign entities, while origination in the corporate sector remained focused on top-quality exporters with US dollar generation capacity. As a result of this overall decline and an average lending spreads throughout the year 2018, net interest income of $110 million represented a year on year decrease of 8%, and annual net interest margin of 1.71% declined by 14 basis points. Our lending spreads for the gear were partly upset by the net positive effect of an increase in the interest rate environment.

Throughout the year, the bank's assets and liabilities reprised at a similar pace given its narrow interest rate gap structure resulting in a net positive effect on the banks higher yield on equity invested in financial assets. During the quarter, the bank originated $3.1 billion in loans, exceeding maturities by $54 million. Loan disbursements for the year 2018 total $14.3 billion as we continue to perform well on our short-term origination capacity and we are also able to deploy longer tenor transactions with our traditional client base of top-quality financial institutions, exporting corporations, and multilatina. As a result, our loan portfolio increased by 1% on ¼ on quarter basis and by 5% year on year to $5.8 billion as of December 31, 2018.

Now moving on to page 7, fees and commissions were relatively stable year on year at $17.2 million for 2018. Fee income from letters of credit and contingencies performed well with quarter on quarter increase of 25% to $3.5 million. On an annual basis, fees from this line of business increased by 12% to $12.3 million. Quarterly fees from syndication, the other main component of degeneration for the bank, increased to $1.9 million in the fourth quarter and totaled $4.9 million for the year 2018, a 26% decrease from the previous year denoting that transaction based on even nature of this business. The bank has positioned itself as a relevant player in originating syndicated transactions across the region and was able to close seven transactions during 2018 for a total of $847 million.

On pages eight and nine, the commercial portfolio including loans, letters of credit, and contingencies remained well diversified across countries and industries. Overall exposure to financial institutions, sovereign and quasi-sovereign, represented 67% of the total commercial portfolio at year-end 2018 from 45% in 2015, denoting a continued improvement in portfolio quality over the last four years. Financial institutions alone, the bank's traditional client base accounted for predominant 52% of total exposure in 2018. Integrated oil and gas sector exposure accounted for 10% of the total portfolio as of December 31, 2018 and is mainly concentrated in quasi-sovereign entities which constitutes long-standing business relationships of the bank. The remaining overall exposure is well diversified among several industry sectors, none of which exceeded 5% of total exposure as of December 31, 2018.

In terms of country exposure, Brazil represented 19% conmetric with the size and prospect of its economy and its relevance in international trade flows. 86% of Brazil's exposure is with banks, sovereign, and quasi-sovereign. The average remaining tenor of the country's portfolio is approximately 14 ½ months with 67% maturing in 2019. We are closely monitoring our exposures in Mexico, which constitutes 40% of total exposure, Argentina with 10%, and Costa Rica with 6%; countries in which the bank has identified very good business opportunities cognizant of relative and certainly that should start to unveil throughout 2019 such as possible adverse economic policies and outcomes of the newly established government in the case of Mexico and presidential elections in Argentina, which are critical to the continuity of recently implemented economic reform and adherence to the IMF accord.

In Costa Rica, we are monitoring the implementation and success of the recently approved fiscal reform. The bank's tactical approach in these three countries is to focus on short tenor origination in winning sectors that should remain resilient, even in the case of economic and political downturn. Total commercial portfolio continued to be mostly short-term with an average remaining tenor of close to 11 months and with 74% maturing in 2019. Trade-related loans represented 59% of the short-term bank portfolio at year-end.

On to page 10, we present the evolution of NPL and allowances for credit losses. During the fourth quarter of 2018, the bank was able to reduce its NPL levels by $54 million as a result of the sale of an NPL and the restructuring of another. Of the $54 million reduction during the quarter, the bank collected sales proceeds of $12 million, wrote up principal balances for $33 million against individually allocated credit allowances and recognized the new financial instrument at fair value for $9 million after restructuring terms. NPL's then total $65 million in represented 1.12% of the loan portfolio at December 31, 2018, with ample reserve coverage of 1.6 times. 96% of banks NPL constitutes a single $62 million loan in the sugar sector in Brazil which significantly deteriorated during the third quarter of 2018 and was then classified as NPL. This loan, individually provisioned at 75%, accounted for most of the increase in the allocated reserve for loan losses categorized as stage III under accounting standard IFRS-9.

Stage II depicts performing exposures showing some credit quality deterioration since origination due to the weakening of financial conditions of the borrower placed on watchlist category or to increase levels of the exposure's country or industry risk. At December 31, 2018, stage II exposure totaled $389 million of which $58 million corresponded to seven individual credits on the watchlist category which are performing but in runoff mode. The remaining exposure represents performing credit in countries that the bank downgraded in its internal country rating review as was the case with Costa Rica in the fourth quarter of 2018. Stage I exposure, which relates to the performing portfolio with credit conditions on change since origination showed an increasing annual trend in represented93% of total exposure.

On page 11, quarterly operating expenses of $12.4 million showed ¼ on quarter seasonally high level. Annual expenses totaling $48.9 million for 2018, increased by 4% year on year, mainly on nonrecurring expenses related to personnel restructuring and compensation of infrastructure platform. Run rate base of annual operating expenses are estimated at approximately $46 million for 2018. Efficiency ratio of 38% for the year 2018 reflects these nonrecurring expenses as well as lower topline revenues alluded to this board.

Now on page 12, I would like to summarize the main aspects for fourth-quarter and full-year 2018 results. In the fourth quarter, the bank got back on a profitable track with a $20.7 million net income on the backdrop of quarter on quarter increase in topline revenue and portfolio average balances coupled with the normalization of credit provisioning. Annual profits up $11.1 million were mostly impacted by credit impairments and to a lesser extent operational charges, all of which totaled $68 million. Annual revenue decreased by 8%, mostly on account of lower average annual lending spread reflecting improved quality of the commercial portfolio although we saw a stabilization of credit spread in the last month of the year.

The decreasing trend in NPL at year-end with proactive management of these few exposures involving sales restructuring and partial write-offs. Operating expenses for the year include nonrecurring restructuring and optimization charges with a decrease in the level of run rate expand base. Capitalization remains solid at 18.1% Tier 1 ratio, while our Board of Directors capped our quarterly dividend unchanged at $0.385 per share. I will now turn the call back to Gabriel to open the Q&A session. Thank you.

Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Ana Graciela. Travis, you can now open the Q&A session.

Questions and Answers:

Operator

Yes sir, if you would like to ask a question, please press *1 on your touchtone phone now. Questions will be taken in the order in which they are received, and anytime you would like to remove yourself from the questioning queue, press *2. Again, to ask a question please press*1 now.

There are no questions in the queue at this time.

There are no questions in the queue; I'd like to turn the call back over to you sir.

Gabriel Tolchinsky -- Chief Executive Officer

Thank you, I did not expect that we were so clear, but thank you very much for joining us today. We look forward to talking to you again in April and have a good day, thank you very much, everyone.

Ana Graciela

Thank you, everyone.

Duration: 28 minutes

Call participants:

Gabriel Tolchinsky -- Chief Executive Officer

Ana Graciela de Mendez -- Chief Financial Officer

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