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Banco Latinoamericano de Comercio Exterior SA Bladex (BLX -1.74%)
Q3Â 2019 Earnings Call
Oct 18, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello everyone and welcome to Bladex's Third Quarter 2019 Conference Call, on this 18th day of October, 2019. This call is being recorded and is for investors and analysts only. If you are a member of the media, you are invited to listen-only. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and 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 earnings release, which was issued earlier today, and is 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 make certain statements that are forward-looking, such as statements regarding Bladex's future results, plans and anticipated trends and the market's effect in its results and financial condition. 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 the Bank's press releases 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. Tolchinsky for his presentation.
N. Gabriel Tolchinsky -- Chief Executive Officer
Thanks Chantelle. Good morning everyone, thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the third quarter, I would like to discuss with you important developments that took place during the quarter, and the impact of these recent developments on our perception of risk and financial results. I will address the global macroeconomic context, the economic and business environment in Latin America, and relevant country and industry specific developments affecting our portfolio.
During our last four quarter's conference calls, we mentioned that the credit quality of our portfolio, cost structure, and allowances for expected credit losses, set the pace for our earnings generation capacity. Our third quarter 2019 results are another step in that direction.
The global economy in 2019 is on course for its weakest year of growth since the financial crisis, weighed down by tensions that have significantly slowed international trade. Overall growth is now expected to fall 3% this year, according to new estimates from the International Monetary Fund, down from an estimated 3.2% in July. The IMF attributed the slowdown, primarily to rising trade barriers, that have impacted manufacturing and investment around the world. The IMF now forecasts that world trade volumes will expand by just 1.1% this year, less than half of the growth rate of the July estimate of 2.5%. For 2019, forecast for U.S. economic growth were cut by 0.2% to 2.4%. Forecast for the Euro Area were cut by 0.1 to 1.2%; and China's economic growth was lowered by 0.1% to 6.1% from their last July report. Shockingly, the IMF expects slower economic growth in 90% of the world.
Given this macroeconomic context, we are -- once again, downgraded our economic and trade growth expectations for Latin America for 2019. Today, we are expecting only a 0.2% economic growth for the region, down from 0.6% at the end of the second quarter. And trade is expected to grow only 1%, down from 2.6%.
This tepid growth prospect masks significant disparities in economic performance between countries. Large countries like Mexico and Argentina are experiencing uncertainties and lower foreign investment flows, a key driver of economic growth. On the other hand, countries like Colombia and Brazil are showing a pick up in consumer demand that is supporting their economies, despite low commodity prices and weak international trade. In other words, slow or no growth from the developed world and the consequences of protectionist measures on trade and commodity prices are having an uneven impact on the region, with some countries better prepared to withstand the prevailing environment.
Brazil, the region's largest economy, is a bright spot among the three largest countries, with growth expectations of 0.8%. Mexico is expected to grow only 0.3% and Argentina is in an outright crisis, its economy expected to shrink 2.9%. We will discuss Argentina in more depth later in the call.
Although Brazil will grow significantly less than we expected at the beginning of the year, we are seeing some of the economic growth drivers stabilizing and starting to show some improvement. Both consumer demand and investment are showing signs of life. Both categories had sizable declines in 2015 and 2016, and have barely recovered since. With policies aimed at opening up the economy, such as an aggressive privatization program and the passage of pension reforms, we are optimistic on Brazilian economic growth, and business opportunities there.
We see medium term risks in Mexico, resulting from the prospect of potential interference in state-owned entities that for the last 20 years, were run independently and professionally. That said, we see three clear short-term priorities from the current administration, that should keep Mexico on the relatively good side of the rating agencies. One, is maintaining a small primary fiscal surplus. Two, continued support for PEMEX in restoring production; and three, keeping a good relationship with the U.S. Our base scenario, is that Mexico will not be downgraded to below investment grade until 2021. As such, we maintain a short-term profile of 10 months of average life in our Mexico portfolio.
The Andean Corridors stands out with Chile, Peru and Colombia, all exhibiting good growth prospects. Although growth expectations for both Chile and Peru have been downgraded because of lower commodity prices, expectations for economic growth in Colombia have improved, on the basis of macro stability and a regeneration of consumer demand. We are increasing exposure to these countries in our portfolio. Most of Central America and the Caribbean continue to show solid economic growth prospects. Although these have also been downgraded recently, on the back of lower commodity prices for their exports.
We continue to pay close attention to the economic performance of Ecuador and to the political ramifications of the implementation of its IMF program. The current Ecuadorian administration seems to want to follow through with this program, but with basically zero economic growth, the contractionary elements of the IMF prescriptions, such as the elimination of fuel subsidies, are encountering stronger position from political groups.
Costa Rica is also in our closely monitoring category. In particular, we are following the impact of the fiscal reform package passed a few months ago. Costa Rica has a sizable fiscal deficit, fiscal reforms, mostly an increase in value added tax, took many years and several iterations to be finally approved. These were aimed at reducing the primary fiscal deficit, which would then lower financing rate, that exacerbate the overall fiscal imbalance. When the package was passed, we spoke about the rating agency skepticism on the magnitude and potential effectiveness of the reforms. It's too early to tell, and we have a long way to overcome a larger than 6% of GDP deficit, but September was the first month of primary fiscal surplus in years.
Argentina, what can I say? Have we seen this movie before? Disappointment over the primary election results, which gave the leftist populist candidate a significant lead going to the general election, resulted in a run on the currency and the reprofiling of some of the country's debt. Argentineans demanded U.S. dollars, preferably in physical notes, at a rate that was fast depleting the Central Bank's low available reserve levels. After some currency controls, interest rates, north of 80% and a few planes with physical cash from the U.S., the Argentine government managed to temporarily control the situation. But with a debt to GDP ratio approaching 90%, very few available reserves and constant demand for hard currency, Argentina remains in critical condition. We will not make predictions on the outcome of next week's general election, or the economic policies that a Fernandez administration would pursue. What is clear to us, is that the country will remain very reliant on the U.S. dollar income it can generate from its main export, commodities. Whomever wins the election, will likely -- they will likely maintain open trade and trade related currency lines, and continue to promote the development of oil and natural gas rich Vaca Muerta shale, for the eventual export of hydrocarbons. As you'll hear from Ana Graciela, we have reduced our exposure to Argentina, and are very comfortable with our book, concentrated in strategic industries and U.S .dollar generators.
We continue to believe that the current macroeconomic context offers no room for complacency. Furthermore, the combination of slow growth and risk aversion is exacerbating liquidity for the top names in the region, compressing their margins, not always compensating for the risk these credits represent. Against this backdrop, we continue to analyze the risk reward function at the country level, to adjust our portfolio accordingly, and maintain a very vigilant credit underwriting posture.
As we mentioned in previous calls, 76 of our commercial portfolio has less than one year of remaining life. Bladex is in a privileged position to dynamically adjust portfolio exposures. We see growth opportunities in Brazil, Central America and the Caribbean, Colombia, Peru, Paraguay and Chile. This balances out reduction in exposure to Argentina.
Bladex is all about consistency in a challenging and changing context. Our book of business is solid. 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 focus on high-quality borrower and persistent U.S. dollar liquidity in key markets puts some pressure on our origination margin, Bladex has been able to maintain relatively stable margins. Our pipeline of syndicated and structured transactions tied to Latin American integration, is also solid, and should help us continue to increase the exposure we look for, in our medium term loan portfolio, as well as, increase our fee income. Deposits, particularly from our Class A shareholders represent 62% of our funding structure. We appreciate the trust and commitment of the Region Central Bank, and the impact that these deposits have in improving our cost of funds.
On the cost side, expenses for the quarter continued to be under control. As you'll hear from Ana Graciela, our credit impaired loans experienced a slight decrease from last quarter, as well as a reduction in our watch list category. Our credit reserve coverage in Tier 1 capital ratio remains strong, and our book value remains solid above $25 a share. That is why our Board of Directors approved to maintain a $0.385 a share dividend for the quarter. Against this backdrop, the management of Bladex, as well as its Board of Directors, is cautiously optimistic for the reminder of 2019 and look for a continuation of the profitability path we embarked on, in the last four quarters.
With these brief comments, I will now turn the call over to our CFO, Ana Graciela, to provide you with more color about our financial performance in the third quarter 2019.
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Thank you, Gabriel. Good morning. I will now go over the third quarter and year-to-date 2019 results into more detail, making reference to the presentation uploaded on our website. So on page 4, profit for the third quarter of 2019 totaled $20.4 million or $0.52 per share, compared to a $40.7 million loss in the third quarter of 2018, when the bank recorded impairment losses on financial and non-financial instruments, totaling $60 million, mostly related to impaired credit. Third quarter 2019 profits were down 8% on a quarter-on-quarter basis, on account of decreased structuring and syndication fees and lower net interest income.
Profit for the first nine months of 2019, totaled $64 million, compared to a $9.6 million loss a year ago. During the first nine months of 2019, the Bank has maintained a relatively stable level of topline revenues, which increased by 2% with respect to the same period of 2018. Improved efficiency, with a 20% reduction in operating expenses, achieving a 31% efficiency ratio, and sustained high quality portfolio origination, evidenced by a substantial decrease of credit provisions, which totaled $2.4 million for the period.
On page 5, net interest income for the third quarter of 2019 was down 2% year-on-year and 5% quarter-on-quarter on lower average loan portfolio balances, which decreased by 3% quarter-on-quarter and by 5% year-on-year to $5.3 billion. Lower average portfolio balances during the quarter reflect reduced exposure in Argentina, coupled with lower credit demand from certain countries in the Central America and Caribbean region, partly offset by increased high quality loan origination in countries like Chile and Colombia toward the end of the quarter. The quarter-on-quarter decrease in net interest income was also impacted by a 4 basis point decrease in net interest margin to 1.77%, mostly related to the effect of decreasing LIBOR-based market rates on the banks, asset and liability, interest rate gap position.
For the first nine months of 2019, the Bank's net interest income increased by 1% year-on-year to $82.6 million and the net interest margin increased by 3 basis points to 1.77%, mostly reflecting the benefits from an increase in market rate environment throughout most of the period, compared to the year before.
Now moving on to page 6; fees and commissions totaled $2.8 million for the third quarter of 2019, representing a decrease of 25 -- I'm sorry, 24% year-on-year and a 45% quarter-on-quarter, mainly on account of lower fees from closed transactions in the structuring and syndication business. Year-to-date fees from the business remained stable at close to $3 million, while total fees fell 13% to $10.3 million, due to reduced revenues from letters of credit.
From pages 7 through 9, we present the evolution and composition of our commercial portfolio. At September 30, 2019, commercial portfolio totaled $6.2 billion, representing a stable level quarter-on-quarter and a 1% decrease year-on-year. Total commercial portfolio continued to be mostly short term, with 76% maturing in the next 12 months, and an average remaining tenure of close to 11 months. More than half of the Bank's short term commercial portfolio is specifically trade related.
Financial institutions, sovereigns and quasi sovereigns represented 71% of total commercial portfolio as of September 30, 2019. Aside from financial institutions, the largest industry exposure, accounting for 55% of the total, the other relevant industry sector in our portfolio is oil and gas, both integrated & downstream, with a combined total of 12% of total commercial portfolio. The remaining exposure is well diversified among several industries, with no sector exceeding 5%.
Brazil, Mexico, Colombia and Chile represented the highest country exposures, together totaling 55% of total commercial portfolio. While Brazil and Mexico remained relatively stable at 17% and 14% respectively, we were able to increase our portfolio in Colombia to 13%, and Chile to 11% on our continuous effort to optimize risk-reward opportunities in high-quality countries. Exposure in Argentina was reduced to 4% of the total portfolio, as we continue to execute on our plan to reduce the exposure in the country, in view of the macroeconomic, political and foreign exchange rate volatility. 84% of our exposure in the country is with exporting, state-owned and private corporations, with U.S. dollar generation capacity. The remaining 16% is with banks.
Central America and the Caribbean remain a relevant regional exposure to the bank, at 26% of the total, mostly focused in top tier banks, sovereigns and quasi sovereigns accounting for 65% of the exposure in that region. The remaining 35% is with top-tier private local corporations, which are leaders in their respective industries, and with regional players or multilatina.
On page 10, credit impaired loans or NPL totaled $61.8 million, down $2.9 million from the previous quarter, related to the sale of an exposure that was 100% reserved. In this transaction, the Bank collected $0.5 million and the remaining $2.4 million were written off against existing reserves. At September 30, 2019, NPLs represented 1.11% of total loans, with a reserve coverage of 1.7 times, and accounted for a single client exposure in Brazil, with an IFRS 9 Stage 3 individually allocated allowance of 88%, reflecting a book value of around $8 million.
Stage 2 exposure decreased by $55 million during the quarter, mostly due to repayments of scheduled maturities on our watch-list portfolio. Credit reserves allocated to these Stage 2 exposure increased by $3 million, impacted by downgrades on internal client ratings. All of the exposure in this category remains current.
Origination in our Stage 1 portfolio increased by $66 million, while the related credit reserves decreased by $2 million, reflecting improved quality on the increased portfolio origination in countries like Chile and Colombia. This Stage 1 exposure, which relates to the performing portfolio with credit conditions unchanged since origination, continue to be the most relevant, with 95% of total exposure at quarter end.
On page 11, third quarter 2019 expenses amounted to $9 million, representing a decrease of 17% year-on-year, and a 15% quarter-on-quarter. During this third quarter, we recorded an expense level somewhat below the run rate of expenses recorded in recent quarter, which should partially revert in coming quarters. Nonetheless, the Bank's sustained effort and focus on expense control and process improvement has been affected, evidenced by the decrease in sales [Phonetic] and expenses and efficiency level below 31%, both on a quarterly and on a year-to-date basis.
For the first nine months of 2019, expenses were down 20% from the year before, totaling $29.4 million. This reduction mostly relates to lower salary base and other employee-related expenses, resulting from the personnel restructuring process in the first half of 2018. Reductions in other expenses, partly relate to the adoption of IFRS 16 during 2019, whereby the back office space lease expenses are now accounted for as depreciation and interest expense. Other expenses were also reduced on the absence of extraordinary charges recorded in 2018, as well as other cost savings across the organization.
On page 12, we present our capital returns, with a positive trend in ROE, reaching 8% for the quarter and 8.5% year-to-date on a sustained level of capitalization above 21% at quarter-end. Total shareholder return was supported, as Gaby mentioned, by the quarterly dividend payment announced today, with the Board kept at $0.385 per share, representing a 75% payout ratio over quarterly earnings.
I will now turn the call back to Gabriel to open the Q&A session. Thank you.
N. Gabriel Tolchinsky -- Chief Executive Officer
Thank you, Ana Graciela. Chantelle, why don't we open up the Q&A session? Thank you.
Questions and Answers:
Operator
[Operator Instructions]. Our first question will come from Robert Tate, Global Rational Capital.
Robert Tate -- Global Rational Capital -- Analyst
Hi, Gabriel and Ana. Thank you very much. I was just wondering if you could just elaborate on what sectors you think may lead to an improvement in net -- in the net interest rate over time?
N. Gabriel Tolchinsky -- Chief Executive Officer
Yes. Thank you, Robert for the question. What we see from -- and I'm going to go -- approach this from a top down perspective, is its a very challenging global and regional environment, in which we have to be very diligent and careful with respect to our credit underwriting. And we are in a happy position to be able to maintain our credit spreads where they are. We are looking for value-added transactions with key customers, and that is essentially what should be able to make us sustain those credit spreads on a go-forward basis. We are identifying some opportunity, as we mentioned in the Andean region, in Chile, in Colombia, in Peru, and I think that we are about to see more opportunities, particularly in Brazil. It's very difficult as of yet to determine the potential there, but we see very good signs, starting with the fact that they are opening up the economy with an aggressive privatization program, and very importantly, as it relates to the impact on overall credit demand, is the fact that this administration is not keen on maintaining the subsidy that previous administrations had, with respect to the involvement of National Development Bank in lending to industry as a whole.
So as we see the privatization program progressing, we should see credit demand go up, and if the private sector is the one that needs to fulfill this credit demand, that should be a good sign in terms of margin improvement, particularly, given that short-term rates in Brazil have come down to a very low historical levels, the SELIC rate right now is about 5.5%, and we believe that that should stimulate credit demand growth, and we could see a pick-up in margins as the private sector banks start fulfilling that demand for credit.
Robert Tate -- Global Rational Capital -- Analyst
All right, thank you very much. And just noting that your Tier 1 Basel III capital ratio is quite high at 21%. Do you see the opportunity to make use of more leverage over time? And you mentioned that you're optimistic for business of the remainder of 2019. Do you think that a return-on-equity of closer to 10% is achievable in, say, the next 12 months in light of your optimism?
N. Gabriel Tolchinsky -- Chief Executive Officer
12% continues to be our goal on a long-term basis, but we will grow exposure, portfolio, leverage on what we consider to be a prudent and solid credit underwriting strategy. And as such, we will approach it opportunity by opportunity, and as you well know, we don't give projections on how our different ratios will evolve over time. But we are very happy with our portfolio. We're very happy with our capacity to maintain relatively stable margins, and we continue to find good opportunities to deploy our capital.
If it's OK, we should open it up for more questions, if there are any.
Robert Tate -- Global Rational Capital -- Analyst
Thank you.
Operator
Thank you very much. [Operator Instructions]. Our next question will come from Robert Maltbie, Singular Research.
Robert Maltbie -- Singular Research -- Analyst
So Gabriel, I'm here for Jim Marrone today. Wanted to ask a little bit about the impact of the rate cuts in the U.S. short-term Fed funds etcetera and the trends there, and how you see that impacting your forward margins?
N. Gabriel Tolchinsky -- Chief Executive Officer
Thank you, Robert. That is a very good question. And let me start with saying that, of course, lower U.S. dollar interest rate will have an impact on our margins. That said, we believe that we will be able to maintain our margins with incremental origination exposure on a go-forward basis, and be able to counteract that. Now for a more granular perspective, let me turn it over to Ana Graciela to answer.
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Thank you, Gabriel. Hi Robert. Yes, as we have mentioned before --- hello. With respect to our interest rate gap position, like I mentioned, in this particular quarter, we were negatively impacted because of the decrease in rate environment. But that should correct, because we are usually able to -- I mean, we have a very short tenure book, both in our asset and liability side. So with respect to the repricing, we don't see a continuous deterioration there. On the contrary, we should benefit from also lowering rates on our funding side, which eventually -- what happened in this particular quarter is that, because the way we were positioned, our lending book repriced a little quicker. But that should correct itself in the coming quarters. So with that, prospectively in the overall, even in increasing or decreasing rate environments, the bank is able to reprice its assets and liabilities within a short period of time.
And yes, I mean the lower rates at the end of the day, with the high capital balance that we have, obviously, has an impact on the return of that capital invested in our assets.
Robert Maltbie -- Singular Research -- Analyst
Thank you. A follow-up question on operating expenses. Looks like you've done a very good job of reducing your operating expenses, and I'm wondering, in terms of that trend over the next 12 months, do you see that ability to continue or remain about even, or just a little bit of color on that?
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Well, Gaby mentioned, we don't necessarily give prospects of our figures. Going forward, what I can tell you is, we are seeing the average trend in the recent quarters at about $10.2 million, $10.5 million, and that is what we call today, the run rate of expenses, understanding that during the fourth quarter, we may see some cyclical impact on expenses. But if you see the year overall, we should be around $10.5 million in quarterly expenses on average.
Robert Maltbie -- Singular Research -- Analyst
Thank you.
Operator
Thank you very much. [Operator Instructions]. At this time, we have no further questions in the queue. So I would like to turn the conference back over to management for any final remarks.
N. Gabriel Tolchinsky -- Chief Executive Officer
Thank you very much Chantelle, and thank you everyone for joining us today. We look forward to talking to you guys again, when we issue results for the fourth quarter and the full year 2019. In the meantime, for any questions, we always remain open and available. Thank you very much and have a good day.
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Good day. Thank you.
Operator
[Operator Closing Remarks].
Duration: 37 minutes
Call participants:
N. Gabriel Tolchinsky -- Chief Executive Officer
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Robert Tate -- Global Rational Capital -- Analyst
Robert Maltbie -- Singular Research -- Analyst
