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Banco Latinoamericano de Comercio Exterior SA Bladex (NYSE:BLX)
Q4 2019 Earnings Call
Feb 14, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to Bladex Fourth Quarter 2019 Conference Call on this 14th day of February 2020. 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 is available through their 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 the 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 Security Litigation Reform Act of 1995. In these communications, we may make certain statements that are forward-looking, such as statements regarding Bladex's future results, plans and anticipated trends in the markets affecting 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 base 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. Tolchinsky for his presentation.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thanks, Travis. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the fourth quarter and for full-year 2019, I'd like to discuss some important developments that took place this year and their impact on our perception of risk and financial results. I will address the global macroeconomic context, economic and business environment in Latin America and other specific developments affecting our portfolio. After Ana Graciela's review, I will also address my successor as CEO, reasons for my departure, details of the transition and what US shareholders should expect from Jorge Salas' administration of Bladex.

During our last five quarter 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 fourth quarter and all of 2019 results are another step in that direction. In 2019, the global economy experienced its weakest year of growth since the financial crisis, weighed down by tensions that have significantly slowed international trade. According to the IMF, global growth was only 2.9%, significantly below potential which we estimated at 3.8%. The main drivers for the lackluster performance of the world economy were the trade war between the US and China, negative trade flows that disrupted supply chain and idiosyncratic risks in countries such as Italy and Turkey, that along with Brexit affected European growth and in particular, Germany. The US economy grew by 2.3% in 2019, which did contribute to world growth but had a limited impact [Technical Issues] service sector. Trade and investment which have positive ripple effects throughout the world economy lagged. Nevertheless, the US was a beacon of light in an otherwise grim world economic picture.

Despite historically low unemployment and solid growth, the Fed lowered interest rates to counteract economic weakness elsewhere. With inflation under 2% and inflation expectations under control, the Fed lowered its benchmark federal funds rate three times during the year to a level of 1.75%. Under normal circumstances, the Fed's actions would have been a headwind for the US dollar, but in an overall low growth environment with the geopolitical flare-ups around the world, the US dollar strengthened, always a negative development for commodity prices and foreign direct investments into emerging markets.

Although forecast by the IMF, sea world trade flows expanding by just 3% in 2020, and global economic growth of 3.3%, we believe that these modest estimates like in 2019 may be revised downwards Ongoing swings at trade disputes, social disturbances in key countries and climate change were key factors identified as risks to their forecast. Furthermore, growth expectations are anchored on diminishing trade tensions between the US and China, and the resumption of growth in trade flows. We question these expectations, particularly in light of the coronavirus outbreak and the impact it may have on both Chinese and global commerce. To summarize the global context, we see the potential for more noise on the trade front, despite the signing of the first phase of the Chinese US agreement, global growth below potential, geopolitical risk coming from the Middle East, Asia and Latin America, and what we call it, idiosyncratic risks from countries, such as Argentina, Italy and Turkey.

2019 was a difficult year for Latin America. Economic growth came in at 0.1%, significantly below the 1% growth of 2018, and significantly below beginning of year expectations of 2.1%. After other than 2016 when Brazil experienced its sharpest recession in the last 70 years, 2019 was the slowest growth year for Latin America in a decade. Of the largest three economies of Latin America, which represent about 75% of the GDP of the region, Brazil was the only one that showed any signs of life growing tepidly at 1.2%. Mexico had zero growth, a remarkable decoupling from a strong US economy, and Argentina's GDP shrunk by 3.3%.

Trade flows for Latin America overall declined 2.1% and are only expected to recover by 1.6% in 2020. We see a similar picture with respect to 2020 economic growth expectations. After a difficult 2019, estimates are just for 1.5% growth. Despite these modest expectations, we believe there are risks to downward revisions. We regard Brazil as the main potential driver for economic growth in the region. That said, Colombia and Peru should also perform well. But with commodity prices depressed because of trade uncertainties and strong -- and a strong US dollar, Mexico stuck in a low growth or no growth mode due to needed fiscal restraint, tight monetary policy to keep portfolio money flowing and fundamental lack of investment, the potential for social unrest in Chile, and in smaller countries like Costa Rica, which has merit in the fiscal rating or Ecuador struggling to comply with the IMF program, we simply do not see other countries as significant contributors to regional growth.

Brazil is about 36% of the GDP of Latin America. So while we are cautiously optimistic about its capacity to implement an aggressive privatization program, pension and labor reform, along with other free market-friendly measures, we're always watchful for political repercussions and their consequences. Our current expectations for economic growth are 2.4% for Brazil. We are looking to increase exposure there to the extent that we can identify growth in credit demand and can profitably lend to companies that meet our credit underwriting parameters.

As mentioned in our last call, we continue to see medium-term risks in Mexico because of the prospect of political interference in state-owned entities that for the last 20 years were run independently and professionally. Although the current administration has shown a willingness to keep Mexico on the good side of the rating agencies, maintaining a small primary fiscal surplus, continued support for Pemex in restoring production and a good relationship with the US, challenges remain even after the signing of the US MCA. Our base scenario remains that Mexico will not be downgraded to below investment grade until 2021. As such, we maintain a short-term profile of 10-month of average life in our Mexico portfolio. A portion of the Andean corridor stands out with Peru and Colombia exhibiting good growth prospects. Although lower commodity prices will temper growth expectations, improved macro stability and a regeneration of consumer demand should power the Peruvian and Colombian economies forward to the tune of 3.2% and 3% respectively for 2020. We are increasing exposure to these countries in our portfolio.

In Chile, we expect very subdued growth of 1.3% in 2020 after the economy came to a halt in late 2019, because of social disruptions that call for a new constitution and a more equitable pension system. The Chilean economy is sound and should be able to withstand ongoing flare-ups of social disturbances while maintaining a solid credit profile. We will use these periods of uncertainty to maintain or increase our exposure at a profitable level. Most of Central America and the Caribbean, continue to have solid economic growth prospects. Despite lower commodity prices for their exports and subdued demand from the developed world, we are paying close attention to developments in Costa Rica, as fiscal reform seems to have -- to be having little impact in improving the fiscal deficit.

It may be too early to judge the effectiveness of the reforms, but we wanted to see by now some improvement in fixed fiscal accounts from the higher and broader VAT, and what we got was nearly a 7% deficit in 2019. Therefore, we keep our exposure in Costa Rica to short-term with companies that have a significant presence in other countries in Latin America, what we call the multilatina.

We continue to pay close attention to Ecuador, its implementation or lack of the IMF program and its capacity to raise the $9 billion it needs for 2020. So far the country may be able to count with only $4 billion from multilateral organizations, while the capital markets may not be forthcoming given its inability to implement agree to reforms. The contractionary elements of the IMF prescriptions such as the elimination of fuel subsidies have encountered strong opposition from political groups.

Argentina then suspended animation. The new government refuses to submit an economic plan until it has clarity on debt negotiations, while needless to say, foreign debt holders are reluctant to agree to a debt restructuring without an economic program that underpins the sustainability of future debt obligations. It is unclear what comes next. In the meantime, the Argentinian treasuries are having trouble selling local debt, having declared the last two options deserted, raising the prospect of a further closing of the economy to prevent pesos that nobody seems to be willing to hold from being converted into dollars and leaving the country.

As you'll hear from Ana Graciela, we have reduced our exposure to Argentina significantly and are very comfortable with what remains concentrated in strategic industries and US dollar generators. We continue to believe that the current macroeconomic context offers no room for complacency. Furthermore, the combination of low growth and risk aversion is exacerbating liquidity for the top names in the region, compressing their margin, not always compensating for the risk these credits represent. Against this backdrop, we continue to analyze the risk-reward function on the country level, adjusting our portfolio accordingly and maintaining a vigilant credit underwriting posture. At 73% of our commercial portfolio has less than one year of remaining life, Bladex is in a privileged position to dynamically adjust exposures. Our book of business is solid. We are adding new clients and identifying new prospects, we're increasing share of wallet with our existing client base, and we're structuring value-added transactions.

Our focus on high-quality borrowers and pursuant [Phonetic] US dollar liquidity in key markets, puts some pressure on regeneration margin. That said, Bladex has been able to maintain a relatively stable margin level. In 2019, our syndicated and structured transactions tied to Latin American integration have had a solid performance, with a strong finish in the fourth quarter, increasing our fee income. Deposits, particularly from our Class A shareholders represent 52% of our funding sources. We appreciate the trust and commitment of the region Central Bank and the impact that these deposits have in improving our cost of funds.

That said, we continue to diversify our funding sources. We started a new Yankee CD program that will complement our short-term funding structure. On the cost side, expenses for the quarter continued to be under control and have been mostly impacted by the seasonal effects of the fourth quarter. 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 watchlist category. Our credit reserve coverage and Tier 1 capital ratio remained strong, and our book value remained solid above $25 a share. That is why our Board of Directors approved to maintain $0.385 a share dividend. Against this backdrop, the management of Bladex as well as its Board of Directors is cautiously optimistic for 2020, and looks for a continuation of the profitability path we embarked on in the last five quarters.

With these initial comments, I will now turn the call over to our CFO, Ana Graciela to provide you with more detail about our 2019 performance.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Good morning to everyone. Thank you, Gabriel. Let me first say that it has been an honor having a company view in driving the Bank through the strong opportunities today. Under your stewardship, the Bank has reinforced its business fundamentals on which to continue building and creating value. I will now go through the results for the fourth quarter and full-year 2019 into more detail, making reference to the presentation uploaded on our website.

First, on Page 4, let me highlight the Bank's 2019 annual performance, recording a profit of $86 million or $2.17 per share on five consecutive quarters of sustained profitability. These results compared to an $11 million profit in 2018, while the Bank recorded impairment losses on financial instruments and non-financial assets, totaling $67.5 million, mostly related to impaired credit.

2019 results were based on steady topline revenues year-on-year, as the Bank was able to maintain a nearly stable net lending margin with average commercial portfolio volumes slightly up, while shifting its credit underwriting toward lower-risk countries. This is particularly quite an achievement in a context of virtually no economic growth and decreased trade activity across the Latin American region, coupled with a declining interest rate environment during the second half of the year. During 2019, the Bank improved its efficiency, reaching a cost to income ratio of 32% on the account of a 17% reduction in its operating expenses, evidencing its effective cost control management and overall enhanced structural and operational efficiencies.

Also during 2019, the Bank improved its risk profile, not only by reshifting its portfolio origination toward lower-risk countries but also evidenced by the decrease in its watchlist exposures and the fact that no new credits have been classified as NPLs since the third quarter of 2018. As a result, credit provision charges recorded as impairment loss on financial instrument decreased substantially year-on-year to $430,000 compared to a $57.5 million charge in 2018.

Now, on to quarterly results. Profit for the fourth quarter of 2019 totaled $22 million or $0.56 per share, representing a quarter-on-quarter increase of 8% and an annual increase of 7%. On Page 5, net interest income, the Bank's main revenue pool, accounting for about 86% of total revenue was stable year-on-year at $110 million for 2019. Net interest margin, which represents the net yield of productive assets that is net interest income to average interest-earning assets was 1.74% for 2019, an increase of 3 basis points year-on-year, positively impacted by the net effect of increasing LIBOR based market rates during 2018, which remained high through the first half of 2019.

Net interest spread, which reflects the difference in average rates between assets and liabilities are indicative of the trends in net lending spread and remained nearly stable throughout the year at 1.19% for 2019, down 2 basis points year-on-year, while average lending volumes decreased slightly by 2% year-on-year. For the fourth quarter of 2019, net interest income of $27 million was up by 1% quarter-on-quarter and down 4% year-on-year. The quarter-on-quarter increase relates to a 6% growth in average lending volume, offsetting a 12 basis point decrease in net interest margin to 1.65%, mostly related to lower lending spreads on increased origination in top quality countries. The year-on-year quarterly net interest income decline is mostly attributable to a decline in lending spreads together with the net negative effect of decreasing market rates and an inverted yield curve during the second half of the year. These were partly compensated by a decrease in low-yielding average liquidity and its proportion to total interest-earning assets.

Now moving on to Page 6. Fees and commissions totaled $15.6 million in 2019, down 9% year-on-year due to a 12% decline in fees from the letters of credit business, partly compensated by a 14% increase in loan syndication fees, as the Bank successfully closed six structured transactions during 2019. During the fourth quarter of 2019, fees totaled $5.4 million, up 90% quarter-on-quarter and stable year-on-year. The quarterly increase is related to two closed transactions in the structuring and syndication business in the fourth quarter, while fees from letters of credit have experienced a positive quarterly trend throughout 2019.

From Pages 7 through 9, we present the evolution and composition of our commercial portfolio, which includes loan and off-balance sheet exposures, such as letters of credit and guarantees. Our commercial portfolio totaled $6.5 billion at year-end 2019, up 5% quarter-on-quarter and up 3% year-on-year, as we experienced a pickup in credit demand and good risk-reward opportunities during the fourth quarter. Our commercial portfolio remains short-term in nature with 73% maturing in the next 12 months and an average remaining tenor of about 12 months, while trade exposures constituted 53% of our short-term origination. Financial institutions continue to be the largest industry exposure, representing 56% of the total. The remaining exposure is well-diversified among several industry sectors throughout the region, none of which exceeded 7% at year-end.

Throughout 2019, the Bank improved the country risk profile of its portfolio, being able to reduce its exposure to Argentina by $385 million, down to 3% of the total portfolio at year-end 2019 from 10% the year before, after successfully collecting maturities as planned. At the same time, the Bank increased exposure to top-rated countries such as Chile, representing 11% of the total portfolio compared to 3% the year before and to Colombia above 4 points to 15% of the total portfolio at December 31, 2019. The Bank also increased exposures to non-LATAM top-rated countries in Europe and North America, which at year-end 2019, accounted for 7% of total portfolio. These exposures are related to transactions carried out in Latin America, mostly with multi-nationals operating in the region. Other country exposure annual variations such as reductions in Brazil, Panama, Mexico and Costa Rica relate to the Bank's continued focus on optimizing its risk-reward equation.

On to Page 10, credit-impaired loans or NPL totaled $62 million at December 31, 2019, stable quarter-on-quarter and down $3 million from the previous year. The annual reduction is related to the sales and exposure back in the third quarter of 2019, which resulted in $0.5 million collection and a $2.5 million write-off against existing individually allocated reserves. As mentioned before, no loans have been classified as NPLs or credit impaired under the IFRS 9 Stage 3 category since September of 2018. NPLs represented 1% 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.

IFRS 9 Stage 2 exposure experienced a net decrease of over $130 million during 2019, mostly due to repayments of scheduled maturities. This category incorporates exposures that have undergone some credit deteriorations in their origination, some of which are related to internal country risk downgrades or to their incorporation in our watchlist. All of the exposure in this category remains current.

Origination in our Stage 1 portfolio, which relates to the performing portfolio with credit conditions unchanged since origination increased by close to $350 million during 2019, and accounted for 95% of total exposure at year-end 2019. Stage 1 collective credit reserve decreased by $2 million during 2019, reflecting the improved country risk profile.

On to Page 11, operating expenses for the year 2019 decreased by 17% to $41 million, which led to an improved efficiency level of 32% compared to 38% in the previous year. The annual expense reduction was mostly related to a 14% decrease in personnel-related expenses, mainly associated to a restructuring back in 2018. Reduction in other expenses partly related to the adoption of new accounting standard IFRS 16 in 2019 powered [Phonetic] by the Bank's office space lease expenses are now accounted for as depreciation and interest expense.

Other expenses were also reduced on the absence of one-time charges recorded in 2018, as well as other cost savings across the organization, which reflect the Bank's continued effort and focus on expense controls and process improvement. Fourth quarter 2019 expenses amounted to $11 million, down 9% year-on-year and up 26% quarter-on-quarter. The latter mostly related to higher employee-related expenses and other seasonally high-expenses related to year-end activity.

Finally, on Page 12, we present the positive trends in ROE, reaching 8.7% for the fourth quarter and 8.6% for the year 2019 on a sustained solid capitalization of 19.8% at year-end 2019. Total shareholder return above 7% was supported by $0.385 quarterly dividend payment announced today, representing a 69% payout ratio over quarterly earnings.

I would now like to turn the call back to Gabriel. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Ana. It's been a true pleasure and privilege to have worked with you and the rest of the team.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thanks.

N. Gabriel Tolchinsky -- Chief Executive Officer

After five years with working at Bladex from Consultant to Chief Operating Officer, and finally, for the last two years as CEO, I will be leaving the Bank, so I can be closer to my family in New York. This was a consensual decision with the Board of Directors that gave us ample time to find the right candidate for the CEO position and to ensure a smooth transition.

When I took the Chief Operating Officer job almost three years ago, my wife and I were becoming empty nesters as our youngest child was leaving for college. The plan was that both of us would move to Panama, but unfortunately, and for the family reasons, that couldn't happen and we have had to live apart for the last three years. I thought me becoming Bladex's CEO would be a job that would last a lifetime. I have loved every day working at the helm. When I took over two years ago, there were significant challenges that I needed to take on. I had with me an A+ team and together we accomplished so much. In the last two years, we took the Bank from one of the most difficult credit cycles in Latin America to solid and sustainable earnings, tightened our credit underwriting standards to withstand challenging macroeconomic and industry environment, designed and implemented an active portfolio management structure to optimize our exposure along the efficient frontier, worked with our stakeholders with transparency and clarity as to what we were doing and why we were doing it. The governance structure, everything from Board and management committees to key management roles, data and compliance strengthened our operating model, reviewed our processes and procedures and control structure, wrote-off obsolete operational and technology assets and instilled the culture of risk management and control. I am pleased to say today that Bladex's balance sheet is pristine. The Bank has been able to return to ROEs between 8.5% to 9% despite a very challenging environment. Over the past two years, macroeconomic risks, slow regional economic growth, tepid trade flows, and idiosyncratic country and industry risks have been the norm. And all those risks were coupled with overwhelming liquidity, chasing the same credit-worthy client.

If Bladex can deliver 8.5% -- 8.6% ROE with these headwinds, we should be very well positioned to deliver more sizable returns, in a more benign environment that will surely come. We are keenly aware of the risks in the legion and the industries we finance. And with confidence, I can say that our team knows how to spot opportunities and deliver results. I have been working on transitioning Jorge Salas for a few weeks and strongly believe that Bladex is fortunate to have him. He is a highly qualified professional, who has been working in the financial sector for over 20 years in different countries and with diverse mandates, including CEO for the past 10 years. Jorge recognizes that he is getting a well-functioning bank with a strong presence and reputation in our region. And he is cognizant of Bladex's need for continuity. I look forward to following Bladex under his leadership. Finally, I want to thank our Board of Directors and our shareholders for the trust you instilled in me these years. And I'm very grateful to the team and employees of Bladex.

I now open the call for the Q&A session.

Questions and Answers:

Operator

[Operator Instructions]

Our first question comes from Yuri Fernandes, J.P. Morgan.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you, gentlemen. First of all, I would like to wish the best luck to Gab, and also to Jorge Salas who was elected the new CEO, so all the best of luck. And my first question, I guess is more to Ana Graciela. Regarding the asset quality, it was very good this quarter. But if you can provide more color on the Brazilian exposure, I think it's sugar industry-related, if you believe these may continue on the Stage 3, or these may evolve? How these loans evolving, given its big exposure? And I have a second one to Gab, regarding -- I know he is leaving, but like what's his expectations for growth for 2020? It seems like he is optimistic, Brazil is doing better, but we also have China now. And I don't know, like if you can provide any color on loan growth for 2020 like what is Bladex's expectation for this year? Thank you.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thank you, Yuri. Thanks for your question. First, on the NPL exposure in Brazil, that exposure hasn't changed since we recorded it as NPL in -- back in September of 2018. And back then, we also allocated a large amount of individually allocated reserve to that particular exposure, which now accounts for 88%. So even though in or -- in terms of nominal values, the exposure is $62 million and yes, it's related to the sugar exposure. Our book value, when you take into account the allocated reserve is -- close to $8 million. So that particular exposure, it's undergone a long period of restructuring, which is still in process. And we do expect that during this year 2020, the restructuring process should finalize and then we would be able to record in our books the end result of that restructuring. But I would like to stress that the book value of the exposure is about $8 million and we definitely think it's adequate at this point in time and under the restructuring that we are undergoing.

Yuri Fernandes -- J.P. Morgan -- Analyst

[Speech Overlap] Sorry, Gabriel. Just a follow-up to finalize Ana Graciela's points. Do you think there should be a reversal at this point, like it's more likely to get a reversal or maybe you need more provisions here? Or hard to say?

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

No. We -- accounting wise, there's a very strict methodology, and what we report in our book is precisely the value that we see in terms of recovery of that credit. And if that changes, well, we will pay the necessary provisions or reversals as they may happen. But as of today, that is the value of the recovery that we are foreseeing.

Yuri Fernandes -- J.P. Morgan -- Analyst

Got it. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Well, first of all, Yuri, thank you for your well-wishes and question. Let me just add a tiny bit to what Ana Graciela was saying. At this point in time, beyond the exposure that Ana Graciela was mentioning, we don't have any sugar exposure to Brazil.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Right.

N. Gabriel Tolchinsky -- Chief Executive Officer

The remaining sugar exposure that we have which totals about $150 million is in countries with let's say, very little or no exposure to international market that its exposure of a different dynamic than the one in Brazil, which is completely exposed to price -- the sugar price fluctuation. So that's just to add a little bit more color on that particular exposure. Beyond that, I -- if you can repeat your question because your line was not very clear, and I just want to make sure that I address it correctly?

Yuri Fernandes -- J.P. Morgan -- Analyst

No. It's just, how you are seeing loan growth. How do you think it was a good acceleration quarter-over-quarter? And now if you are seeing, I don't know like -- a better dynamics for 2020? Or is the China noise may be a headwind like how you're seeing your potential for growth for '20?

N. Gabriel Tolchinsky -- Chief Executive Officer

Well, we usually discuss objective parameters that kind of underpin the growth of our business, and we don't give specific guidance on a -- for our performance. But we will say that we have been able to navigate a very challenging low growth environment now for the past two years. And we believe that we have again very good penetration with our existing client base, have been able to source new clients and gain a larger share of wallet with our existing client base. So -- and we are, as I said, cautiously optimistic. The Bank historically has grown some multiple of overall trade flows in the region, being focused on trade finance. But as I said, we don't give specific guidance as to the growth in our balance sheet.

Yuri Fernandes -- J.P. Morgan -- Analyst

Super clear, Gab. Thank you. And thank you, Gabriel for the next three years -- last three years in the CEO -- the partnership. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thank you, Yuri.

Operator

Our next question comes from Jim Marrone, Singular Research.

Jim Marrone -- Singular Research -- Analyst

Yes. Thank you for taking my question. And first of all, I just want to wish Gabriel well. It sounds like you did a very fine job over the past few years, and I wish you continued health and happiness going forward. My question is in regards to the --

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you so much.

Jim Marrone -- Singular Research -- Analyst

Yes, you're welcome. My question is in regards to basically the interest environment and maybe interest expectations going for 2020. So I believe in the last conference call, you mentioned, -- I believe, Ana mentioned that the low-interest environment actually negatively impacted results. And it doesn't seem like interest rates are going to be going up, in fact, they're going to continue to stay low in regards to coronavirus exposure and global trade. However, I believe you mentioned that the results were going to be reversed. And I was just hoping you comment on that if that expectation still exists? And if there was a reversal, when you would anticipate that reversal to happen?

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Okay. I will take that, Jim. Thank you. Yes. As you know, our interest rate GAAP profile is very short [Technical Issues] We -- both our assets and liabilities repriced in a very short tenure. Having said that, our liabilities, because of the deposit base that is 60% of total liabilities and very short tenure, usually, also reprice a little quicker. So when the interest rates are going down depending on the provision that we have in our assets and liabilities, we may have a short period of repricing that may be favorable or not in this last -- particular case since the interest rate decline was also accompanied with an inverted yield curve that ended up causing a negative impact in the last couple of quarters. But that is very temporary, so you should see now going forward, and we have already started to see a reversal in that trend. And basically, the repricing almost on between assets and liabilities and at the end of the day that the net effect is pretty much neutral going forward. On the other hand, due to the fact that we have over $1 billion in equity which somehow provides financing for interest-earning assets or a portion of, as rates go down, our NIM gets pressured also, because of the lower yield in the assets in general. What we see going forward is, with stable rates so we also see that for now, for the time being, the rates have seemed to be that are going to be remaining stable throughout 2020. And so business as usual for us in terms of maintaining our net interest spread more driven on the credit spread that we are able to get from lending in the region basically.

Jim Marrone -- Singular Research -- Analyst

In terms of net interest spread for 2020, are we anticipating any -- to stay the same or any uptick? I believe in the last quarter it was 1.8% and the quarter before that was 1.9%. Are we anticipating to see the same type of spread going forward for 2020?

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Like real estate, we don't provide for estimates going forward. But you can see the trend having to do with our incredible shift in country risk profile and it -- that speaks for itself. We think we are -- in terms of loan portfolio, the spreads went down in the fourth quarter of 2018 from 1.97% to 1.92% in this past quarter. So the change was not dramatically high. So we actually are seeing pretty stable trend.

Jim Marrone -- Singular Research -- Analyst

And perhaps just as a follow-up question, the profitability. So it was a nice year-over-year [Technical Issues] in 2018. Can you just provide a little bit of color in regards to why those impairments occurred in 2018? And what we could expect in 2020? I know it's very hard to estimate impairment losses, but if you could just provide a little bit of color in that regard that would be great.

N. Gabriel Tolchinsky -- Chief Executive Officer

Yes. Thank you, Jim. I will take that question. I think that what we can say is that we've done a significant shift in the composition of our asset base to lower risk exposure that is reflected if you see, for example, our overall Stage 2 has been declining. Our Stage 3 exposure has been completely stable. And those are the trends that we've seen throughout 2019. And those are the trends that we intend to keep on a go-forward basis. So, yes, there were some individually allocated reserves that needed to be allocated to problem credits in 2018, that was done. The bank right now is in a very good position from a risk profile to continue with the path it embarked on for the past five quarters. And the exposure in the portfolio and the exposure in the watchlist category show that. So I'm not sure if that answers your questions but stability is part of what we expect and primarily we think that is the right approach to what we believe is a challenging macroeconomic context and that is how the bank is planning to confront these environments.

Now obviously these environments don't last forever, and our expectations is that our returns can get better, maybe even significantly better if instead of having an headwind we start having a little tailwinds and see a more uncertain growth picture from Latin America and trade flows overall, and the liquidity that seems to be flushing around chasing the name gets better distributed throughout the economy and margins start reflecting that overall increase in credit demand that really, we have not seen in the last two years.

Jim Marrone -- Singular Research -- Analyst

Great. Definitely that provides a lot more clarity. Thank you.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

You're welcome.

Operator

Our next question comes from Robert Tate, Global Rational Capital.

Robert Tate -- Global Rational Capital -- Analyst

Good day, Gabriel, and Ana. Gabriel, thank you very much for being the CEO and for providing a good performance over the period that you've been CEO, and as well as providing useful information in the presentation quarterly basis.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Robert.

Robert Tate -- Global Rational Capital -- Analyst

I just have two questions. The first question is related to the credit risk in the portfolio. And the second question is related to the sources of funding. And so, just on the first question in the portfolio, the credit risk which I think has been talked about quite a bit already. But -- just the previous CEO, Mr. Amaral he resigned I think in the second quarter of 2019, and then a quarter later there was that the massive write-off, that sugar loan which caused quite a substantial drop in shareholder value.

I'm pretty sure that was just a coincidence and I wouldn't expect that to happen again. But nevertheless, I just want to ask some questions on the credit risk in the portfolio,, specifically relating to the watchlist and Stage 2 credit loans. I was just wondering if you could just -- you Ana, expand on the nature of the loans in the watch list and in Stage 2, sort of what industries they are, what countries and whether you're seeing any increased risk there or not? I know that the Stage 2 loans have come down, but if you could just give us a bit more color on that, that would be great. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Sure. Thank you, Robert. Let me just say that in our watchlist category, our single largest exposure is $10.5 million. So, that should give you a sense of the risk. And as you've seen, it's a category that has been constantly shown here.

Robert Tate -- Global Rational Capital -- Analyst

Yes.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Yes. And the total has -- so in the Stage 2 category, we may have exposures that on an individual basis have not -- we have not seen a deterioration in their indicators that we follow. But they are in countries which the Bank has decided to downgrade because of credit and risks that have increased. And so, the exposures that are originated in these countries are automatically put on our Stage 2 category, and those are not part of our watchlist, but part of the reduction we have seen in that category relates to the maturity of exposures in Argentina and Costa Rica, for example, that underwent credit downgrades, internal downgrades, country risk downgrades. And so, that exposure has been maturing and we have been collecting it.

And then the other part of the Stage 2 exposure relates to this watchlist category, which has also decreased significantly, and that accounts for like Gabriel mentioned, the highest is $10 million, and really, the total is less than even $25 million as of December 31. So, it has been decreasing significantly also and these are exposures that we do assess individually and because of the trends that we see not necessarily and actually, they have not failed in the repayment schedule that they have with us, but we see in the individual analysis that there is some deterioration in their indicators. And so, our credit risk area puts them in our watchlist and pretty much on the run-off mode. And so, that has also decreased significantly over this past year.

N. Gabriel Tolchinsky -- Chief Executive Officer

Yeah. Thank you, Ana. And just as a point of comparison, 2018 the watchlist category was about $53 million. So, that is also an indication of the overall improved quality of our portfolio. What was your second question, Robert, please?

Robert Tate -- Global Rational Capital -- Analyst

Yes. So, the second question is just on the financing. Thank you by the way for the first question. So, you mentioned that you continue to diversify your funding sources beyond your typical Central Bank deposits, and they -- the Central Bank deposits obviously make up the bulk of your funding and really good interest rates. But do you see any -- do you foresee any difficulties in obtaining access to the Central Bank deposits going forward? And do you foresee any pressure on the net interest spreads as a result of increases in the cost of interest-bearing liabilities?

N. Gabriel Tolchinsky -- Chief Executive Officer

I know, Robert, we actually are very confident and we do analysis on the historical trends of Central Bank deposits. And they are characterized for their stability over time, even though they're very short tenure and cost-effective for the Bank. So, we do not foresee that line of funding source being reduced. On the contrary, they also represent our Class A shareholders and there is a historical relationship there. But the Bank is also on a continued thirst to diversifying our funding sources and that's why as Gabriel mentioned, we announced a new program -- Yankee CD program that we see actually as an alternative low-cost funding source that we expect to start to build up.

Robert Tate -- Global Rational Capital -- Analyst

Okay, great. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

[Speech Overlap] diversifying our funding. So, we have here with us Eduardo Vivone, who is our Treasurer and Head of the Portfolio Management area. So, he can provide you with more specific color about our funding sources.

Eduardo Vivone -- Executive Vice President, Treasury and Capital Markets

Yes. I mean in a few words, the Bank is always committed to diversify that funding base. We are active in many different capital markets. Last year, we issued in Japan, we issued in Mexico. We also participate in [Indecipherable] issued a significant loans we've been pricing to Asian and European investors. And we also -- well, we have a fairly wide range of multi-national institutions from different continents, and also depositors from different continents that complement the deposit base of the Central Bank provides. So -- I mean when we say we're looking for diversification, we look for diversification for the complementary funding base through the deposits the Central Bank provides because that allows us to -- always to keep on efficient and very competitive funding costs.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thank you, Eduardo.

Robert Tate -- Global Rational Capital -- Analyst

Okay. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Robert.

Robert Tate -- Global Rational Capital -- Analyst

Thank you very much. Yeah. Do you have time for just one more question?

N. Gabriel Tolchinsky -- Chief Executive Officer

Sure.

Robert Tate -- Global Rational Capital -- Analyst

Okay. Thank you. Just back onto the portfolio, the exposure to financial institutions has grown in the last three years from 39% in 2016 to 56% in 2019. I was just wondering what's caused this trend? Why is there confidence in financial institutions? And in which industries do you see the most risk?

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Robert. Let me just give you a little bit of a historical perspective. Bladex started as a bank of banks. And the reason for Bladex's founding was to be a conduit between the local financial sector and the international capital market. For us, financial institution is a core market segment that's a client base that we know and understand very well. We finance underlying trade transactions that these local banks do in their respective countries. So for us, this is a very known exposure, and an exposure that we understand and like quite a bit. We have about -- we have a significant amount of financial institution clients throughout the region with a deep and long-standing relationship with them.

So, from our perspective, this is an exposure we like and we understand. And it's very much part and parcel of the core Bladex's business. So, it may fluctuate when we see opportunities in the corporate sector down to 39% or 40%. It may go up to exposure in the 60s [Phonetic] as we see less opportunity in the corporate sector and more opportunity in the financial sector. But we're very, very comfortable with that exposure.

And as far as industry risk category, we really have done a significant amount of derisking from industry categories that we consider not, say, it's like the sugar industry in Brazil. So, what you are seeing right now is a portfolio that we believe meets our risk reward parameters, and that reflects the risk appetite of every single industry sector. Obviously, right now with sugar prices closer to $0.15 a pound, the Brazilian sugar industry becomes a bit more viable. But we know that these things are highly volatile. We have countries like India and Thailand that overproduce and the price of sugar can go down to the single digits again. So, we decided as part of our tightening of our underwriting -- credit underwriting parameters that we will not take what we call make it commodity exposure which we'd never -- as such, simply that we didn't follow the prevailing wisdom of the rule of thumb for lending to the commodity industry which is, you lend to the top quartile of efficiency, and you think that, that's going to protect you from the fluctuations of the underlying commodity prices. As we've been able to see with the price of sugar, it can trade significantly below the marginal cost of productions, even for the most efficient country -- producing country in the world, which is Brazil.

So, what we look for when we lend to the commodity industries are more risk mitigations like vertical integration, control over margin, control over end markets where our Company sell. So, those are the type of credit underwriting standards that we follow right now, and as such are very comfortable with the resulting exposure.

Robert Tate -- Global Rational Capital -- Analyst

Okay, excellent. Thank you. That was very useful, Gabriel. Thank you so much, Gabriel and Ana. And good luck, Gabriel in your next venture. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you.

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thank you, Robert.

Operator

There are no further questions in the queue at this time.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thank you, Travis. And thanks, everyone for participating in the call. I want to wish everybody a continued success. And we really want to thank you for your support of Bladex, and for being shareholders and interested parties. And that is all I have to say. Thank you. Ana?

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Thank you. Thank you.

N. Gabriel Tolchinsky -- Chief Executive Officer

Thanks, everybody. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

N. Gabriel Tolchinsky -- Chief Executive Officer

Ana Graciela de Mendez -- Executive Vice President & Chief Financial Officer

Eduardo Vivone -- Executive Vice President, Treasury and Capital Markets

Yuri Fernandes -- J.P. Morgan -- Analyst

Jim Marrone -- Singular Research -- Analyst

Robert Tate -- Global Rational Capital -- Analyst

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