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Banco Latinoamericano de Comercio Exterior SA Bladex (BLX 2.21%)
Q3Â 2020 Earnings Call
Oct 27, 2020, 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 2020 Conference Call on this 27th day of October 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. It is available through the webcast and on the Bank's corporate website at www.bladex.com.
Joining us today are Mr. Jorge Salas, Chief Executive Officer; and Ms. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on their 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 and Section 21E of the Securities Exchange Act of 1934.
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 market 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 Bank's press releases and filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may differ significantly from the results expressed or implied in these communications.
And with that, I am pleased to turn the call over to Mr. Salas for his presentation.
Jorge L. Salas Taurel -- Chief Executive Officer
Thank you, Nick. And good morning, everyone joining us today to discuss our third quarter results. Today, I'm here with Ana Graciela de Mendez, our CFO; and a few members of my executive team. This morning, I will be going through the presentation and talking about our balance sheet management during the quarter and then Annie will discuss the P&L implications of it. After Annie's remarks, I will make some closing comments, and then I will open it up for questions.
Let me start by saying that overall for the quarter, where we're still in a very uncertain environment, the underlying business fundamentals for Bladex performed quite well. The unique flexibility of our business model and the quality of our customer base continue to be key.
Moving to the presentation on Slide 3, as you probably recall, during the second quarter, our loan portfolio shrunk by as much as 16%, up to $1 billion, while we're in the process of reassessing credit risk and favoring liquidity during the first few weeks of this quarter. After very solid collections in Q2, we entered the third quarter with a very healthy portfolio close to $5 billion, mostly short-term focus on top tier banks and top tier corporates.
In Slide 4, you can see that we had over $2 billion maturing during the third quarter. More than 40% of our portfolio matured during Q3. Again, just like we did in Q2, we collected virtually 100% of all maturities across all industry in all the 18 countries we operate in.
Moving on to Slide 5. In Q3, we managed to grow our portfolio by 3%. We continue working closely with our clients and disbursed over $2.2 billion, 2 times of volume disbursed in the previous quarter. In Q2, these were mostly short-term, trade-related loans, the average tenure was 180 days and the average rate was LIBOR plus through 2027. That is on average 32 basis points higher than the maturing loans for the quarter. The resulting loan portfolio for Q3 in Slide 6, was slightly above $5 billion fully performing with 0 NPL. 73% of this portfolio is maturing less than a year with an average rate that is 14 basis points higher quarter-on-quarter.
Slide 7 highlights the fact that our credit exposure remains very conservative both in terms of countries and sectors. 59% of our loan book is now in investment grade countries and similarly 55% -- 53% of our book is based in top tier financial institutions across the region. You can see in both graphs, the remaining exposure is well-diversified among countries and sectors.
We will move to our next slide. In Slide 7, highlights the fact that our credit exposure remains very conservative both in terms of countries and sectors. It's worth mentioning that as our portfolio matures we keep strategically reducing our exposures in high-risk countries like Argentina, Ecuador and Costa Rica. Likewise, our exposure to risk in specific sectors has also been declining. As an example, our exposure in the airline industry continues to follow a downward trend since Q1. It has come down by almost a $100 million, 67%, and today represents less than 1% of the portfolio.
Moving on to Slide 8, we show our asset composition has valued throughout the year. By asset mix, by quarter-end, it's a [indecipherable] of resuming commercial portfolio growth. We have gradually reduced our liquidity position which by the end of the quarter was $1.5 billion, but always making sure we maintain a robust level. Also, as an effort to increase the profitability of our cash position, our relatively small investment portfolio increased by $138 million or 144% and reached $234 million. Of this total, $107 million was invested in highly -- in high-quality liquid assets in accordance with the specifications of the Basel Committee.
Moving on to the liability side of our balance sheet in Slide 9, we'll show how our funding structure has varied over the year. Several points should be highlighted. One, our deposit base continues to grow as much as 6% quarter-on-quarter. Couple of things here, one, Bladex new Yankee CD program has observed a very positive evolution, over 70% growth quarter-on-quarter and reached $329 million. These certificates are proving to be an efficient tool to further diversify our funding base and attract new investors.
Also on the deposit side, Latin American central banks, our Class A shareholders continue to comprise more than half of total deposits. As we have said before, these deposits represent not only a stable, cost effective funding source, but also a clear demonstration of the support that central banks across the region continued to delay in Bladex during uncertain times.
The other thing worth mentioning is our bond issuance. As you probably saw in early September, the Bank successfully placed its third bond issuance on the 144A/RegS market for $400 million. The bonds have a five-year term and pay a fixed rate of 2.375%. The placement was 4 times oversubscribed. The robustness of the demand allowed these transactions to be completed with the lowest coupon of all 144A issues carried out by Bladex so far.
Also, the Bank sells a new syndicated facility of $150 million, which was successfully paid among investors in Asia, Europe and the America. The Bank entered into these transactions for the dual objective of further reinforcing the structure of its funding base by increasing diversification and extending the residual times maturity of its financial liability. Moreover, with the purpose of generating efficient financial resources to capture new medium-term lending opportunities that have been identified by our commercial team.
I will now turn the call to Annie, so she can walk us through the P&L implications for all of us. Annie?
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Thank you, Jorge. And good morning to all. So let's move on to Slide number 10, where we present the results for the third quarter 2020 with a net income of $15.4 million, representing a 9% increase quarter-on-quarter and this is mainly due to increased revenues from interest, fees and other income up a combined total of $1.8 million or 7% due to higher net interest margin and spread and to a better performance in fees from the healthy business, which has already recovered to pre-COVID levels.
In addition, the combined impact of credit provision charges and of changes in fair value of financial instruments totaled $1.9 million for the third quarter, a $0.6 million increase compared to the previous quarter thus denoting a relatively stable trend in provision charges in line with historical level. This is a reflection of the overall good performance and sound asset quality of the credit portfolio on the account of close to 100% collections as Jorge mentioned, and of no NPL as I will go into with more detail later.
Year-on-year, quarterly profits decreased by 24%, mostly on lower net interest income on margins due to the change in asset composition since March of 2020 when the Bank decided to increase its cash position and lower loan balances in view of the impact of COVID-19 and the market uncertainty is triggered that Jorge alluded to before. Lower profits on stable and solid level of equity of over $1 billion has resulted in decreased quarterly returns for 2020 with a 6% ROE for the third quarter, denoting nonetheless an improvement of 0.5 percentage points quarter-on-quarter.
On Slide 11, represents drivers for quarterly net interest income evolution, which represent the main revenue pool for the bank at approximately 90% of total revenue. Quarterly net interest income or NII increased 4% quarter-on-quarter to $22.6 million, while net interest margin or NIM of 1.42%, was up by 14 basis points. The main driver of quarterly increases in income and margin was a continuous widening in net lending rate differential denoted by the 2.05% difference between loan and overall funding rates, which increased by another six basis points during the third quarter. This in turn reflects higher lending spreads as Jorge referred to before given that Bladex continued to take advantage of new loan origination at higher risk adjusted pricing with respect to pre-COVID levels, really compensating loan repricing on lower market LIBOR based rates, which also positively impacted liabilities repricing.
On the other hand, average volume effect continued to put pressure on NII due to asset mix compensation, as I just mentioned, with average cash still representing about 27% of total assets for the third quarter and average loans at 70%. Even though in the period, loan balances started to show a positive growth trend during the third quarter with a 2% increase and accounted for 74% of total assets at the end of the quarter. While ending cash balance decreased by 31% during the quarter, representing now 22%.
Year-on-year, the quarterly NII decreased of 15% and the 35 basis points drop in the net interest margin are mostly a privilege to the change in average assets compensation, that I just commented on, as well as lower market rates impacting the overall yield of assets financed by our ample equity base. On to Slide number 12, we present the evolution of allowances for credit losses which under accounting norm, IFRS 9, incorporate forward-looking expected losses so that Bladex's best estimation of the impact of the current economic environment is already accounted for.
Non-user deteriorated credits were recorded during the quarter, so NPL balance remained at zero as of September 30, 2020. Moreover, during the third quarter, Stage 2 exposure as said by the bank has having increased risk was reduced by $178 million, now representing 6% of total credit exposure, mainly reflecting the reduction of credit balances in countries that have been downgraded by the Bank during this year. In this respect, during the third quarter, and given the recent developments in Argentina, based through allowances, allocated to exposures in that country -- mainly in that country increased by $4.5 million, which combined with lower Stage 1 requirements on low risk originations explains the overall $1.5 million charge in credit provisions for the third quarter.
Stage 2 exposure reduction also reflect collections on the Bank's watch list exposures, including the sale of a $17.5 million loan to a South American company in the airline sector, reducing that company's exposure to zero, down from $46.5 million in March of 2020. This transaction led to a $4.4 million write-off against previously established credit allowances denoting an overall recovery rate in excess of 90% of this client's exposure since the beginning of the current crisis.
Stage 1 exposure, categorized as low risk, increased by $487 million during the quarter to 94% of total exposure. Overall, the Bank's total allowance for credit losses represented 84 basis points of total credit portfolio at September 30, 2020, all of which remains current.
Continuing on to Slide number 13, operating expenses for the third quarter of 2020 remained relatively stable quarter-on-quarter at decreased level year-on-year, mainly due to lower salary and other employee expenses we accounted to due performance-based variable compensation provision, while non-personnel expense levels remained relatively stable. Efficiency ratio stood at 33.1% for the third quarter, an improvement of more than 8 percentage points with respect to the previous quarter on higher revenue.
I would now like to turn the call back to Jorge. Thank you.
Jorge L. Salas Taurel -- Chief Executive Officer
Thank you, Annie. As I said in my opening comments, the third quarter results are once again a good reflection of our conservative approach and the flexibility of our business model. A client that we deal is exclusively with top tier corporations and banks, has allowed us to keep collecting virtually a 100% of all maturities on time and dispersed new loans in Brazilian countries and sectors.
Having said that, there is no doubt that there is still a great deal of uncertainty in the months to come and therefore priorities will continue to be the quality of our loan portfolio in keeping ample liquidity. I am very proud of the way our team has come together to navigate the storm so far. There is no doubt that opportunities that keep arising as the economies reopen throughout the region and Bladex will continue to be there to support our clients during this uncertain times.
That said on our side, I'll open it up for questions now.
Questions and Answers:
Operator
Thank you. And at this time we will open the floor for questions. [Operator Instructions] Our first question comes from Alvaro Lewis. Please go, ahead. Alvaro, your line is now open, please proceed with your question.
Alvaro Lewis -- BG Valores -- Analyst
Sorry, can you hear me? I was on mute.
Operator
Yes, go ahead.
Alvaro Lewis -- BG Valores -- Analyst
Perfect. Thank you. Well, thank you for the update and for taking the question. I have two questions. I'll start with one. So during the quarter, the bank resumed its portfolio growth. And I just wanted to see if you could elaborate on the sustainability of this growth going forward, I assuming that current economic conditions in the region? And also if there's any particular sectoring we anticipate to focus this growth on?
Jorge L. Salas Taurel -- Chief Executive Officer
Sure. Thank you for your question. It's a very good question related to opportunities going forward and the sustainability. We do see opportunities going forward. As the economies reopen, we're seeing increased demand from our client base, both corporate clients and banking clients. Obviously, we are seeing an uptake in their demands with their own clients. Also some of our corporate clients are looking to take advantage of the situation to grow organically and inorganically. So we have some demand there.
There's also an interesting thing going on with our letters of credit. And there are some to the extent that sometimes, I think, maybe switching suppliers there's some opportunities there as well. So, I would say we do think that demand will be there in short as economies reopen. As far as sectors, we do have a very clear understanding of what sectors are more resilient and we have a lot of demand in those sectors as well.
Alvaro Lewis -- BG Valores -- Analyst
Perfect. Thank you so much. And is there a time for another question?
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Sure.
Jorge L. Salas Taurel -- Chief Executive Officer
Sure.
Alvaro Lewis -- BG Valores -- Analyst
Perfect. The other question is in regards to liquidity, the bank has gradually reduced its liquidity position. During the last quarter it stood at around $1.5 billion at the end of third quarter. So I just wanted to see what are your plans to optimize your liquidity at this point?
Jorge L. Salas Taurel -- Chief Executive Officer
Yes, liquidity has been coming down, as I mentioned, because of -- we're positioning for commercial portfolio growth. I cannot give you a specific target on liquidity. I can say though that as opportunities arrive, we could see liquidity coming down. And also to increase the profitability of our cap position, we're also increasing our bond portfolio as I mentioned with highly liquid, low risk assets, but that's a way to increase profitability on that cash position.
Alvaro Lewis -- BG Valores -- Analyst
Perfect. Well, thank you so much for the update and for the feedback on this question.
Jorge L. Salas Taurel -- Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from Robert Tate. Please go ahead, sir.
Robert Tate -- Global Rational Capital -- Analyst
Good morning. Can you hear me?
Jorge L. Salas Taurel -- Chief Executive Officer
Yes, we can hear you.
Robert Tate -- Global Rational Capital -- Analyst
Great, thank you. Congratulations on the good results. Very solid. I just have three questions if that's OK. So the first one is on the loans in the airline industry, the second one is loans in other high-risk industries and the third one is just on dividends. So the first one I just wanted to ask what is the remaining average number of months to maturity for the remaining airline loan balance of $48 million? And is it due to just one borrower or more than one borrower? That's the first question.
Jorge L. Salas Taurel -- Chief Executive Officer
Thank you, Robert. So it's just one borrower and we feel very comfortable with the exposure. The airline has over $1 billion in cash and that exposure is, it's for two more years.
Robert Tate -- Global Rational Capital -- Analyst
Okay. Thank you. And so the second question is just on other high risk industries, loans in other high risk industries. And early in the year you spoke about and reported on a number of them, including the others of particular interests, I think, are automotive, retail and upstream oil and gas. And so I was wondering if you could just give us -- just talk about those industries and give us a bit more background as to what is happening in terms of the loans to those industries. That would be great. Thanks.
Jorge L. Salas Taurel -- Chief Executive Officer
Sure. So oil and gas upstream, and supply chain, and also to a lesser extent, we have, car industry, including car dealers and then sugar and ethanol among others. We've been able to reduce our exposure to this higher risk industry by about $230 million. That's 31% compared to Q1 numbers. So, with a major concession in car trade, and airlines and then sugar and retail as well. So, oil and gas are exposed to 85% focused in the oil industry mainly on Trinidad & Tobago. Our main exposure is with a trade company there. And we believe that the sovereign plays a key role under stress scenario. So we feel comfortable there.
In the sugar and ethanol, we cut our exposure to the industry by 46% since the onset of a crisis after we sold the NPL case in Brazil. I don't know if that -- you need more clarity on that. That's what I can say.
Robert Tate -- Global Rational Capital -- Analyst
Yes. I think that -- yes, that's fine thank you. And in the final question, the third question is just on the dividend, and I was wondering if you could comment on the most important considerations that the Board would focus on in assessing the dividend and whether to raise it back to its previous levels. Like, what are the things that -- that you tend to I guess place the most emphasis on in making that decision?
Jorge L. Salas Taurel -- Chief Executive Officer
Sure Robert. I'm going to say it again, as you all know, the dividend policy is up to the Board. It's a quarterly decision. So I consider the results for the quarter, but also the situation going forward. I prefer not to speculate on future dividends. I cannot tell you this is the new normal, I cannot tell you otherwise, the historically high levels of our capital are a reflection of the nature of the region we operate in. Capital preservation is our priority and I don't see that changing until we have more visibility on how this whole situation is going to evolve.
Robert Tate -- Global Rational Capital -- Analyst
Okay, thank you very much. Congratulations on the solid results.
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Thank you, Robert.
Jorge L. Salas Taurel -- Chief Executive Officer
Thank you, Robert.
Operator
Thank you. [Operator Instructions] Okay, and it appears that we have no additional questions at this time.
Jorge L. Salas Taurel -- Chief Executive Officer
All right, then thank you everybody for joining the call and please stay safe. Good bye, now.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Jorge L. Salas Taurel -- Chief Executive Officer
Ana Graciela de Mendez -- Executive Vice President and Chief Financial Officer
Alvaro Lewis -- BG Valores -- Analyst
Robert Tate -- Global Rational Capital -- Analyst
