Banco Latinoamericano Comerc Exterior SA (NYSE:BLX)
Q1 2014 Earnings Conference Call
April 23, 2014 11:00 AM ET
Rubens Amaral – CEO
Christopher Schech – CFO
Chris Delgado – JP Morgan
Gary Lenhoff – Great Lakes Advisors
Hello, everyone, and welcome to Bladex’s first quarter 2014 conference call on today, the 23rd of April, 2014. 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.
And joining us today are Mr. Rubens Amaral, Chief Executive Officer of Bladex, and Mr. Christopher Schech, Chief Financial Officer. Their comments will be based on the earnings release, which was issued yesterday. A copy of the long version is available on the corporate website.
Any comments made by the executive officers today may include forward-looking statements. These are defined by the Private Securities Litigation Reform Act of 1995. They are based on information and data that is currently available. However, the actual performance may differ due to various factors which are cited in the safe harbor statement in the press release.
And with that, I am pleased to turn the call over to Mr. Rubens Amaral for his presentation.
Thank you, David. Good morning to everyone, and thanks for taking the time to attend our call today. I’m pleased to present to you solid results for the first quarter 2014. We were able to benefit from the strong origination in the fourth quarter 2013 which helped us to do over the cyclicality of the first quarter in Latin America when productivity is traditionally slower.
Our total disbursements to give you some color for the quarter amounted to $3.3 billion, being $430 million in medium-term transactions which supported the diversification of the mix of our portfolio and improvement of the margins as discussed in previous calls. On the other hand, we’re continuing to diversify our funding structure taking advantage of the strong demand in the private placement market as well as in the syndicated loan market.
With more liquidity flow into the region, we were able also to improve slightly our cost of funds. Therefore, with the improved margins on the asset side due to the medium-term deployment, and better cost of funds, our net interest margin improved quarter-on-quarter and year-on-year reaching 179% which is ,although, shy of our objective was 2% is an important step towards this goal that we have shared with you before.
Our loan syndication business continues to strengthen and we are very pleased with the results in the first quarter 2014 as we have participated in six different transactions being sole lead arranger in two deals, joint lead arranger in two other transactions that were originated by us, and mandated lead arranger in two other transactions.
The total amount of the six transactions was $610 million and we held in our books an average of 25% of each transaction. Our pipeline for the second quarter remains attractive and we expect to continue to increase our fee income accordingly.
In terms of our investment in the front, the performance was again weak posting a small loss. Notwithstanding, we continued our redemption schedule as planned. And as of April 1, 2014, we’ve reduced our investment for $13.9 million which will enable the bank to deconsolidate the investment fund during the second quarter of 2014.
The Board of Directors approved the quarterly dividend of $0.35 per share, consistent with improved performance of our business results. The dividend yields remains attractive at over 5% and although the market price has depreciated a little more than the indices.
In terms of the market environment and how it might affect our business moving forward, our view hasn’t changed since the last time we meet. We had by now experienced an important reduction of the monetary stimulus by Federal Reserve Bank, fluctuations and the commodity prices and now there are things affecting our markets, but we continue to see investors investing more in our region. Thus, we’re keeping our forecast of the fourth quarter growth for 2014 between 10% and 13%.
We continue to monitor constantly the quality of our portfolio. That is a critical feature in the way we manage the bank. And we do not expect any meaningful change in our provisions requirement except the natural movements coming from the growth of the credit portfolio.
Lastly, we continued our efforts to improve efficiency throughout the organization. Our efficiency ratio continues to improve – ratio continues to improve and we remain committed to do more with less.
Thanks again for your time today. I will now turn it over to Christopher, to give value to our presentation and to provide you with more color about our figures. Thank you. Christopher, please.
Thank you, Rubens, and hello, and good morning everyone. Thank you for joining us on the call today. As we discuss our first quarter results, I will focus on the main aspects that have impacted our results. And as mentioned in the introduction, I will base myself on the earnings call presentation that we have uploaded to our website together with the earnings release which is being webcast as we are speaking.
So before we go into more detail, let’s start on page 6 with a quick rundown of the key financial highlights and drivers that shaped this quarter. The first quarter 2014 closed with net income to Bladex’s shareholders of $23.5 million compared to $23.9 million in the previous quarter, and $16.3 million in the first quarter of 2013.
In order to accurately present performance in our recurring business activities, we focused on business net income which is recurring net income derived from our principal business activities of financial intermediation which generates net interest, commission and fee income. We also referred to it as core income or income from core activities.
And that business net income reached $24 million in the first quarter down from the fourth quarter 2013, mainly due to the absence of reversals of provision to our credit losses. Business net income grew over 50% compared to the first quarter of 2013. Net interest margin is back on track as mentioned by Rubens having risen 10 basis points during the quarter versus the previous quarter which put us 17 basis points ahead of the level seen in the first quarter of the year ago.
Return on assets and return on equity metrics remained fairly stable quarter-on-quarter but improved sharply compared to prior year levels. The efficiency ratio improved quarter-on-quarter mainly from better non-core results and remained significantly below prior year levels. Our tier one capitalization continues to be comfortable, reaching 16.4% at the end of the first quarter.
So let’s look into quarterly results in a bit more detail, moving to the next slide, page 7 which shows the evolution of net income compared to the previous quarter and compared to the first quarter of 2013. Net interest income grows compared to the fourth quarter 2013 benefiting from higher lending spreads and lower cost of funds.
We had very little net movement in the provision line this quarter compared to the reversals of provisions recorded in the fourth quarter of last year. Other income which encompasses non-recurring items and non-core activities such as the participation in investment funds, these further other income recover from a larger loss in the previous.
Fee income while a bit lower in the fourth quarter of last year, we see them bullish from a very active structured finance business as already alluded too by Rubens as we will discuss later also in more detail. And the letter of credit activity was also better than what is usually seen for this time of year as the higher margin South American business is just starting to get underway.
Year-on-year, quarterly net interest income was substantially ahead on greater average portfolio balances and higher lending spread. Fee income was also ahead compared to the year ago on higher letters of credit activity and as mentioned the higher revenues from our syndications platform.
The next page, page 8, provides a closer look at net interest income and net interest margins. Deposited dilution [ph] quarter-on-quarter and year-on-year with both metrics benefited from lower cost of funds as evidenced by a rising spread. But lending rates also recovered when compared to the fourth quarter of 2013 in which we had seen weaker margin trend. Average portfolio balances remains relatively stable this quarter as we continued to give priority to better price transaction.
Average funding cost declined further this quarter as deposit balances grew, offsetting the effect of expanding tenders in our long-term borrowing. For the first time ever, Bladex plays 10-year tender debt during this quarter in order to provide a well-diversified and stable funding base for our business.
And just today, we also completed a very – oh, yesterday actually, we also completed a very successful and well-priced syndicated transaction, slicing $250 million in global and especially Asian markets with a tender of three-and-a-half years in support of our medium-term lending activities.
On page 9, a quick discussion of our efficiency levels which saw improvement compared to the previous quarter and the first quarter of the year ago. The business efficiency ratio looks at our recurring base of expenses and revenues and it showed a meaningful year-on-year improvement while remaining stable quarter-on-quarter at higher variable compensation expenses offset the efficiency effect of higher revenues.
Our first wave of Lean Six Sigma process improvement just launched during the first quarter of this year. And we expect to see the effect of that driving further business efficiency ratio decreases.
On page 10, we show the evolution of average portfolio balances. Financial institutions increased their share of the portfolio, mainly as a consequence of the medium-tendered structure transactions that our syndications platform arranged and took participation in this quarter. Demand from corporations remained robust, and average little market balances declined temporarily as the result of the current profitability reviews that we have been conducting.
On page 11, we highlight our fee and commission income business which generated income of $4.3 million compared to $4.7 million in the previous quarter. Year-on-year, fee income growth was nearly 80% as a result of the increased scale of our structured transaction platform business which closed more deals this quarter across the diversified lanes of clients, industry sectors and countries.
The pipeline of transactions looks quite healthy, and we expect to be making progress towards establishing this line of business as a dependable, consistent contributor of fee income going forward. Fee income generation on the contingency side of our business was also fairly solid are a bit lower than the previous quarter considering the seasonal aspect of this business. As mentioned before, we expect to see income picking up as the main season of commodity shipments get underway in South America.
On page 12, we talk about our non-core income, primarily resulting from the remaining classes investment in the investment fund, formerly owned by Bladex and which was sold a year ago. Performance in the funds was improved but still negative this quarter.
As Rubens mentioned, effective April 1st of this year, we made a partial redemption from the fund bringing our participation in the Feeder Fund below the 60% threshold. This will allow us to deconsolidate the Feeder Fund during the second quarter of this year. We will of course continue with contractual redemptions to bring down our exposure until our final redemption which is dated for April 1, 2016 at the very least.
And so, finally on page 13, we highlight our focus on total shareholder returns. Just recently, the Board of Directors authorized a quarterly dividend payment of $0.35 per share, helping maintain an attractive dividend yield for our shareholders.
And with that, I would like to hand it back over to Rubens to sum up our conclusions, and thank you.
Thank you, Christopher. Ladies and gentlemen, we are ready for your questions.
Ladies and gentlemen, at this time the floor is now open for your questions. (Operator instructions)
Our first question comes from Chris Delgado, with JP Morgan.
Chris Delgado – JP Morgan
Hi, good morning, just one quick question kind of relating to loan growth. Could you give us a sense of how you see that evolving over the course of the year, especially given the reforms that are happening in Mexico? Do you see yourselves increasing your exposure there? And that’s pretty much it.
Hey, Chris, good morning, and thanks for your question. We see our growth normally this year as we have seen in past years that the first quarter is always more challenging for us. And this year we benefited as I mentioned before from the strong origination we had in the fourth quarter. And we expect to see growth in the second quarter and the quarters ahead. Normally the way we see the market behaving, first quarter is slower, second quarter stronger, third quarter stable and fourth quarter again, stronger.
So we are anticipating to have the same sort of behavior that will allow us to grow something between the 10% and 13% that I told you before in my initial remarks. Mexico is an important market for us. It’s a very challenging market, with now the upgrade, margins naturally will be under pressured. But as we are diversifying into the middle market, we see opportunities of growth in that market. And we have also been more active in the local currency transactions. And you might see us being more active in that type of transaction in the second quarter.
So we expect to keep a health portfolio [ph] in Mexico, and we expect to see an important growth in the second quarter in Mexico, and you might see more growth in the local currency rather than US dollars as we also are benefiting from the availability of funding in Mexican pesos also to us in that market.
Chris Delgado – JP Morgan
Okay, great. Thanks.
Thank you, Chris.
(Operator instructions) Our next question comes from Gary Lenhoff with Great Lakes Advisors.
Gary Lenhoff – Great Lakes Advisors
Thank you. Christopher, just an administrative question, once you deconsolidate the investment fund, where will we see your participation in the investment earnings and expenses? Will that be in other operating expense or where will it flow to the income statement?
Yes. Gary, thank you, and good morning. Thanks for your question. Actually the main impact is cosmetic of course, we will still continue to participate on gains and losses of the fund and to the extent they materialize according to our participation percentages, which as you know has gone down.
It would be a single line in the other income line. And it would be net gain from investment funds trading. That would be the only line where we would show the results of our participation in the funds. And to us this is a great improvement because we don’t have to breakout the different lines, the expense line, the revenue lines. And so, that’s much easier for us and I think commensurate with what we intended to do from the beginning. So I hope this answer your question.
Gary Lenhoff – Great Lakes Advisors
It does. Thank you very much.
(Operator instructions) We have another question from Chris Delgado with JP Morgan.
Chris Delgado – JP Morgan
Hi, actually one other question I had relates to your efficiency. You guys have been able to control expenses quite well over the past few quarters, do you think you’ll still be able to continue to do that in the coming years without impacting the profitability of your business negatively?
Yes. Chris, if you don’t mind, I would take your question. I think the overarching goal is to do more with less as Rubens has mentioned. And so of course we want to generate more revenues with lesser expense growth.
So you may not target necessarily the expense reduction as we continue to grow our revenues in the double digits. But our intention is really to have a double digit growth rate in revenues accompanied by a low-single digit growth rate in our expense base. And that is something that we’re waiting for [ph].
And of course the overarching goal for us is to reach our efficiency ratio target of 30%, we’re getting closer. And if and when we get there and we don’t have much thought that we will get there, we won’t stop. I think we will continue to drive more efficiency in our business. And that is over the short and medium-term.
Did that answer your question?
Chris Delgado – JP Morgan
Yes, it does, perfect. Thanks.
(Operator instructions) I would now like to turn it back to Mr. Amaral.
Okay. Thank you, David. Thank you for taking the call today. As we always like to say when we close, we continue to work hard to make sure we continue to deliver a good results, solid results and improved results quarter-over-quarter, and we’re looking forward to a very successful second quarter.
Thank you very much. Have a great day. And thanks for taking the time to participate in our call today.
Ladies and gentlemen, that concludes today’s Bladex first quarter 2014 conference call. You may disconnect your lines, and have a wonderful morning. Thank you.
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