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Banco Latinoamericano de Comercio Exterior, S.A (NYSE:BLX)

Q2 2012 Earnings Call

July 19, 2012 11:00 am ET

Executives

Melanie Carpenter - IR

Jaime Rivera - Chief Executive Officer and Director

Christopher Schech - Chief Financial Officer

Rubens V. Amaral - Former Chief Commercial Officer and Executive Vice President

Analysts

Saul Martinez - JP Morgan Chase & Co, Research Division

Jeremy Hellman - Divine Capital Markets LLC, Research Division

Marc Miller - DePrince, Race & Zollo

Michael Bunyaner - TLF Capital

William R. Jones - Singular Research

David Ross - Chevy Chase Trust Company

Alessandro Arlant - Bank of America

Jordan Hymowitz - Philadelphia Financial

Presentation

Operator

Hello, and welcome to the Bladex Conference Call. We now have our speakers in conference. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Melanie Carpenter. Ms. Carpenter, please begin.

Melanie Carpenter

Thank you, Lindsey. Hello, everyone. Welcome to Bladex's Second Quarter 2012 Conference Call on this, the 19th of July of 2012. This call is for investors and analysts only. If you're members of media, you're invited to listen only.

Joining us today are Mr. Jaime Rivera, in what I'm sad to say is his last quarterly conference call as CEO of the bank. But we also happily welcome Mr. Rubens Amaral, longtime Chief Commercial Officer, who you all know well and has been named his replacement effective August 1.

Also with us is Mr. Christopher Schech, Chief Financial Officer of the bank. Their comments will be based on the earnings release issued yesterday. A copy of the long version is available on bladex.com, which was recently redesigned, so we invite you to go visit the website for some new additions.

Any comments that management makes today may include forward-looking statements. These are defined by the Private Securities Litigation Reform Act of 1995. They're based on information and data that is currently available. However, the actual performance may differ due to various factors, and these are cited in the Safe Harbor statement in the press release.

And with that, I'm very pleased to turn it over to Mr. Jaime Rivera for his opening remarks.

Please go ahead, Jaime.

Jaime Rivera

Thank you, Melanie, and good morning, ladies and gentlemen, and welcome to our quarterly conference call. Thank you for your continued interest in Bladex.

Like Melanie just said, this is a special occasion for me. It is, after all, the last chance I get and the last opportunity that I have to exchange views with you regarding the current state of the company and the way I believe it's going to move forward. So because of that, because it is the last chance I get to talk to you from within the context of this forum, I hope you will allow me to change the format of the call just a bit.

If you noticed, the press release -- in the press release, rather, I extended my comments on the quarter a bit more than I usually do. So I will be addressing the quarter only in a very short way because what I would want to emphasize and where I would want to spend a bit more time on is to outline the strategic drivers that I will -- I think that under Rubens' leadership and direction, will allow the bank to accelerate its growth and creation of value in the future.

Following my comments, Christopher will cover the highlights, the growth about -- on the drivers of the second quarter, and then we will be glad to take up whatever questions and answers you might have on any topic that might interest you. And after that -- after that, I will go through and go through my literally closing comments. And then ask Mr. Amaral to give us a few thoughts on what he thinks what he's going to do about the current state of the company and about his preliminary comments and preliminary ideas of the way he plans to move the bank forward. Of course, we placed Mr. Amaral last in the program to make sure that you will all stay and listen to everything else he has to say.

So with that then, let me quickly say a couple of things about the quarter and it's nothing new. But I do want to emphasize 2 aspects, which I think of the second quarter that is, which I think are very important. Firstly, the issuance of medium-term debt that increased the cost of funds during the quarter. We think of this as the same type of investment that we did in 2010. Remember when in 2010, we invested in the expansion of our network. We opened new offices and hired new people. So that expense has depressed the results of the quarter of the bank for a couple of quarters. But it turned out to be a fantastic investment. This is one of the reasons why the Commercial division has doubled its contribution the last year. And we're firmly convinced that the issuance of that medium-term debt will turn out to be equally beneficial to the bank over the medium term.

And secondly, the provisions that we have to take this quarter. Those provisions came about, they are generic provisions, by the way, very importantly, they are generic provisions. And they are the result of a couple of, more than a couple of very good business opportunities that we didn't want to pass on. In both cases, we did -- let me just state clearly, we did not have to issue long-term debt. We did not have to do it. And the results for the second quarter would have been better. And certainly, we did not have -- we could have forgone on those very good transactions that we did and which brought about the need for additional provisions. We did not have to go through with them. And they would also have added to this quarter's results. That's not, as you know, the way we run the company. We run the company with a medium-term prospect in mind. And from the perspective of the future, both the issuance of medium-term debt and the pursuit of transactions such as the ones that we did this quarter that brought about the provisions about, will be extremely beneficial to the company.

So that's -- so those are the only 2 comments that I wanted to make on the quarter. Again, if you have questions after Christopher's view on the performance of the bank during the period, we will be glad to expand on the subject.

But what I'm really most interested in conveying to you today is my objective view of what I believe are the drivers that will continue to allow the company to move forward at an accelerating pace. There are 4 points that I wish to make, if you allow me.

Firstly, yes, we're all aware that there's an economic crisis going on. I personally side with those who believe that the crisis will still go on for a long time because the underlying root, the only underlying reasons that brought it about has not been addressed. But it is, in the United States, at least, an economic crisis. And as all economic crisis do, it will pass. It will pass. And in Europe, of course, it will probably take longer and be more costly because the Europeans are facing what I believe is not only an economic problem, but also a political one. Political crisis tend to take longer to resolve, and unfortunately, are generally more costly by the time it's all over.

But the important thing, and the thing to keep in mind as you think of the crisis and Bladex, is that not only it's a company -- has the company been able and is very well prepared to weather the crisis. But just as it happened in 2008, we will come out stronger for it. And let me give you just a couple of reasons why I believe this.

Firstly, we're going to be facing even less competition than we're facing today. There will be fewer international banks focusing on trade financing in Latin America. It will take a while for them to replenish their capital bases and address the issues that they need to address before and some of them will return to Latin America.

And secondly, we will also have less competition because while Latin American banks are becoming increasingly regional, they are doing so focusing on businesses other than trade finance. Their focus remains on retail -- retail business, mortgages, et cetera, and are only being -- are not being significant competitors to us. This factor alone will place in a stronger position than we're currently at, and allows us to do more business.

Secondly, internally, just to give you another example, if you think that we had a very strong risk management system before, you should see the one we're creating now. In order to continue doing business and growing as we have and while maintaining our credit quality, we have had to invest and upgrade our Integrated Risk Management System to the point where I can assure you that shareholders would be proud of what we've done. This, of course, with the Risk Management System, will represent a tremendous competitive advantage, not only now, but even after the crisis is over. Again, first point, there is a crisis. It'll probably take a long time to resolve, but as was the case in 2008, Bladex will come out stronger for it.

The second point that I'd like to make is, that in my opinion, Latin America will weather the crisis better than it's being given credit for. Do you remember the last decade of the 80s? Well, as it turns out, the bitter, extremely bitter medicines, in fact, that we were forced to take during the 90s has resulted or has brought about the situation where all countries throughout the regions, as you know, are weathering the crisis, weathering the international crisis quite well. As you know debt levels are low, reserve levels are high, et cetera. But there are a couple of points that I want to make because I don't think they have been given due importance, and which are important for Bladex and -- for Bladex and its future.

Firstly, domestic markets. Domestic markets in just about every country in the region have evolved. New wave of consumers have come about. I think that I told you the story about visiting San Pedro Sula, in a small city in Honduras, not too long ago, and not being able to find a parking place in a shopping center. And what this mean? What this means for Bladex is that domestic markets have evolved. Consumers, a new wave of consumers have come about, and consumers are importing. Consumers are buying goods, many of which have to be imported. Some of which come from other countries in Latin America, some of which come from outside the region. But this new wave of consumers is fueling, and will continue to fuel Bladex’s growth to a larger extent than it did even just a few years ago.

Thirdly, and as we predicted a couple of years ago, but maybe to an extent that we did not anticipate, Latin America has become a breadbasket to the world. We knew that we're going to continue being important, I mean, become increasingly important producers of the food that the newly emerging countries in Asia and the Middle East need. But as it turns out, Latin America has become a bread basket, so to speak, also for minerals and, increasingly and crucially, energy. I'm sure you're familiar with the discovery of new energy sources, oil and gas, not only in Brazil but also in Colombia and Argentina, and how Mexico is expected to invest significantly in production over the next 2 years, et cetera. This energy and this food and this minerals are going to be exported. They're going to need a financing and that will also fuel Bladex's growth, turbocharge it in the coming years.

And finally, the fourth factor that I think is important is the dynamics of demographic. It's not often -- very few people have focused on it to the extent that Bladex has. But if you look at the demographics dynamics or the dynamics of the demographics in Latin America, you will see that they are very favorable, extremely favorable, in fact, as you compare them to the rest of the world. There are very large numbers of people who are about to enter the labor force. Mexico, as I think I mentioned before, something like 38% of the population is below or younger than 20 years of age.

As those people enter and join the workforces, enter and become economically active, they will demand goods and services. Many of the goods that they will demand will have to be imported, again, many from other Latin American countries. And with that, trade volumes in the region will grow and that will directly play up to Bladex's strength. That would also -- that will also be another factor driving the growth of Bladex's underlying business.

So there are 4 very important established shifts in the region that will, over the long run, continue to fuel Bladex's growth. Now all of these -- all of these factors would mean little if we didn't have a good position in the market. But the fact is that we are extremely and uniquely well positioned. We have very close relationships with 23 governments in the region. We work with just about every important bank in the region, and by the way banks we believe are also going to grow as the new populations join the economy demand banking services. So we know -- and we have strong relationships with just about every bank that will benefit from this strength and we do business with them.

And finally, we are positioned such that we do business with companies all the way from Monterrey in Mexico to Santiago in Chile, something like, last count, 29 different industries. So we are extremely well positioned in the region. We are, objectively, I believe, positioned as the very best regional financial services company operating in the region.

And if you couple these, couple all of these with what our clients have described as the best team in the business, Bladex’s businesses, Bladex's team is considered by our clients the best in the business. And the leadership of my friend Rubens Amaral, who I think is the best man in the business, you have the makings of an absolutely winning combination over the next few years. Those are the strategic drivers that will continue to fuel and accelerate the performance of Bladex as it moves into the future. And that's why I'm so excited about it. If you're a long-term shareholder, again, and most of our shareholders are long-term holders of our shares, I think you can see -- I think you can see the potential for Bladex to continue growing and to continue generating wealth is very real, very real. And that is why there are risks involved in the execution of the strategy as we move forward, the odds are very much in our favor.

The work that has been done with the company over the last 10 years has been very good. But the way I think about it, the way I think about it, in terms of what is likely to go on from here onwards, and that was a -- and this is the way I described the process to the board a couple of days ago. It seems to me that if you want to do some sort of analogy over the last 8 to 10 years, what we've been doing is basically putting together a very strong and reliable rocket that is about to take off under leader -- under Rubens' leadership. This company is literally, I believe, going to be moving on to a different sphere and another orbit, based on the very objective and clear factors that I just described.

So with this I will then now ask Christopher to take us through the drivers of what was the second quarter. And then we will be extremely glad to take up your questions and have a conversation, which is, as you know, the part of the conference call that we enjoy the most.

Christopher, please.

Christopher Schech

Thank you, Jaime. Hello, and good morning, everyone. Thank you for joining us on the call today. In discussing our second quarter of 2012 results, I will focus on the main aspects that have impacted our results, and I will put them in context with the previous quarter and the same quarter of the year ago.

Now both these comparison quarters have shown particularly strong net income performance, which was significantly impacted by the release of reserves in the case of last quarter, and the investment fund trading gains in the case of the second quarter of last year.

Net income this second quarter of 2012 is the result of -- is the result of the return to more normalized levels regarding reserve levels and trading gains in the investment fund. Nevertheless, we believe that core business fundamentals remained solid this quarter. On a year-to-date basis, results are as strong as they have ever been in the course of more than a decade, leaving us well positioned for the remainder of the year. But let us look in more detail into these and other factors that have shaped the second quarter results.

The second quarter of 2012 closed with net income of $23.2 million, a decrease of $9 million or 28%, compared to the previous quarter and a decrease of 10% versus net income reported for the second quarter of 2011. Let's get right into the key drivers that defined this quarter, starting with the performance in the Commercial division, where net income was $15.7 million in the second quarter compared to $25.7 million in the first quarter of 2012 and compared to $10.8 million in the second quarter of 2011.

As Jaime mentioned, a change in generic reserve provisions for loan and off-balance sheet credit losses was the main factor impacting the quarter-on-quarter variance of the Commercial division and for the entire bank. While last quarter there was a release of reserves, this quarter we had provisions resulting in a $9.5 million swing quarter-to-quarter. Two main factors were driving this: Firstly, the growth rate of our Commercial portfolio balances was 3% this quarter and with that reserve requirement grew as well; secondly, we saw this quarter a shift in the Commercial portfolio towards exposures with high in hand risk, essentially reversing the shift in the opposite direction that happened in the first quarter of 2012. Taking these movements of the 2 quarters together, our reserve levels are basically back to where we expected them to be in relation to overall credit risk mix and portfolio growth at this point.

The second important driver of the Commercial division results was in the net interest income line, as net interest margin and net interest spread showed a decline this quarter versus a long-running trend of increase the last couple of years. The reason for this decline was the change in the structure of our funding base towards longer tenors as Jaime already described.

Over the last 6 months, we have raised over $750 million in medium to long-term funding in this 5 year range. And we have substantially decreased our dependency on short-term borrowings, which are cheaper, but which are also much more volatile. This has driven an increase in our interest expense this quarter, which more than offset increased interest earned on higher portfolio balances and higher rates. However, we believe that the net interest spread contraction will be short lived and it will eventually be compensated over the next few quarters as you put the new funding to work through the 5-year tenor loans, which will support a sustained NIM expansion. The more solid funding base puts us in a position based on business growth regardless of short-term capital market volatility that allows us now more than ever to be a dependable provider of financing solutions to our clients across a wide range of tenors.

Commission income came in slightly higher compared to the previous quarter as activity in the letters of credit business picked up in South American market. In terms of portfolio quality, the portfolio risk profile remains solid with nonperforming loans representing 0.5% of total loan portfolio balances, same level as in the previous quarter and compared to 0.6% in the second quarter of a year ago.

Average Commercial portfolio balances, including acceptances and contingencies increased 2% in the second quarter, driving interest earnings as I mentioned earlier. And this growth was 11% higher than a year ago. So average Commercial portfolio balances reached $5.3 billion, while period end portfolio balances reached $5.6 billion, a 3% increase over the previous quarter and an 8% increase over the prior year.

Quarterly disbursements amounted to $2.6 billion in the second quarter of 2012, up 3% from the first quarter of 2012, as we ramped up disbursements both at the very short end as well as in the longer tenor. Credit disbursements increased as loan demand stabilized in Brazil after the introduction of new FX regulations and we continued expanding our business in countries like Peru and Panama. Peru now represents our second largest portfolio.

Loan demand from large corporations and financial institutions remain solid, and the share of middle market companies in our Commercial portfolio continues to increase gradually. This middle market segment now accounts for 9% of the Commercial portfolio. And that Commercial portfolio continues to be short term and trade related in nature, despite what we intend to do in terms of extending loans in the medium to longer tenors. 77% of the portfolio will mature within 1 year, and 66% of the portfolio is trade-finance related, while the remainder represents lending to banks and corporations that are also involved in foreign trade.

Now let me move on to the Treasury division, which posted net income of $0.2 million in the second quarter, compared to $5 million in the previous quarter and compared to $3.8 million a year ago. As favorable valuations of funds issued in the region persisted, we again reduced positions in securities, during times of high market liquidity and realized gains on sale in the process. For our cost benefit analysis, these gains that we have realized so far this year, exceed by far the foregone interest earned on the coupons for a full year.

Nevertheless, the reduced bond portfolio balances, together with the changes in our funding structure that we discussed a few moments ago. This contributed to the decrease of net interest income this quarter. As Jaime mentioned, we will become bond buyers again when market valuations become more attractive.

The securities portfolios continues to consist of high quality in liquid Latin American securities. More than 80% of the securities portfolio represents sovereign or state-owned risk.

This quarter increased market volatility prompted us to boost liquidity balances again. The liquidity requirement is determined by our liquidity measurement process, which we built to monitor our liquidity coverage and stable funding ratios.

At a level of $2.4 billion, deposit balances remained at the high levels reached last quarter, up 14% versus a year ago. Deposits represent 44% of the bank's liabilities. In contrast, short-term borrowings, the most volatile component in our funding structures in terms of availability and pricing, now represents 13% of total liabilities compared to 20% in the previous quarter and compared to 22% a year ago.

Now lastly, our Asset Management division or units rather, added another positive quarter to the investment track record with net income of $1.7 million, after the net income of $1.5 million in the first quarter of 2012 and compared to net income of $11.1 million a year ago. The bank has so far maintained its investment levels in the fund this first half of the year, but we've continued to execute on our strategy to reduce exposure to the fund.

Moving on from the analysis of the key business dynamics in our segment review, let me give you a brief summary of other financial highlights of the bank's performance in the second quarter of 2012.

Operating expenses in the second quarter were up $0.7 million or 6% compared to the previous quarter, mainly as the result of higher salary and other employee-related expenses that are associated with a higher average headcount. And also related to an increase in other operating expenses, which is mainly attributable to the move to our new corporate headquarters. Year-on-year quarterly expenses in the second quarter were up by 1%.

The move to new headquarters also triggered the sale of our former corporate offices, which resulted in a one-time gain of $5.6 million this quarter. Bank's overall return on equity reached 11.7% in the second quarter after 16.6% in the previous quarter and compared to 14.3% in the second quarter of 2011. Year-to-date returns stand at 14.1% compared to 11.9% last year.

The bank's book value stands at $29 -- $21.29 a share, up from $20.79 a share in the previous quarter from higher retained earnings balances. Leverage at the end of the second quarter is at 7.7x, which is going to be unchanged from the previous quarter and only slightly down from the 7.9x that we saw in the second quarter of 2011.

Tier 1 capital is also stable, standing at 18.2% compared to 17.9% last quarter, and 17 -- 18.1% a year ago.

The board declared a dividend of $0.25 per share at our meeting that just concluded a couple of days ago for the second quarter of 2012. Meanwhile, our stock price has reached new multiyear highs just recently.

And with that, I'd like to hand it back to Jaime for the Q&A session. Thank you very much.

Jaime Rivera

Thank you, Christopher. Ladies and gentlemen, please, we would love to listen and address whatever questions you might have on the quarter or any other issue related to the Bank or Latin America or the industries that you would wish to discuss.

Please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Saul Martinez with JPMorgan.

Saul Martinez - JP Morgan Chase & Co, Research Division

I have 2 questions. First, is there any way to quantify what the impact of the medium term debt issuance had on your financial margins? Obviously, it declined sequentially quite a bit, I think in absolute terms $3 million, $4 million. How much -- is there any way to quantify that, the impact? Either in terms of the difference of funding cost versus your other funding, just any color around that would be helpful. And how quickly can you get your net interest margin back from 1 -- this quarter 1.7% back to what it was in the first quarter, closer to 1.9%. And then secondly on your generic provisions, can you provide a little bit more color on what drove that, what changes in your or what your risk model -- how your risk model is incorporating some of these increased exposures? Any color on what drove that? Because, obviously, as you mentioned credit quality was -- didn't -- deteriorate at all in the quarter.

Jaime Rivera

Saul, this is Jaime. I would take the first part of -- or the second part of your question, and I will let Christopher deal with the ones related to margins. Just to give you a flavor for how our provision system worked. It is based and driven by a sophisticated model. As that takes into account the type of transaction that is involved, tenor of the transaction, the risk rating of the client involved and the geography of the country where the deal is taking place. Different types of transactions combined with different geographies bring about different need for provisioning, in terms of percentage of the deal. And what happened in this quarter is that we had the opportunity and there was demand from -- on the part of countries that are lower or -- lower on our risk rating as to do transactions that were more general -- more capital intensive. They were very attractive from the point of view of risk adjusted returns, but they did require of higher provisions. They were, in all cases, they were strategic transactions with clients that we have been trying to develop with -- a relationship with for a long time and that we think are going to continue doing business with us. In essence, those were good deals, that because of our provisioning model, have brought about the need for what this quarter were, particularly heavy provision charges. That's simply what happened. Again, we could have forgone them, but it would have been a very bad decision from a business perspective. Once those transactions are repaid, and they are short-term transactions, by the way, as I said in the press release, provisions will be released. They will either come back to the income statement as reversals, or having -- as the provisions having been created, they would allow us to do other business, either with the same client or in the same country and with -- on the same structure. Did I answer your question?

Saul Martinez - JP Morgan Chase & Co, Research Division

No, that's great. But I guess the bottom line is that on a more -- obviously, these are good transactions from an economic standpoint and in a more normalized quarter, the provisioning level should be lower.

Jaime Rivera

That's correct. On a normalized quarter, it should. And actually, like Christopher alluded to, in a normalized quarter, the provision levels probably approximate the provision levels that we have averaged over the first 2 quarters. That's more like it. The first quarter, the business mix was just the opposite. We did a lot of transactions in lower rated countries and lower -- from our perspective of risk and lower risk restructures. That was the opposite this quarter. Going forward, provisions will remain necessary, of course. We will continue growing. But they'll be somewhat more normalized.

Saul Martinez - JP Morgan Chase & Co, Research Division

Okay, that's great.

Christopher Schech

And in regards to your question regarding the funding cost, I would like to take that question, Christopher. You saw it in our quarterly analysis, in exhibit 3 and 4, I believe it is, that our average funding cost did increase by around 21 basis points, and that is really attributable to the higher levels of medium-term funding that we have put on the balance sheet. But remember also that we decided to reduce short-term borrowings, which were, of course, cheaper than medium-term funding, but were in our view, beneficial. Because within the short-term bracket, this short-term fund borrowings were relatively expensive. So we’d rather be keeping our powder dry in those short-term tenors of funding and make better use of that type of funding when it becomes necessary. So overall these 2 factors drove up the average funding cost by around 20 to 21 basis points. Now the question is, of course, how quickly can we compensate for that on the lending side and here, I think, it is clear to us at least, that the differential between the rates that we get in 2- to 5-year tenors are vastly superior than the lending rates that we achieved in our short-term business. So we are quite confident that any new deal that we place in the 2- to 5-year tenor will more than compensate for the incremental cost. And eventually, that will lead to a strengthening of the net interest margin again. We expect that to be happening over the course of the next couple of quarters. Hopefully, we can see substantial inroads in this year, but certainly we will benefit from that in the coming years as well.

Jaime Rivera

One last comment on the subject if I may, Saul. Also critically important that the funding that we raised will allow us to expand our syndication business. We already have a couple of mandates in the bag that will be structured probably over the next quarter. The syndication business, of course, not only produces interest income, but also produces fees, which as we have admitted in the past, remains one of the few weak points that we still need to address in our business model. So the benefit will be double, not only higher spreads that's because of the tenor of the loans that we will be extending, something we can afford to do. As you can see from the press release, our average loan tenor, actually, came down to 2, something like 280 days. Although, we have a lot of space to prudently extend it to other tenor on the portfolio, but also there will be a very significant and real impact in terms of syndication fee. An area, by the way, where we have less competition than we had in the past. There are fewer players because there are fewer banks that have the capital resources to be able to underwrite the transaction, which is something that I'm sure Ruben's going to be emphasizing over the coming quarters.

Operator

Our next question comes from Jeremy Hellman with Divine Capital Markets.

Jeremy Hellman - Divine Capital Markets LLC, Research Division

Most of what I have has been covered. But I did just wanted to chime in and say thanks and wish you all the best. It's truly been a pleasure working with you over the years. And I think you may remember, I first started studying the company when Carlos Yap held the CFO position, so it's been a while. So just wanted to wish you well, all the best and I have enjoyed it and extend my welcome to Rubens.

Operator

Our next question comes from Marc Miller with DePrince, Race & Zollo.

Marc Miller - DePrince, Race & Zollo

I just have a follow-up question from some of the questions that were asked earlier. Just on the NPL coverage risk, can you talk to the risk level for high-risk markets, such as Argentina?

Jaime Rivera

I'll be glad to take the question up. But if you give me just a bit more depth to the question, so that I can address the exact issues that might be worrying you.

Marc Miller - DePrince, Race & Zollo

Yes, I'm just trying to better understand your NPL coverage risk, specifically, where you're allocating the provisions. You talked about some of the more stable markets where you've reallocated capital. But I'm trying to also better understand what the risk level is for smaller markets that have higher risks, such as Argentina.

Jaime Rivera

Clearly, the way the model works, if we do a transaction in the riskier markets, let's just say Argentina, clearly, the model allocates significantly more provisions to that transaction than if we were to book it, say, in a country like Chile. Also if we extend a long-term loan in Chile in connection, say, with leasing transaction to import machinery, that loan will carry significantly heavier generic provisions than a freestanding pre-export financing in Chile. So the general idea is riskier countries get heavier charges for provision, longer tenors do as well. All within the context -- and by the way, it's all model based and the model itself is based on 14 years of statistics experience in the region. That's the basic principle of how it operates. Did I answer your question?

Marc Miller - DePrince, Race & Zollo

Yes. And just the only follow-up would be, have provisions dramatically changed then in Argentina from your risk model over the past quarter?

Jaime Rivera

I don't believe so, Mark. What has changed we've -- by the way, we review the model frequently as we gather more experience. But, no, they haven't changed significantly. What happened this quarter is that the composition mix changed. There were more transactions done in a -- of a longer tenor or less structure or in countries where the risk is higher. In all cases, again, just to make a point, as the return, risk-adjusted return on what -- on the transactions that we did was very favorable and also made all the sense in the world to go through with it.

Operator

Our next question comes from Michael Bunyaner with TLF Capital.

Michael Bunyaner - TLF Capital

It's Michael Bunyaner and I'm with TLF Capital. I just want to ask you a couple of questions. I have known Bladex for just about 10 years or so. And the promise of the growth and the benefits from the growth really didn't come through for various reasons. And what was very helpful is to hear you discuss all the hard work that you did do that today, the company is a rocket about to take off. Could you be kind enough to take a step back and share what does it truly mean in terms of asset growth, the returns that you hope in terms of asset growth, either in terms of spreads or in terms of return on equity, and please share with us the distribution of dividends as you think, as a percentage of earnings going forward, because, obviously, we have gone from steady growth up until the crisis and then we had the dividend cut from $0.22 to $0.15 and then you rebuilt it back to about where we are now. Just if you can step back and tell us what is this rocket going to look like 3 to 5 years out.

Jaime Rivera

I'll take the third part of your question first, regarding dividends. I think that our record shows 2 things. Firstly, dividends has been raised along with improving -- along with the improving performance of our core business. I expect that to continue being the case. Caveat to the comment is that dividends have been raised only after the company is sure of the ability to sustain the higher level of profitability that we achieved as we moved forward. And I believe that will continue being the case for the reasons that I will next address. So I am convinced that profitability will continue increasing and that the company will continue increasing its dividend. I can state publicly, I've done it before, that from the perspective of the board, we want to be classified as a company that pays an attractive dividend here. Secondly, asset growth. Asset growth, to an extent, depends externally on what goes on in the world and how quickly economies in Latin America and trade finance grow or not. Trade finance, as I said before, tends to grow at a multiple of economic growth. So you can assume that as long as Latin America continues growing, trade will grow at a multiple of anywhere from 3x to 4x that, and that we will, at least, accompany that growth as we've done in the past. Difficult, if the economic cycle turns against us as it did in 2000 and 2009, it's not only difficult, but it's downright dangerous, even fatal, to try to move against the business cycle, in the banking business at least, to try to move against the business cycle, because you're probably going to feel extremely sorry than you did 1 year or 2 years afterwards. Because of the reasons that I just explained, I'm convinced that over the long run, Latin America will continue to grow and that it's trade flows will therefore continue to grow because of demographic and strategic reasons. And I believe that will continue to drive the business of the bank at a multiple of 3 to 4x Latin American growth. ROE has been with the bank 10 years, so you've heard us say often times that our aim is, and that remains the aim, ROE in the mid teens, combined with an attractive dividend yield. You might remember, 4, 5 years ago, I stated in our conference call that we thought that with time, ROE of the banking industry, the rest of the banking industry would come down to the mid teens level because we did not think that, unless the special circumstances applied, that ROEs in the mid-20s were sustainable and consistent with proven banking. So we thought that the industries' ROE were going to come down and that ours are going to come up from the 5% or 6% of we were operating -- where we were operating a few years ago and that we would meet somewhere in the middle. As it happened, that's what -- that's exactly what's going on. And so I will restate what our position has been, mid teens ROE remains our goal, and with that an attractive dividend yield. That's what I can say about the subject because it's really what I believe and what -- that's what the company's position is and has been. Was my answer clear?

Michael Bunyaner - TLF Capital

Yes. One more if I may. The mid -- the $750 million which you have just secured, does this mean that the percentage of the portfolio that is geared toward the 2- to 5-year loans will grow significantly beyond the next couple of quarters? How are you thinking about that?

Jaime Rivera

Absolutely. We -- those $750 million will be deployed, of course, and will be deployed at attractive risk adjusted returns. And by the way, the beauty of it all is that, because we raised that money under such favorable conditions, the spread that we're going to be able to earn on that money will probably be significant, which is why I spoke of a very good investment to the company a few moments ago. The overall composition of the portfolio, the distribution between short and long, between trade and non-trade, will probably not change much because the rest of a portfolio, the short-term portfolio, will grow concurrently. So I don't expect any major shift to take place now.

Michael Bunyaner - TLF Capital

Very helpful. And one last question. You also mentioned that one of the core business -- one of the opportunities in terms of improving the business model are the syndication and the fees. How large of a total profit or net interest income -- net interest margin, excuse me, the fee has become?

Jaime Rivera

Can I ask you to please repeat the question because I missed the crucial part, what you said. And I mentioned that one of the important elements in the business model going forward was the fees. Was that what you said?

Michael Bunyaner - TLF Capital

Fees, syndication fees. Yes. How significant could this become?

Jaime Rivera

It will have to become very significant. Actually, even a few years ago, we're running at relative fee -- our relative fee a few years ago were running at something like twice what they're currently at. And we had explained this before, starting 2010, we focused on what was the most critical element, the most critical limitation of the business model at the time, which was scale. And we worked and dedicated a lot of time to that, just regaining and acquiring scale. We are a relatively small company, one. And secondly, we are obsessively -- we are obsessed about focus. We are focusing our efforts on growing scale to the detriment, admittedly, and we’ve stated and admitted it before, to the detriment of our ability to generate what should have been a larger amount of fees. That is now changing. We have now acquired the scale. And fee generation has now become a very important part of our business model going forward. It is the best and most effective way of reaching a higher ROE. Again, just as we were successful at gaining scale rapidly and faithfully and prudently, when we focus the organization on that, I'm sure that as Rubens focuses the team on the generation of fees, the efforts will bear fruit fairly rapidly.

Operator

Our next question comes from Bill Jones with Singular Research.

William R. Jones - Singular Research

Two quick questions. First for Christopher, on the income statement, there's a gain on the sale of premises and equipment. Maybe you could give little color on that?

Christopher Schech

Yes, sure. This is in reference to the sale of our old corporate offices, and we moved to new, and in my view, much nicer corporate offices in a different part of town in Panama City. And so we sold what used to be our property at a gain of $5.6 million. We have this -- we were owners of this property since the inception of the premises back in '82 or '83, I believe. And we realized a gain on that sale. That's all there is to it.

William R. Jones - Singular Research

Okay. And then secondly, on prior calls, we have -- Jaime had discussed possible resolution to the Asset Management business or an exit or final resolution. Have there been any more thinking in that regard? Maybe you could bring us up-to-date on what the thought process is there and how we should be -- what we should expect?

Jaime Rivera

Firstly, there's been a lot of thinking on that. Just to restate our position, and we stated this a couple of quarters ago, we find the status quo not acceptable. Business as we run it now has been a good business, but it has two limitations. Firstly, we haven't been able to generate fees out of it, and there are good reasons for that. But the fact is we haven't been able to generate fees. And secondly, while volatility, the result, has diminished significantly, we still believe that our exposure to the fund is too large -- is larger than we would like it to be. So we have been actively working on a solution or a new structure that would allow us to make the most out of what has been a very good track record in the business. The solution that we have been working on and we have made progress on, is one that would allow us to firstly, reduce our investment in the fund; secondly, preserve the ability to generate fees; and thirdly, reduce amount of management time that is spent by the corporation running the business. We've done significant progress on it. We will -- on the solution, we are considering a couple of serious proposals. This is something that I know Rubens will be focusing efforts on during the next couple of quarters. A solution will be forthcoming. And if no solution is forthcoming, no solution that allows us to achieve all our goals, that is: reduced exposure, increased fees and monetization of our track record, then we will all consider shutting down the position and moving on with our work. But again, that's our least preferred option. We're working on structures that I think will provide a solution that will be effective, will continue to realize trading gains, will generate fees and reduce the amount of management time that has to go into it. Rubens is going to work on it, and I'm sure he'll bring you up-to-date on what we're doing.

Operator

Your next question comes from David Ross with Chevy Chase Trust.

David Ross - Chevy Chase Trust Company

Just a quick question. It looks like there's some declines in places that kind of surprised me, like Colombia, Chile and Mexico, which I know has been a focus for you. Can you give us some context as to what's going on there?

Jaime Rivera

It's controlled -- in Colombia, I'll tell you what happened for instance. We had extended financing to a number of banks because of changing liquidity conditions in Colombia. When the transactions matured, they did not replace them. The temporary happens from time to time in different countries. Nothing more than that, normal changes in the markets. In Chile and Colombia, was basically the result of more liquidity in the local market and banks not needing to renew the financing that we have extended to them. I'm sure that either this quarter or next, the situation will change again. In Mexico, there were a couple of companies that actually prepaid extensions of credit that we provided with them. As you know, in Mexico the conditions in the capital markets improved. Money became widely available. But that's one of the reasons why Bladex issued bonds in Mexico, so did some of our clients and they used the proceeds to pay us. But Mexico is growing, the United States is growing. And I'm sure we'll see that business being replaced either with the same companies or with others. So the changes that happened in all countries follow simply a purely business-related developments in the industries and the countries involved. Our business is short-term in nature, as you can imagine. Our average portfolio, the length of our loan on average is 280 days. So even small changes in the conditions in one or another country quarter-to-quarter will and has -- had and will continue to bring about quarter-to-quarter changes, which we don't really "worry about." We manage the portfolio more on the basis of year-to-year trend.

Operator

Our next question comes from Alessandro Arlant with the Bank of America.

Alessandro Arlant - Bank of America

Three quick follow-up questions. If you could confirm the pace of loan growth now for the second half, if we can expect that loan growth to accelerate and what do you have as loan growth for 2012, the full year?

Jaime Rivera

Traditionally, our -- the second half of the year has been stronger for us than the first. So we expect the second half of the year to follow what has been the pattern over the last few years. It is changing world, however. And we were surprised, the first quarter, as you probably remember, has traditionally -- had traditionally been for us as the weakest quarter of the year. This year, we have a sterling first quarter. So again, all I can say is that if things behave the way they have behaved in the past, our second half of the year should be better from the point of view for growth. We have a good pipeline than the first half. Whether it will happen or not, quite frankly, it will depend on the way the world economy react over the next couple of quarters. We should, however, Latin America, according to the latest IMF figures, is supposed to grow somewhere around 3% per year. Growth in trade ought to be in the order of 9% to 12%. And God, we ought to be able to at least match that and quite possibly beat it.

Alessandro Arlant - Bank of America

Okay, great. My next question is with the middle-market lending, it's at 9% of your portfolio. And you mentioned that you will be deploying more capital into it. Do you have like a medium-term target in terms of a percentage of the portfolio where you want to attain maybe above 9%? And if you could give us a number so we could have it at the back of our mind, that would be great.

Jaime Rivera

I comment on the middle market. By definition -- by definition, we extend very little, if any, medium-term lending to the middle-market, simply because our middle-market activity is driven by trade finance. Almost exclusively middle-market in general, tends to be riskier than the larger corporations. When we define one of the principles of our middle-market strategies, we concentrated our exposure to the middle-market on trade finance, which is by the way, most of our trade finance exposure to the middle-market, even has really solid and real guarantee. So I expect most of the -- most of the middle -- most of the long-term or medium-term money that will be extended either to the banks or to the -- or to large corporations. Within the size of the -- within the figures of the portfolio, you can simply add $750 million in medium-term lending and at the same time, we will probably grow about what we've been doing over the last couple of quarters, $100 million to $200 million in short-term loans. The percentages will not change much within the portfolio.

Alessandro Arlant - Bank of America

Okay. So we can assume in the medium-term that you'll -- the middle market is going to be around 10% of the portfolio.

Jaime Rivera

Yes, for now that's what it's going to be, yes.

Alessandro Arlant - Bank of America

Okay, great. And then my last question is, I know you issued a dollar bond. Given this push in terms of the duration on the asset side, again, in the medium-term, do you expect to access the international capital markets by the end of this year? Or is this something that ought to be a project for next year?

Jaime Rivera

What we have is enough ammunition to take us through the end of the year. Just -- so the answer is, all things being equal, no. But things might not remain equal. If another window of opportunity wants to open for us, where we could secure medium-term funding at attractive rates that would provide us with fuel to ensure the growth in 2013 and onwards, we might consider it. But that is not on the table at the moment, no. We have ample ammunition to do what we need to do this year to probably the middle of next one.

Operator

Our next question comes from Jordan Hymowitz with the Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

Just a quick question. You talked about mid teens ROE and you mentioned 14%, 15% once or twice. What's the earliest you get there?

Jaime Rivera

If things go well, but if things go well, if we extend the medium-term loans that we intend to extend, I mean, if we are able to increase the fees the way we are intending to do, and if that brings about as it would, increasing levels of profitability and that allows us to increase the dividend, and therefore the rate of growth of our equity slows down, we should get there fairly fast. And fairly fast means, in my mind, I would think anywhere from no less than 2 quarters to probably no more than 4. That's a frame of mind or time that I will have in mind, anywhere from 2 to 4 or maybe even 5 quarters.

Jordan Hymowitz - Philadelphia Financial

So by the end of 2013 as you sit here today, do you think there's a reasonable possibility that you could be at 14%, 15% of ROE on a run rate basis?

Jaime Rivera

Reasonable possibility, yes, depending on exogenous factors really. If growth rate in Latin America remains reasonably strong, then that is very much within the realm of the possible. My only concern would be a deepening recession in Europe, a slowdown in Latin America, it will still grow, but not as fast as before. If risk levels will increase, that would lead us to be more careful and that will delay the process. But absent exogenous factors of that nature, I think that you've seen our ROE doubled in something like 15 months. Clearly, we're not going to do that again, but we're most -- we're most of the way towards our meeting our ROE goal.

Jordan Hymowitz - Philadelphia Financial

And would you say the current economic environment as we stand here today, no better, no worse, is good enough to get you and that was plans of 14%, 15%?

Jaime Rivera

It's there in a steady, slow, proven manner, again. The environment, as it is today, is sufficiently beneficial for us to continue making progress. Again, keep in mind that as we look at our performance over the next year rather than quarter-to-quarter, because we might have another quarter like the ones you just saw because of special opportunities in the market we are forced to take actions that might be detrimental to that one particular quarter. But quarter-to-quarter, we're doing well. The company is very well positioned, the region is growing, trade is growing and we have the best team in place that we've had ever since the creation of the company. 15%, a reasonable and reachable number.

Operator

[Operator Instructions] I'm showing no further questions. I will turn the call back over to Mr. Jaime Rivera.

Jaime Rivera

Well, thank you. Ladies and gentlemen, many, most, all of you, my friends, this being the last time that I have the privilege of speaking with you in the context of this forum. I would want to thank you, really, from the bottom of my heart, for your steadfast support, for your trust, for your encouragement and really for your downright faith placed in Bladex, in our team, and ultimately on me during the 8 years that I have the honor and privilege of being at the helm of this great company.

As the person charged with the ultimate responsibility for safekeeping the bank's sterling reputation and for securing its place as a winner within the new emerging economic reality, because that's what I think is happening, this new, emerging economic reality that will define the next decade. It was only through your steadfast support and along with the help of my teammate, that provided me with the inner strength and the inspiration, that helped me remain focused on fulfilling the Bank's mission in Latin America and fulfilling its commitments to its clients and its obligation to you, as our shareholders. So for all that support and for all that faith, I thank you again. I thank you from the deepest part of my heart.

A couple of additional comments. For all mistakes made along the way, and there were a few, I take full and complete responsibility, and hope for your understanding. And for everything that we did right, and there were many things that we did right, I want the record to unequivocally state that it was all the result of a wonderful team effort. As I had the honor to work among a group of consummate professionals and just wonderful human beings.

I want to take the opportunity to thank a team, they all are so steadfast in their support of what we're trying to do over all these years.

Now going forward, and this is what the world is all about, you have to look at the future, the bank position in our business, in our region, that it knows like few others, under the superb leadership of Rubens Amaral, bodes, I frankly believe a great future for the organization.

Everything is in place. Everything is in place. From here on, it's just execution and vision and Rubens is superb at that. Rather than hearing the story from me, we're lucky that we have Rubens right here with us. So I'd like him to share with you a few of his preliminary thoughts on Bladex, our opportunities and what he sees -- what he sees for the bank going forward and what you can expect. Again, I stated that -- as I stated when my resignation was announced, and as I have stated publicly in numerous occasions and every time I can, I'm absolutely delighted at Rubens' take over at the helm of the company. And frankly, frankly, honestly and transparently, I cannot think -- I cannot think of a better man take over the helm and to bring the company to the next level.

So Rubens, welcome. And this I'm sure, this is what people have been waiting for on the call, to listen to your preliminary thoughts.

Go ahead, please.

Rubens V. Amaral

Jaime, thank you very much. Good morning to everyone. I would like to say just a few quick words. First of all, I'm trying to paraphrase someone very famous. The state of Bladex is strong, financially sound, a growing business franchise, a skilled workforce and a clear view to continue to add value to our clients and shareholders by catering to an important emerging region on the world, Latin America. We all know that Latin America presents important business opportunities associated with the growth of trade, namely inter regional flows and regional integration, which are the two main important pillars of our business preposition.

Of course, we'll continue to work clearly to preserve credit quality and to face the challenge of generating fee income, and not least -- and last but not least, making sure we continue to run a very efficient company.

I want to thank you, Jaime, for your insight, mentoring and friendship throughout all these years I have had the privilege of working closely with you. I wish you all the best in your new endeavors. May God bless you.

Ladies and gentlemen, I'm looking forward to talking to all of you in the next quarter. Thank you.

Jaime Rivera

Thanks, Rubens. Ladies and gentlemen, this literally brings to a close my cycle with the company. Again, thank you very much. On a personal basis, I wish you and your families health and continued success and look forward to continue meeting you in the context of the financial industry. Best of luck and a fair wind to all of you. Bye, bye, and you will be speaking to Rubens and to Christopher in October. Bye, bye. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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