Joe Lambert – Director of Marketing, Singular Research
Jeremy Hellman – Analyst, Singular Research
Jaime Celorio – CFO, Banco Latinoamericano de Exportaciones, S. A.
Banco Latinoamericano de Exportaciones, S.A. (BLX) Singular Research's Annual "Best of the Uncovereds" Conference Presentation September 4, 2008 4:30 PM ET
Okay. We are just about to the 4:30 pm timeframe and I would like to – once again, I invite Jeremy Hellman who is one of the top senior analysts at Singular Research who follows the next company and I would let Jeremy to go ahead and take it over.
The last presentation of the day is going to be by Jaime Celorio, the Chief Financial Officer of Banco Latinoamericano de Exportaciones also known as Bladex, who sorted the [ph] script again as he did last time by.
Jaime has been with Bladex since the end of 2007 and I also handle the IR program. Prior to joining Bladex, he was the CFO and Chief Administrative officer for Merrill Lynch Mexico from 2002 to 2007. He also served as Controller Associate of Emerging Markets in New York for Goldman Sachs from 1998 to 2001 and participated in the start-up of The Goldman Sachs Mexico Group from the year 1995 to 1998.
Jaime also served in various capacities in PricewaterhouseCoopers Mexico from 1991 to 1994, as a Senior Auditor in the Audit Division and as a Supervisor in Financial Advisory Services. And also, I would like to add that it’s a very unique story which I think really begs everyone’s attention. So the proverbial basis, (inaudible) coming out of the backwater a lot of ways as a financial – seeing the stock go up with the group but once you stop and hit another story, you will see that it is a very attractive idea that has an excellent management team and tremendous potential. And with that, I will introduce Jaime Celorio.
Hi everyone, thank you very much. I'm probably the last one of the day and will try to make this very fast so we can go out and have a drink because I saw a couple of – many of you already having a drink, but anyway, I will try to make it short and I’m going to start the presentation.
Basically – all right, as Jeremy mentioned, this is a very unique company. We are a different animal just considering the fact that we are basically a supranational bank that was established back in ’75 by 23 different countries and 23 different Central Banks in Latin America. The idea is basically to promote -- in the region, promote trade finance. What we have here is that in Panama, the functional currency was US dollars and basically Panama didn't really have a Central Bank really to put together the idea with all Latin America to promote trade finance and found this company.
Originally, it was only done by or founded by Central Banks and later on we were partially made public. The mission of the bank, as I mentioned before, is just to provide seamless support to Latin America and again to promote foreign trade.
The bank itself was the first bank listed in the New York Stock Exchange back in 1992 and the reason why it was listed because basically the bank started growing and basically Central Banks decided to really want to continue adding capital into the bank and it was basically the first bank to be made public in 1992.
It was also the first Latin American bank to be rated investment grade, and also the current ratings that we have in the bank and as you can see this was pretty recent, back in December ’07, we got an upgrade from Moody’s and also an upgrade from S&P back in May, and then we have got a first time coverage from Fitch, and we got basically in the two of them, we have a BBB and a stable outlook.
Some of the – I think this may be one of the only banks in this turbulence in the industry that has been getting an upgrade, so this is actually something that we feel very proud about and are pleased the rating agencies have been able to differentiate versus all the other banks.
What we have here is basically ownership and vertical position that is totally different again versus other banks and this is what makes us very unique. We have basically 17% of our ownership is by Class A, which are basically the central banks. We have 7% by commercial banks and we have the rest, the 75% float that is listed in the New York Stock Exchange.
In terms of the Directors composition, we have basically ten Directors, nine of them are independent and basically the CEO, Jaime Rivera, is the only one that is not independent in terms of the Board. Basically, here we have basically one man one vote when it comes for the Board composition in terms of dividends, in terms of buyback programs, in terms of every decision -- they have basically the same vote. We only some majority – certain majority rights when it comes basically to changing the whole mission of the bank for basically Class A shareholders need to approve that part [ph].
When it comes to the business model – sorry I actually moved back. Okay, yes. In the business model basically, as you can see here, we put together all the quarters and next quarter [ph] and we are trying to connect the dots here basically by providing leasing, factoring and all other (inaudible) and all other parts of the trade here. We used to have -- we used to be only a bank that used to be called the bank for banks (inaudible), be lending money to other banks in the region. Now, we basically have loans to banks which represent 45% and 55% represent corporates.
In terms of the financial highlights of the bank, as you can see here, we have been actually growing the operating income basically in the last couple of years, basically starting in 2005 when we actually started with $28 million, then we moved to $39 million, and then all the way up to $71 million in 2007. Year-to-date we have $45 million and this is basically just the operating income. In terms of net operating income, again, quarter-by-quarter as you can see here below, it is quarter-by-quarter, we have been able to increase the bank and the average basically in terms of compound average growth rate, the total is about 20%, but this is something we have been doing in the last couple of years which we are very proud about.
In terms of efficiency levels, as you can see here, we have been bringing net efficiency level for 46% which is higher than the industry. The industry should be some place close to 40%. Right now, we actually in the last quarter, we did 29% and in the first quarter we did 32%. So our target is supposed to be at some place below 35%.
In terms of ROE evolution, as you can see here, we have been actually increasing also our operating ROE, bringing this down from 5.2%, actually increasing this all the way up to 16% average that we reported in the last quarter two.
The capital management of the bank, this is something very important because the bank was very heavy capitalized at some point back in 2003. The reason (inaudible) that the bank in 2003 as you can see here which is basically all these that you can see here in gray is basically the levels for which we are very comfortable in terms of having capital tier- one. But the capital was very heavily capitalized and then it hit the Argentina crisis and we ended up actually collecting 85% of those -- of that portfolio of those loans, and the reason why we only collecting 85%, because the other 15% we ended -- decided to sell it readymadely.
But, we collect basically all those loans and we ended up being very heavily capitalized. So what we did is basically returned through extraordinary dividends, we ended up actually returning to the investors $40 million back in 2004 and $78 million back in 2005, and $38 million back in 2006.
Our current ordinary dividend yield is 88 per share, and then the given yield that we have so far last week is basically close to 5%. We did increase, as you can see also here, ordinary dividends. We have been increasing this also year-over-year.
When did it start – here I forgot to mention that we believe that the bank obviously right now is heavy capitalized, but this is something that makes us also unique and makes us also be looking for potential opportunities out there. We feel comfortable to be in the level of 50%. So eventually, we will be bringing it down, the tier-one capital to 15% and that we will increase also our ROE in terms of that.
The bank is composed of three main divisions; the Commercial Division, Treasury Division, and the Asset Management Division. In terms of the Commercial Division, as you can see here, has also been having a substantial increase in the last couple of years. Quarter by quarter, we have been showing increases. Again, all these increases in terms of compound average growth rate, all of these ones are about 20% every quarter.
In terms of the portfolio by country and the breakdown, we have a significant increase -- significant part in our portfolio in Brazil. We have 36% and 36% which we did in Brazil, we feel very comfortable considering the fact of the importance of Brazil in the region. And we have also Columbia with 7%, Argentina represents right now 6%. It is important to mention that Argentina these days, basically all the loans that we give to Argentina are basically trade financials.
Basically, in terms of forward [ph], we believe there will be a lot of opportunities in the future basically in Mexico, Columbia, and Peru, where we actually are some of the countries in Latin America that we believe there will a lot of opportunities in the near future. That's where we have been growing basically most of our portfolio.
In terms of the portfolio growth, again we just want to show here -- this is quarter by quarter. We have been increasing the portfolio very constantly and we have been increasing also the credit disbursements quarter by quarter and this is just to show the track record of the Commercial Division.
The asset quality, it is in the Commercial Division, it is basically non-performing loans since 2006 had been zero, so some of the regulators obviously they said, "Well, this is great because you guys have zero." And some of the rating agencies also they feel – they are comfortable. But in terms of the debt, sometimes they say, "Well, you guys are not taking enough risk here because you have obviously a tier-one (inaudible) non-performing loans in zero, so we have been actually increasing our portfolio in the corporate segment, and I will show in the next slide, and we believe that we will continue to do so. But we just want to be prudent right now that our risk here is actually very strong and we have basically non-performing loans in zero.
Here at this stage, I don't know quite for some reason this looks funny but anyway, the commercial portfolio, we have 66% that's trade finance and 34% that is non-trade finance and the graph here below basically shows what we have in terms of financial entities that represent 42% and non-financial entities represents 55%. The 2% of this is basically sovereign.
Here in terms of the Commercial Division, we have the break down in terms of industry. We have basically 28% [ph] that is basically food, crops and grains. We have 31% that is manufacturing. We have mining with 9% and then we have energy which basically represents oil and gas where we have close to 30%. So basically, all of the segments basically together in terms of the growing segments, they almost represent 62% and this is where we have most of our portfolio.
In terms of the Treasury Division, we divide this division in two parts. We divide this from the funding part of this with the back-office funding in terms of asset liability management, interest rate risk, and basically, what we consider revenue function which is basically the amendment of securities and the asset distribution. Here, what we have is basically a portfolio that has been increased in the last couple of quarters. We have right now, as of the end of June, we have $737 million, and here what we do and we have been very good at this – we are very good at this, is that we buy basically these portfolio of available for sale securities, 81% of this corresponds to sovereign risk and we buy them pretty good spreads and we hold them and we trade them and we have been successful in actually selling this paper as you can see here back in 2007 when we realized $9 million, and this year we have only $2 million that we realized until now. But we can wait until things are better and actually realize some of these papers and since we don't have any capitalized, we don’t have to recognize or sell these papers, we don't need to, so we can hold them until maturity if in case.
We have here in the Treasury Division, we have funding long positions. Basically, we hedge all the interest rate risk and the currency. So we try to avoid here basically currency risk, interest rate risk and this is basically -- especially the 81% portfolio that I was mentioning, here we have sovereign risk of – if you consider the state-owned corporations, state owned banks, as well as the sovereign, these represent 81%. And then to recap, the portfolio mainly is in Brazil, Columbia, Mexico, and Panama, that's where we basically keep most of our investments.
The funding sources, our funding sources are divided in four parts. We have deposits at 37% and we have been increasing also our deposits. This is the fact also for flat quality basically from some of the Central Banks, they have been holding [ph] actually some deposits in the last couple of quarters with us. We have some repos, most of the banks it is actually very short term. 70% of our portfolio in the Commercial Division is due less than one year, so everything is very short term. We have been actually successful right now at being able to access the markets and tried to get some funding at medium term, so we can start to all these corporate in terms of lending money for working capital to be able to providing medium terms loans and by that we can actually increase our spreads. So, we have been – we just closed two-year syndicated term loan facility – what was actually targeted to be $150 million and we ended up oversubscribing this one to $245 million. It was run basically by Standard Charter and Santander. We actually – we issued some Peruvian soles. And we also have a facility that we have with China Development Bank we signed last year, a cooperation agreement with them and we ended up getting also a facility from them at very good conditions, market conditions.
The Treasury Division also, as I mentioned before, has no FX risk, has no currency exposure and basically we avoid (inaudible) interest rate risk by actually swapping orders into floating [ph] rate. Here is just the proof that we have been in the (inaudible), we have been increasing our liquidity since last year, basically in the last -- when we started back in the second quarter of last year, where we went actually almost from $240 million all the way up to $250 million, therefore we are (inaudible).
The Asset Management Division also came across by actually sell-off [ph]. In the Commercial Division, we may be successful at basically diversifying our portfolio and having basically include corporate and we are not actually having any risk there because we hedge basically all the interest rate risk, we hedge the currency rate and we basically are able to put the non-performing loans on zero and then we opened the Treasury Division. It is only long positions in the Treasury Division, again we hedge interest rate risk. We hedge currencies and we have already long positions, so basically we decided to open an asset management position where we can actually have some risk.
The idea of this is basically we started reporting today $100 million and started developing basically a track record and we started that -- by the end of 2006. We have right now nine quarters operating this one. Right now the net asset value is close to $145 million and we have been very successful at it. It is actually – we have really opened this with third parties. We have right now close to three investors and we (inaudible) that it is going to help us a lot in terms of having – generating fee revenues (inaudible) revenues from trading. So this is pretty much just a chart in terms of where do we stand, the net asset value and we have been actually growing this significantly. We trade here basically derivatives, FX, equities with all the indexes; we cannot [ph] do stock taking with the bonds and basically futures and that's pretty much what we do here on hedge funds, so we do loan on short positions and mainly we have been making a lot of money also in Brazil, Columbia, Mexico and also we hedge some of these also in – with some indexes here in the US.
So this track record is what I mentioned. We have - these are the nine quarters. The first two quarters where we have some losses and ever since then we have been actually able to show gains quarter-by-quarter.
In terms of the stock performance of Bladex, I got here [ph]. It is interesting because Bladex is a supranational bank; it is in Panama and as I mentioned, it was one of the first ones to be listed in the New York Stock Exchange. Well, basically, our valuations since the Argentinain crisis in 2002 basically came along to be basically at book value. So ever since then, basically, we have not been able to recover. But we see other banks, for example, in the region that they are actually, for example, the Brazilian Bank now trading at 2.5 times. The Chilean Bank is trading 2.5 times two [ph]. And all of these ones – they have been actually showing a significant decrease basically in the last year. Obviously because of the (inaudible) banks and then the financial institutions and so basically most of the investors are actually trying to review their exposure to the financial industry.
So, here what I want to show is, basically, here we were at 1.1 times book value. This is actually the other one. At some point in February, we were actually below book value. So we already recovered again in April – in May and again we are right now close to book value. So we believe that our model even though it shouldn’t be 2 or 3 times because we don’t have as much growing rate, (inaudible) some of the banks for example in Brazil. But we are not keeping that much risk basically on the downside of this banking [ph]. So this is actually quite where we believe there is a good investment opportunity. The volumes are there. I mean as you can see, we keep -- pretty much having the same volumes in the last year also.
And this is just stock performance. This is a chart that shows -- the one on the top is Bladex that actually ended up at being back in April, we went all the way up to 19. (inaudible) before, we announced our first quarter results, so we went all the way up to 19. We got also an average here from S&P as well as from another firm that covers our research. We got also here the research from Singular and then our stock came back well -- went all the way up here then came back again and then when we announced our results, pretty much close to here which was basically in July. Our stock is as of today closer to 18, but it went all the way up again to 19.
So this is pretty much just a short comparison with some of the indexes for common trade [ph] index in Latin America, basically with some of the banks like BBVA, Banco Frances, Banco Marco, Grupo Galicia, all the banks in Brazil like Banco Bradesco, Banco Itau, Unibanco, and the banks in Chile as well as in Colombia and minority Mexico. So, this is basically the graph and right now, we are pretty much like here and these guys are pretty much here.
The year-to-date performance, we have like 16% return year-to-date. Again, if we compare these with the Dow Jones banks as well as with basically the Russell 2000, we are pretty much above those ones.
In terms of conclusion for the bank if I mention, it is a bank that has been growing pretty steadily in the last couple of years. We grow pretty much at the rate of foreign trade since basically this is what we specialize. Foreign trade has been growing in Latin America at the rate of 14%, so we expect to be growing pretty much, at least, at that rate. We have pretty good governance standards and with corporate governance very strong. It is a lot of transparency. We are basically -- we have regulators all over. We have the Superintendency of Banks in Panama, we have the SEC, we have the Federal Reserve.
We obtained actually preferred creditor status. Also, another important thing is that we are basically -- the US dollar is our functional currency, we basically report everything in US GAAP, so we don’t have any -- there is nothing to lose within the translation of local GAAP and US GAAP. We also have a special treatment in Panama because of the Panama government. By law [ph], they want to promote the trade finance, so we actually do not pay taxes also at the bank in Panama.
Something important to mention is that even though I showed in the graph before, we did not have a significant downside, at some point, where basically all the financial industry was having problems, we never had any exposure to subprime, to CDO segments or any monoline, et cetera. So we never had and we currently do not have any of that. So that is also important to mention, our investors actually differentiate us basically versus the way other banks are running their own business.
Now, we have a well established track record and seeing all the indicators I was able to show in the last slides moving in the right direction, and I think that thing is a very good attractive investment considering the fact that we are right now priced close to book value.
So, by saying this, I want to thank everyone. I want to thank the guys from Singular, from Bladex, and thank you everyone. I wanted to make a chart in case of some of you guys want to walk away from the -- I think there is a breakout session right now, and thank you very much.
So, we'll do question and answers right here, right now. Go ahead and ask questions that you have of Jaime right now, and before we go into the breakout session, we can have this open discussion.
(inaudible) discussion the other thing that you are seeing less competition and (inaudible) opportunities for your markets?
Yes, great question. We have been actually --
Repeat the question.
I'm sorry. The question was that – the question asked was, if we are concerned the fact of what is happening in the industry in general that we have been seeing less competition and ourselves in the region. And the answer is, yes, we have been seeing less competition in Latin America. Why this? Because basically, this is all we know on Latin America, we specialize in Latin America and we compete with global players where at this point in the last year, they have been having bigger problems basically at their own homes, in their headquarters that they basically have to -- put together basically their whole business. So, we have been seeing significantly offside and we have been actually gaining market strength in the last couple of quarters basically, and we have been able to increase also our spreads basically in terms of our loans. Yes?
Can you comment on the dividend policy -- you have a fixed payout ratio to earnings and (inaudible)?
Okay. As you can see – I'm sorry, I forget, the question was what is our policy from a dividend point of view in terms of the Board? We have been – as I was able to show the bank itself is heavily capitalized, we are right now at 19% tier one capital, and our policy right now is we are paying 0.88, so it is 0.22 every quarter and we have been increasing that dividend, the organized dividend we have been increasing in the last couple of years.
The policy is continue paying that, our deal right now is close to 5% and we are right now evaluating basically what makes more sense from a capital management point of view. We believe that right now most of the investors from the financial industry, they prefer basically to not have that much volatility, considering the fact that what has been happening and basically be sure that – basically you can increase the dividend and by that you can actually keep paying the dividend, and we have that capacity.
So, we have been putting together that analysis. At the same time, we have been talking in terms of repurchase program, repurchase our own stock, considering the fact that we have been telling the market that we are – at some point, we were below book value and we believe that it's the market now taking the opportunity and we want to take that opportunity too. So, we have been actually thinking of what are the benefits between repurchase both shares and increasing the dividend. So this is something that we have been presenting to the Board and I’m sure that in the next announcement, with the September numbers, we will able to also provide also a feedback. Well, this is something that the Board is looking at every quarter.
A related question is, you alluded to before that your model evaluation basically be trailing the book value with some of the higher growth banks trading at 2, 2.5 times book value. What do you would precipitate a re-evaluation whereby you will be valued at higher than book value?
The question is why we were valued – when do we feel we are going to be valued above book value, and if we compare ourselves with other banks in the region that they are valued at 2.5 times. The answer is, basically we have pretty much a lot of exposure that they have in terms of credit exposure. We have the same exposure that they have. In terms of risk, we have less risk than they have from a currency point of view, from a tax point of view, from – even from an accounting point of view. So, we believe that by having less risk in those countries and being able to prove the solid -- having nonperforming loans in due [ph], et cetera, and this management, we believe that we should have closer value to the way they are valuing the other banks. The other banks, I think, they are valued because our rate is very high, but also they don't have a higher also tier one, and they are also (inaudible) where we are not, meaning consumer which again is leased [ph] here. And therefore we think, if they actually try to consider that our business model is totally different than theirs, they should be at better valuation.
I think I have asked you this before, but if you want to re-phrase it, do you have a real opinion regarding the US election, Democrat or Republican, is really was there Obama having more of an anti-trade test [ph]?
Okay. And the question is we don't have any opinion in terms of any presidential candidate here in the US. We say this probably, but anyway – no, it would be that much effect (inaudible) right now we are not focusing that much in the region. Eventually, I think they will, because they will actually see how much this will affect the (inaudible), they have also too many problems right now going on here with their own economy to worry about Latin America as a first priority.
Is the Columbian free trade agreement kind of viewed as something that was only upside at this point, is it – kind of thought of as almost dead in the water, such that – is there anything (inaudible)?
That's a good point. The question is just how we see the Columbian free trade agreement, if we see it as an upside? Definitely, we see it as an upside. I think our perception of Columbian economy here is pretty good. I recently was there and it was amazing to see how people actually feel pretty good about the economy, about the President, and you see a lot investment also going on down there. So, eventually, when they get the free trade, I think they are going to get a lot of benefit upside.
Did any of your shareholders of Central Bank compete with you anyway, do you have a privileged position in these markets?
Not really, because they do not actually lend money directly to any of the – sorry, the question is, if we compete with Central Banks, and the answer is no, we do not compete with them. We will re-compete, it is actually with some of the banks where we lend the money. There are some banks with 45% that we actually lend money to our banks in the region and we ended up competing with them. And obviously, because those are better credits [ph] so we compete with them because we have cheaper source of funds. What we have here is a niche (inaudible).
Thank you, Jaime.
Thank you everyone.
All right, thank you very much. As we mentioned, we will have a breakout session. It is in the following room next to ours. We'll tell you a few things that are going to be happening here very shortly. We do have the cocktail hour. We will be starting over in the (inaudible) room which is just as you walk in off the elevators, you'll see the room. It is just on the other conference that you probably noticed as you came in. It is probably the first room you come to. So, that is where the cocktail will be and that's where we will collect your business cards and have our (inaudible) for six months of platinum service for Singular Research.
I want to reiterate a couple of things about and just really summarize the day and what we do. I think that one of the comments that we get at this conference is that we have quality companies here. There is no accident that the companies that are invited here to present are that's of uncovered. And what do we mean by uncovereds? Little or no analyst coverage. That is one of the events that Singular Research really looks for when we are screening for stocks. And then the other subtitle that you see behind me here, Unbiased performance based research, no investment banking relationships, no paid for research by the company. So, we are trying to look for as little conflict with our analysts in writing research reports as possible out there, that's why we say unbiased.
We believe that it is important that our clientele is servicing the institutional money management environment and we think that it is also important that our analysts not only are paid for the reports that they do, but they are paid a performance fee on how well their ideas do against the benchmark. Now, the result of that is, is that this model that Singular Research has brought to you today some of the companies that you saw; this model has also actually produced results.
We are one of the few research firms out there that will actually publish a track record on when the stocks have done and you saw that earlier. In our inception in August of 2004, since that inception four years ago, our stock picks are up 170% compared to the Russell 2000. In the same time period, it is up about 24%. So when you free up your analysts to pursue their best ideas and that is what we are trying to do, we have certain screens that we go through, the analysts will pull over those screens and we actually share all those screens with our clients so they could see what our analysts are looking at.
So, in summary, when you free up your analysts to pursue their best ideas, you get results. And that's what Singular Research's business model is all about. That is what we are trying to accomplish by doing this conference. A lot of companies in the space that we are doing providing independent research and many of the companies are kind of going by the wayside that Singular Research is here, we are staying the course in good markets, bad markets and producing results.
So, with that, I thank you very much for your attendance. We thank you for your time and we hope that you had a lot of great information out of this. Again I want to remind you that Bladex will be over next door to do a one-on-one time spots. We will have the cocktail hour that will be starting within about 15, 20 minutes from now, and we encourage you to join us and thank to all of our sponsors too that made this possible. Vandham Securities, they are sponsoring the cocktail, and we appreciate the sponsorship on that. Also to the other sponsors AFA, Seeking Alpha and also Divine Capital Markets. So we appreciate the support to make this available to our clientele and prospective clients.
So again, thank you for your time and I will join you at the cocktail hour.