Banco Latinoamericano de Comercio Exterior SA (NYSE:BLX) Q3 2012 Earnings Call October 17, 2012 12:30 PM ET
Scott Cutler – Head-Global Listings, New York Stock Exchange-Euronext
Gonzalo Menéndez Duque – Chairman
Rubens V. Amaral Jr. – Chief Executive Officer
Christopher Schech – Executive Vice President and Chief Financial Officer
Krim Delko – Orange Capital Partners LLC
Michael Bunyaner – TLF Capital, LLC
William Jones – Singular Research
Good afternoon ladies and gentlemen. My name is Scott Cutler, and I am the Head of Global Listings here at NYSE-Euronext. I want to welcome everybody here today for Bladex Day and its 20th anniversary of listing on the New York Stock Exchange. Thank you for coming here today.
I'd like this opportunity to acknowledge the Bladex Executives that are here today and the entire team Gonzalo Menéndez Duque, who I’ll introduce in the second; he is the Chairman of the Board of Directors. Rubens Amaral, who is the Chief Executive Officer, welcome back, it’s great to see you both here again.
Let me begin with just a very quick snapshot of our marketplace today. So much continuous change in the financial services landscape and at the Exchange, today, this is a $21.6 trillion marketplace. If you look at the value of the combined listed companies on our platform, we have over 4,500 listed companies here and in our European platform. And our equity exchanges today are in the U.S. and in Europe are transacting over $80 billion a day in equity. 70 of the largest 100 companies around the world are listed in our marketplace, and we’re really pleased to be able to have companies like Bladex, that on the NYSE is one company of over 450 from international marketplaces.
NYSE is truly a destination and a partnership with Latin America. We are very pleased with the partnership that we have with both the countries as well as the companies in Latin America. Just to give you a little bit of perspective, we have 77 companies that are publicly listed on the NYSE from Latin America. It’s $1.3 trillion in value. Among the new listings this year from Latin America, we’ve been pleased to have Cementos Pacasmayo from Peru, Cencosud from Chile, and more recently Banco Santander, Mexico, and of course early in the year BTG Pactual, which listed both in Brazil, as well as in our European marketplace in Amsterdam. I think that says something about the significant opportunities that we see in Latin America, and we’re extremely proud to have Bladex among the 77 companies from Latin America that are listed with us.
Today, you will have the opportunity to hear from the management team, the top executives and leaders from Bladex. But before I turn the time over to Mr. Duque, Bladex was the first Latin American bank to list on the New York Stock Exchange So the first, which is great. And it’s the only bank of its kind that truly represents in present in 23 countries in Latin America and focused on trade finance. Bladex is a leader in the areas of corporate governance and then partnered with the NYSE in participation on our International Advisory Committee. I think it’s truly important to be able to highlight the focus on corporate governance, and are really among one of our most transparent and leading companies in this area, which we’re very proud of.
So without further ado, I would like everybody to give a warm welcome to our friend, Mr. Gonzalo Menéndez Duque, Chairman of the Board of Bladex.
Gonzalo Menéndez Duque
Good afternoon. Mr. Scott Cutler, Executive Vice President, Head of Global Listings at New York Stock Exchange-Euronext; Mr. Nicolas Arino, Director of Latin America and Bermuda and the Caribbean for the Global Corporate Client Group of New York Stock Exchange-Euronext. My fellow board members, CEO of Bladex, a member of Bladex’s management, esteemed shareholders, ladies and gentlemen. I would like to welcome all of you today to celebrate together with us the 20 anniversary of Latino Bladex at the New York Stock Exchange.
For me, especially this is a very special and emotional occasion. As I have a privilege to be here at the same venue 20 years ago on the day of our initial listings. I am proud to have such a long-standing association with Bladex and with the New York Stock Exchange.
As we all know, these two decades have brought a few changes to the financial world. And it seems appropriate to take a moment today listed back in times, and share with you how we, at Bladex view the financial world when we went public. I would like to emphasize that how much the bank has benefitted from the long association it has enjoyed with the New York Stock Exchange and with our Class “E” shareholders.
Please allow me to quote my good friend Ariel Buira Bladex, Chairman from his own word back in 1992. After the prolonged crisis of the ‘80s, the economies of Latin America have turn to a new model of economic development. That builds up new stabilization programs and a tactical reform. Companies began to adopt a trading strategy base, an open market and greater integration into the global economy, and that foreign trade became one of the principal engines of economic growth. Recognizing that the profit will require greater volume of credit Bladex brought a substantial capital increase.
On September 24, 1992, Bladex became the first Latin American bank listed on the New York Stock Exchange. The success of this placement can be seen by the fact that the offering has to be increased from 4 million shares as a result of the investor demand. It is interesting how two moments in time separated by 20 years can be so similar.
In 1992 Bladex was preparing itself to support the growth of trade as the countries in Latin America were seeking greater integration into the global economy after an important debt crisis. Today Latin America is indeed integrated into the global economy, with the strong financial system. Several countries with investment grade ratings and with foreign trade continued to play a key role in the development of our economy. As though we are exceeding the process of recuperating from the worst global crisis we have since the Great Depression, Latin America is poised for continue growth and to faster continue integration within the region. Have realized its potential in a market, with an aggregate GDP of $6.63 trillion and a population of more than 600 million people.
Bladex today is a strong institution with a diversified business model and a much improvement funding structure. It is well positioned to capture and to benefit from what we believe could be the Gate of Latin America.
As we like to slide some figures that they must place Bladex’s unique position in the region. Total accumulated disbursement in 1992, reached $29 billion. For the quarter ended in September 2012, that amount has grown to $188 billion. Our credit portfolio has increased from $2.3 billion in 1992 to more than $6 billion by the end of September 2012. Our market capitalization has increased from $348 million to $843 million.
Our net profit reached from $27.6 million in 1992, the accumulate figures by the end of September 2012 have reached to $68.5 million. In 1992, apart from our head office in Panama, Bladex has a banking agency New York, another representative office in Argentina. We have additional representative offices in Brazil, two offices in Mexico, in Miami, in Colombia and Peru.
Our association with the New York Stock Exchange and with our Class “E” shareholder, not only have provide access to fresh capital, but also have helped importantly to the improvement of our corporate governance system, there by increasing our disability in the wealth financial market. We are also proud of constantly improving our dividends payout as our business grow. In the last eight years alone, we have returned a total of $384 million, between dividends and buyback. We are aware of the risk that today’s global economy presents, but we are optimistic about the region and the profit of the region for the coming years.
Bladex have successfully navigate several crisis, thank you to our focus on the basic principle of sound bank management, we continue finance the real economy and we're proud that we have been able to contribute to improving the quality of life of people throughout our region.
In closing, as Chairman of our institution, I can assure you that Bladex remain committed to excellence and innovation. In a very challenging environment, making toward value efficiently for our clients. This will enable us to continue providing superior and sustainable return to our shareholders, while maintaining in attracting working environment, as we live the values of our organization, integrity, respect, commitment, humility and excellence.
Ladies and gentlemen, thank you very much for your valuable time today and I leave you now with our CEO Mr. Rubens Amaral. Thank you very much ladies and gentlemen.
Rubens V. Amaral Jr.
Thank you, very much Mr. Chairman. And I would like to take this opportunity also to thank you, and the Board of Directors of Bladex in trusting me, with this important assignment of becoming the CEO of the Company, I'm very proud and I like to acknowledge here that I've had a very much of trust. And to our shareholders, I would like to renew my commitment to continue to develop and to bring you the results that you are seeking, when you are investing in our company.
It is indeed a privilege and honor for me to host my first results conference as the CEO of Bladex, from the New York Stock Exchange on the occasion of the celebration of our 20 years of listing at this important prestigious stock exchange. And as our Chairman has highlighted, our association with the New York Stock Exchange indeed unlocked the world’s potential for Bladex. So let me then talk to you about our business pillars, and we have here presentation that I will be following, so you can follow along.
First one, foreign trade, that talks about our knowledge and expertise in financing the foreign trade of Latin America.
Second one, Latin America itself, our commitment to the region, and we see a region that as our Chairman mentioned in his speech, 10 front integration to the global economy, to integration into its own regional integration within Latin America. Trade has been very important for Latin America since 1992, and for the economies in the region, I mean, it remains still one of the key drivers of economic growth. We now see Latin America, well integrated to the world economy, and advancing it rapidly to set the base for a more comprehensive regional integration, which will present opportunities and challenges in the years to come. But Bladex, we see it as an opportunity to further develop and enhance our business model, as we are committed to innovation and providing solutions for our clients, as they seek to increase their trade with the region and also when they are looking for opportunities to expand the business to the countries throughout Latin America. The Latin American trade flow has continued to increase and the interregional trade is expanding.
As you can see from the graph in the slide, in 2011, the total volume of trade of Latin America reached $2.2 trillion and over $410 billion refers to interregional flows. Foreign trade also represents as you can see, 38% component of the GDP of the region in 2011, it continues to be well diversified in terms of trade partners as you can see the United States alone continues to be the most important partner for Latin America. Then the second one is Latin America in itself as it grows its interregional flows. And then thirdly, you see Asia as we highlight the importance of China in this relationship and fourth place, Europe as you can see with all the discussions we have today about the risks we are facing in the world economy, the European impact in trade flows in the Latin America is not as big as used to be 20 years ago.
Bladex, as Mr. Gonzalo mentioned during his speech is uniquely positioned to benefit from this expansion within the region. And although we understand all the challenges of an environment with a lot uncertainty, one thing that is important to highlight is the change in the risk profile in the region.
As you can see at the left-hand side, you see the Latin American started risk rating and you see in 2005 that 19% of blue-collar, 19% of the Kansas were rated investment grade. And today we have 42% as an important growth and in the right-hand side, you see the portfolio of Bladex and you can see, it appreciate that in 2005, 20% of our credit portfolio was with country’s rated investment grade. And today, 77 that attest the quality of our portfolio, and why we have been able to remain not only profitable, but with a credit quality that is unique in the marketplace. As we see a lot of financial institutions losing, because of the credit Bladex is the opposite. We continue to grow our returns, but we remain committed to deliver or to keep a very good asset quality in our portfolio.
If we compare, then these you see how important has been at Bladex, the risk management process. And we are very proud to have today within the bank an enterprise risk management that manages risk in an integral way and that helps the bank to navigate through the different crisis.
So also in this environment, thinking about Bladex being well-positioned and having a very good risk management platform, but how is the region doing. So our Chairman made very clear that we're very optimistic about the prospects of the region. And we can see from this data that the growth economic growth in Latin America has been sustainable over the course of the year since the debacle with Lehman in 2008. So Latin America grew 6.4% 2010, 42% 2011, 2.9% 2012, the forecast in this impacted heavily by the lower growth in Brazil that is expect to grow 1.4% this year, and then the forecast for 2013, 3.7%.
And we highlighted also Central America, because Central America where Bladex is headquartered in Panama. Also is experiencing a wave of growth that has in the last three years being out performing the growth of the Latin American region as overall and this growth has been spearheaded by Panama sales that this year is poised to grow 10%. And we select also a few other countries where we have majority of our portfolio, so you can appreciate how growth also is happening in these countries, we're very pleased to see, what's going on in Mexico now with much more competitiveness in Mexico when compared to China, and we see this growth is being reflected now in Mexico that’s growing over its potential.
We are using here the figures of J.P. Morgan and you see that the growth potential in Mexico is 3%, and they're going to be growing next year 3.6%, Brazil very close to its potential. And then Colombia, a little below its potential, but almost there. Peru, it's really a hot spot today and is a priority for Bladex, growing 7%, 1% over its potential, and Chile growing also over its potential 4.5%.
And the other graph that I have in this slide shows clearly how strong this region is. In 2008 the U.S. dollar reserves of Latin America totaled $469 billion, today we have this impressive figure of $768 billion in reserves, and you see the major countries that hold this reserves and how they steadily increase the level of reserves. And also the foreign direct investments continue to flow to the region although we have seen all this deleveraging that has happened in Europe, we see this money also moving down to Latin America, and have any stable flows, as we see $119 billion in our foreign direct investments. So having this backdrop, of all this information that’s the opportunity for us at Bladex.
I think it’s what we call simple effective value proposition target at key clients, we have three major client basis, one our traditional banks, the finance institutions. Bladex was created to support the finance institutions and to cater to them in the 70’s, but we diversified front, just bank to banks to be also a bank that can service the importers and exporters of traditional, and I see that the names there is it's not correct, it’s missing its multilatinas, is not move is multilatinas then multinationals of Latin America.
The multi law as happens and it happen now, so the multilatinas, the company's the multinationals of Latin America there are growing outside of Latin America companies, there are investing outside the region investing in the US, investing in Europe, invest in Asia, but mostly investing in Latin America. And I can give you a good example Bladex has being recently mandated for a very interesting transaction of a Mexican company acquiring a Colombian company.
And this Mexican company came to us and asked us to set up the acquisition financing for them because of two things first, because we knew the Mexican company very well and we knew also the company they were acquiring in Colombia, because it is a client of Bladex.
So we could breach that gap in a very important way because we could take this the new shareholders, Mexican shareholders not known by the Colombian market, we could take them to the Colombian market, because we know them very well and we knew the company they were acquiring and this is being very successful, we're just now receiving the commitments from the different institutions, and I can tell you that the situation is going on, this year it’s going to be oversubscribed.
So very clearly how we can add value to this multilatinas as they seek to further expand in the region and with the importers and exporters our traditional clients will continue to service them with the traditional products of trade finance, and with the banks they know that we are there, when they need the most. So they know that we understand the region and we can support the financing that they might require from time to time because now banks in the region are also have much more access to the international capital markets than they had before.
So we’re totally committed to generate with all of this. We are totally committed to generate sustainable and superior results to our shareholders as is stated by our Chairman. Then present figure of $394 million in dividends and buybacks, in a span of eight years, I think it speaks for itself. The vision to increase our dividend from $0.25 to $0.30, also confronts that we are committed continue to add value to our shareholders. And as you can see, we have two major directives from our Board of Directors, you have to improve efficiency, and you have always to maintain conservative risk approach, because it is critical for a bank that is only a lending institution not to have surprises on the credit side.
That’s why we are looking on how to grow the revenues. And one of the things, that for us is critical and has been a limitation in our institution, is fee income. So, we are totally committed to increase the levels of fee income and we are planning to achieving that levels that we expect. We grow substantially next year, by improving our distribution, syndications platform, but also engaging in what we have been calling an active credit portfolio management that allows us to balance our portfolio to what ideal portfolio for our size of capital could be, thus generating more income for the bank.
Of course, margins are key and we are looking to increase the margins by diversifying our portfolio to a more medium term, type of portfolio, because now we have a strong funding base, as our Chairman has mentioned before, as you know our shareholders and analysts that this year Bladex increased substantially its funding or enhanced substantially its funding structure by going to the international markets and raised long-term funding.
So we are ready to deploy this capital. And now we see that's the time because we see the prospects very positive for the region. So we see the combination of these two factors will help us to grow our medium-term portfolio and improve our margins. And we continue to work to have the scale in the bank. So by doing that, and by maintaining the conservative risk profile, we hope to achieve a sustainable ROEs in the medium-term, between 13% and 15%. And this is something that for us it's remarkable, because we are coming from lower ROEs to get to this level.
Today we see all the banks are talking about 50% ROE, but the difference is, they are coming down and we are going up. So we continue to increase our ROE. So I would like to renew my commitment to the shareholders that we will continue to have a conservative approach to our portfolio, but we’ll fit to use your capital wisely and to deliver you the sustainably superior returns that our Chairman alluded to.
So finally, I think in terms of what we are doing at Bladex, we want to make Bladex the reference when dealing in trade finance in the region. There is a big difference between Bladex and our competitors. There is not a bank like Bladex. We at Bladex, we look to work within the region and catering to all the different countries. We’re not looking to be the number one in a local market. We’re not looking to grow our portfolio in our local market. We’re looking and how we can provide a solution for the clients in the different markets; they’re dealing with different countries.
For instance, we can add value to a Chilean company, because and not because of our cost of funds, sometimes because maybe Chilean companies because of the rating of Chile and the Chilean companies itself can raise funds more cheaply than Bladex, but we can add value to them when they are dealing with Venezuela, because we can take the risks of the Venezuelan enterprise, the Chilean banks will never do that. And our Chairman is here from Chile to tell that is true.
So we can add value to a Brazilian company that is looking to set up an operation in Guatemala, because we know Guatemala very well. We know the country and we know who the partners are and there is something interesting that is happening because that we see the companies we are working with and the activities they are and their plans of expansion and we’re being able also to approach companies in one country to another country to help them in their expansion plans. So we are aiming, our vision is to make sure that we can work in this company to transform Bladex in the reference in trade finance, and in the reference when you’re willing to invest in Latin America.
And last but not least, let me talk about the quarterly results, I will just give you a few highlights, then Christopher will give you the full details. I think what I have to state to you as my first quarter, head of the organization, we’re again delivering solid growth in the core business, with the outlook is improving. So we are very optimistic about the continuation and the sustainability of our earnings that’s why we confidently decided to increase the dividends from $0.25 to $0.30. The credit quality continues to be high. We are in the solid foothold to continue to deliver you double-digit ROEs, strong funding as I mentioned before. We continue to view this diversified platform and looking to generate fees as this is one of our challenge and we know that very well.
I'm very pleased to be here today also and to let you know that we are advancing rapidly to a solution to our asset management activity and although you have seen that they contribute that negatively to our results this quarter, we are very close to a solution and I hope in the near future to be able to give you the further details on these transactions. I think this is going to be important for the bank because bank engage in this type of activity to generate fee income and we realized after successful period with this company that we needed more and we had certain limitation in terms of market in this company in the U.S., so we decided that we had to find a way of having some upside in the future of this track record that we generate in the past and that’s why it took a little longer for us to get to a solution that could satisfy our desires in this type of business and we're very closed to that, so I hope very soon to be telling you what's going to happen to the asset management unit. And we had also to absorb amortizations of designation of hedging in our portfolio, in our transactions cross currency swaps.
And Christopher will give you further details on that. Back to we are, doing a solid foot for next year, and I'm very pleased to be here in my first meeting with you to tell you that 2013, the first and fourth quarter will be even better as we see a resumption of growth in several countries, Brazil is a good example. And I mentioned Brazil, not because I'm Brazilian. It's only because Brazil represents 40% of the economy and it's an important component in our portfolio. I know I have my Mexican director looking at me, but our portfolio is growing in Mexico substantially, we have doubled our portfolio in Central America, but we see a resumption of growth in Brazil – we see Mexico doing very well and these are all markets where we have priorities.
So I think we’re very well positioned for the fourth quarter all the commercial efforts that was done in the third quarter will reap the fruits on the fourth quarter, providing a solid footing for the bank for 2013. And if the reading of the scenarios, with all the mitigation factors that we have been coming from Europe, coming from China, coming from the U.S., of course we have this election in the U.S and the discussion about the fiscal cliff, and how this might affect further down the road.
But I think the consensus that we have seen from the different analysis and economist, the outlook for 2013 it’s a little bit better. So having all that together, I think we see 2013 very optimistically.
So thank you for your attention and now, I leave you in the hands of Christopher, that can walk you through the details of our results. Thank you very much.
Thank you, Rubens. Hello and good afternoon everyone. thank you for being with us here at the New York Stock Exchange. So it is a great occasion and thank you also to all of you joining us on the call today. In discussing our third quarter results, I will as usual 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 a year ago.
The net income for the first nine months in 2012, totaled $68.5 million as you heard Rubens and Mr. Menéndez and that compares to $58.4 million over the same period a year ago that is an increase of 17%. And the third quarter 2012 closed with net income of $13 million compared to $23.2 million in the previous quarter and compared to $16.3 million, the third quarter of last year. As Rubens mentioned, the results of the third quarter 2012 showed continued strength in our core commercial business while capital markets provided for more challenging background driving lower results in both treasury division and the asset management units.
And unlike last quarter, we did not benefit from extraordinary income items this quarter. So let’s look into the factors that drove this quarter’s results. We begin our segment performance review with the commercial division where net income was $23.7 million in the third quarter compared to $15.7 million in the second quarter of 2012, and compared to $14.5 million in the third quarter of 2011.
The quarter-on-quarter variance was impacted primarily by the reversal of loan loss provisions, and portfolio growth focused on high credit quality business. The shift of the portfolio composition towards transactions with lower inherent risk is highlighted by moderate shifts in our country risk exposures towards larger markets, and also highlighted by the fact that 67% of our portfolio is trade-related that is up one point from last quarter. The portfolio risk profile remains solid with non-performing loans representing 0.4% of total loan portfolio balances and that compares to 0.5% in the previous quarter and 0.7% in the third quarter of a year ago.
Net operating income, meaning net income before provision for credit losses reached $20.7 million this quarter. Net interest income grew as a result of higher average loan balances during the quarter that saw accelerating loan demand as already mentioned.
Average portfolio loan rates remained fairly stable even as margins came under pressure early in the quarter due to ample liquidity in the majority of the markets that we operate in. Expenses allocated to the commercial division increased 9% compared to the previous quarter, but that is mainly due to non-recurring employee related expenses owing to transitions in the workforce.
Average portfolio balances, including acceptances and contingencies increased 1% in the third quarter of 2012 reaching $5.4 billion while period-end portfolio balances reached $5.8 billion in the Commercial division. And that represents a 3% increase over the previous quarter as we’ve redeployed liquidity towards lending activity. Credit disbursements amounted to $2.7 billion in the third quarter of 2012 and that is up 2% from the second quarter of 2012, and down 2% from the level of the third quarter of 2011 on a year-to-date basis. Total disbursements amounted to $7.8 billion and that is just 5% after pace of the year ago.
General loan demand from large corporations is gaining a momentum again and the share of middle-market companies in our Commercial portfolio continues to grow gradually. The middle-market segment now accounts for 10% of the Commercial portfolio, [that’s not delineate], getting there in a minute. Well, we’ll wait until we get there.
And the middle-market segment now accounts for 10% of the Commercial portfolio. Lending in the traditionally low margin financial institution segment on the other hand was more restrained as we seek better returns in our transactions. This accounts for the Bank segment to represent less than 40% of total Commercial portfolio balances as of this quarter.
We of course, expect loan demand in this segment and the Bank segment to pick up towards the end of the year as well, but we will continue to seek better returns. The Commercial portfolio continues to be short-term and trade-related in nature. 79% of the portfolio will mature within one year and as discussed earlier, 67% of the portfolio is trade finance while the remainder represents lending to banks and corporations that are closely involved with foreign trade.
We continue to maintain a diversified mix of country exposures that enhances in the risk profile of our portfolio. you just saw the slide that Rubens showed you earlier with more than 75% of our total exposure in investment-grade rated countries, 77% I can give like accurate number.
Now let me move on to the Treasury division, and you have the slide already up there. We’ve had a quite challenging quarter, posting a net loss of $7.2 million this quarter compared to a gain of $0.2 million in the second quarter and a gain of $5.2 million a year ago. As valuations of bonds issued in the region remain high with increased levels of volatility, we largely maintained our positions in our securities portfolio with average portfolio levels declining slightly versus prior quarter levels. And these reduced portfolio levels resulted of course, in a lower interest income generated for the divisions.
Unlike prior quarters, we did not generate any income from the sale of securities this quarter that also contributed negatively to the revenues and results of this quarter. The securities portfolios continued to consist of high quality and liquid Latin American securities. 90% of the securities portfolios represent sovereign or state-owned risks.
The bank continues to cover any foreign exchange exposures with appropriate derivative instruments that are primarily designed to offset the effects of gains and losses on foreign currency exchange. Most of the times, these coverages are designated and hence qualified for hedge accounting either as cash flow of their value or net investment hedges.
Some transactions however contracted to hedge underlying assets and liabilities do not qualify for hedge accounting. In those cases, the valuation effects of the hedging instruments are accounted for on a stand-alone basis and reported separately in the respective P&L positions.
Taking together, these positions largely offset each other and by that they achieve our economic goal of neutralizing FX risks. The bank decided this quarter to discontinue the hedge accounting treatment for certain contracts and to treat them as freestanding instruments going forward.
Now accounting rules required that the amortization of adjustments of valuations through underlying liabilities that have been recorded in prior periods under hedge accounting is shown as interest expense, but this quarter led to an increase of interest expense in the borrowings and long-term debt line even as average borrowing balances and funding costs remained essentially unchanged. Without these amortizations, overall average funding rates would have been at the same level of the prior quarter and total net interest margin for the bank would have shown an increase of two basis points over the previous quarter.
Average weighted funding costs including these amortizations in the quarter increased until then by 11 basis points versus the second quarter 2012. and they are up 65 basis points versus the same quarter of a year ago. If we compare to prior levels, we do see the effects of extending the tenures in our funding and that has been a substantial factor in driving up these average interest expense rates.
Now, the funding sources of course, continue to be a well-diversified with deposits continuing to represent a significant share of our short-term funding with the obvious benefits to our funding cost base.
Now, let’s talk about the asset management units, which lost $3.5 million this quarter on negative trading results after net income of $1.7 million in the second quarter of 2012 and compared to a loss of $3.4 million a year ago. The bank has resumed the redemption of retained earnings in the fund while making progress in negotiating the divestiture of the unit as already mentioned. we expect to bring this project to a conclusion later in the quarter.
Moving on from our segment review, let’s give you a brief summary of our other financial highlights of the bank’s performance in the third quarter 2012. We talked about the interest income of course, and highlighting the fact that our net interest margin dropped five basis points versus the nine months of last year. And the main driver of this was of course, the expansion of our funding tenures. but also if you look at the third quarter results, the reduction in them is mainly attributable to the amortization of these financial instruments that I’ve talked about earlier. There is no fundamental change in our funding structure we reported for this quarter.
And operating expenses from the third quarter was stable when compared to the previous quarter, as lower variable compensation type of the performance in the asset management unit offset higher employee-related expenses. The other expense categories were largely in line with the previous quarter.
Year-on-year, quarterly expenses were up 9% from a higher employee-related expense base reflecting a higher average workforce. The bank’s efficiency ratios suffered this quarter from reduced revenues coming from the Asset Management Unit and Treasury division.
The efficiency ratio for the first three quarters of 2012 reached 40%, which puts us at the same level of a year ago, clearly, not satisfactory, but as Rubens mentioned with our own continuing focus on the efficiency, we are quite certainly – we’ll be able to improve on that.
The bank’s overall year-to-date return on equity reached 11.5% in the third quarter compared to 10.8% a year ago. The year-to-date core ROE, which relates to results excluding extraordinary items or non-recurring items and which also excludes the Asset Management Unit is also at double-digit levels at 10.4%.
The bank’s book value stands at $21.34 a share, up $0.05 from the previous quarter and up $1.63 a share from the third quarter of 2011. Leverage at the end of the third quarter 2012 stood at 7.8 times that is up a fraction from the second quarter and down from the 8.6 times that we showed in the third quarter of 2011.
Tier 1 capital stands at 17.9% that compares to 18.2% in the previous quarter and to 16.9% a year ago. In light of the solid expansion of our core business since at last decided to adjust dividend levels, the bank’s Board of Directors have decided to increase the quarterly dividend corresponding to the third quarter of 2012 to $0.30 a share. This represents an increase of 20% over the prior quarter. This decision in our view underscores our belief that we are well-positioned to continue our core income expansion over the coming quarters.
And with that, I’d like to hand it back to Rubens for the question and answers. Thank you very much.
Rubens V. Amaral Jr.
Okay. so let me open for questions please.
And had a lot of problems in Argentine, but a difference perhaps depending on my composition of the Commercial business today versus then and sort of riskiness of your current business as you perceive it?
Rubens V. Amaral Jr.
Okay. Thank you very much and you are?
Rubens V. Amaral Jr.
Thanks for the question. Well, as you said in 2001, the bank was a whole different organization, the bank was a bank, working with banks basically, primarily with the feel, syndicated loan transactions in its portfolio and had an exposure at that time to Argentine of $1.1 billion. And you know the story as you know very well. Really the Bank is a whole different bank organization. our portfolio today, it’s 40% with banks and 60% with corporations. and these corporations involved in either market corporations and large corporations. And when we go to the middle-market operations, you might wonder we’re taking more risk in your portfolio, because these companies tend to be more riskier, because they pay higher specs and you’re right.
And that’s why we showed before that graph where we compare the quality of our portfolio compared to the overall quality of the region, and you see how we outperform the regions by having 77% in the investment grade countries rather than 42% and what the region profile is. But when we go to the middle-market, we have guarantees. And most of these transactions are secured, so either secured by inventories that we monitored on a constant fee basis in countries such as Brazil, Mexico, Peru. We’re looking to grow in this type of segment, in this type of countries where we still can get the financial information that’s reliable.
So as we move further down, the segment we move to the countries where we feel much more comfortable we can get information where we can get also the guarantees. So overall, in terms of the commercial strategy, the commercial strategy has been to grow in the segment in the short-term trade finance and to diversify with the large corporations as I alluded to before the acquisition finance in Mexico. The companies they’re really expanding the region, we can provide the medium-term financing, and also for this type of companies with the leasing activities that is growing our portfolio as well.
So we see a much more diversified in terms of products and diversified also in terms of the countries. And when we have riskier clients if you will, then we cover it with guarantees. And in the riskier countries, if you ask me and in terms of exposures to countries such as Venezuela, Ecuador when we finance exactly what is strategic for that country. And that’s basically primarily the oil transactions. And we know, and for the track record and experience, we are very safe in this type of transactions, we never had it before from Ecuador or Venezuela. It seems there’s a lot of inception, because we always step to finance what is certainly as good for them. I think, we’ll have…
Hi, Rubens, thanks, I’m Christopher. My question is, when you look at your results, you’ve been delivering on the expenses and the asset quality has been very much under control, when you talked about kind of growing fees and net interest margin. So maybe, if you kind of quantify how much that can expand over the next few years. and so it has been able to expand margins that have competition, and then also the fee you talked about this in the occasions that you’re doing, how much can that contribute to fee income? And then with your ROE target of 13% to 15% as I got, next year like what’s your medium-term, how would you quantify medium-term for that?
Rubens V. Amaral Jr.
Okay. Thank you. First, our target has been always and we have it from the markets that we want to achieve mid teens ROE. so this is a medium-term target. We’re not saying that we’re going to get 15% next year. You saw that we have solid 11.5% returns this year, and you see how the core is growing. So we expect the core to continue to grow the next year that will help us to sustain the double-digit level ROEs that you are seeing.
In terms of the fee income, we have the two possibilities that generate fee income. And the first one is our traditional letters of credit business where we confirmed the letters of credit, discounted the letters of credit and with generic fees. This has been very difficult to forecast as countries might need more or less LCs. You saw a big swing in our reserve requirements, because we had LCs that we had for short-term in a riskier country that required more positions. and then those LCs were paid and then we released the provisions. and we didn’t replace those LCs, because there was no business there to replace those LCs.
So it is very difficult to forecast. but we see that we have been able to; in a sustainable way to provide a reasonable level of fee income. The difference will come through our syndication of strategies. And this is something that we have agreed whether our Board is going to be a very important target for next year. As we’ve set the base, we established this syndication desk one year ago, and we went to our clients and we discussed with our clients, because by not having experience in track record in this business that it takes time for you to build this track record. and we’re in the process of building this track record, and we did last year one transaction that was very successful in syndications in Peru. And this year, we closed this syndication, and we have nine other syndications in our pipeline, three of which are solid and we believe we might have the possibility of getting these mandates very soon.
So this is one of the ways, we’re going to be focusing on in generating fee income. As the region really is looking to diversify the source of financing, and we think that Bladex in this case is particularly well-positioned to benefit from its other location in Panama. The Panama as we’ve mentioned before is growing in an important way and the pulls on liquidity that we see in Panama are very high, and the Panamanian banks are very interested in the assets outside of Latin America. so we see that as a huge potential for us to benefit from this poor liquidity and offer these to clients throughout the region.
So we’ll go in that direction, that at Bladex, we have been very conservative in providing guidance to you above this type of numbers. but I can tell you, it is an important target that we have for next year to grow our fees in an important way. So you can be looking for growth in our fees over 50% for next year that’s what we expect with this deployment of this syndication.
Krim Delko – Orange Capital Partners LLC
Krim Delko with Orange Capital. I have two questions. First, I just follow-up on the ROE maybe, how much more leverage do you tend to take, it seems to me that you have a lot of capital, and I assume some of the ROE increase is going to be through leverage, maybe I’m wrong, but maybe you can talk about this. And second, kind of which I’m just curious have you seen a withdrawal of the European competitors in your business and has that helped your business? And maybe on the negative side, have you seen let’s say Asian competitors come in, help do trade finance and so how is the competitive dynamics across your region? Has it changed dramatically in the last couple of years or what do you say?
Rubens V. Amaral Jr.
Okay. Thank you very much, a good question. In terms of the ROE of course, leveraging, it is important for us. We have already said that because we’re in Panama and we don’t have the land of less resort like, we have to be very careful in terms of not over exposing the bank in terms of leveraging in more of the balance sheet, but we believe that the ratio of Tier 1 between 13% to 15%, in 15%, I think the sweet spot for Bladex, it is possible and this our medium-term target to get to this 50 Tier 1, of course I have my good friend here from Moody’s in the Casino. and I know that they’re going to be looking very carefully, if I had lowered too much that Tier 1. and although if we need to exposed to when it’s trespassed and the Basel III type of calculation, we would say, we would help better than any bank as you know very well.
So the leverage is definitely something that we continue to consider. And we’ll continue to grow. We expect to grow next year between 10% and 12%, and using this capital and actually, we do more medium-term financing in our internal models that requires more capital, and that puts a limit also in our capacity of leveraging the balance sheet. But we’re very careful about how we do that. so pointing to your question, we are definitely using the leverage tool to improve ROEs, but the challenge for us is to change the mindset in the company and really, we committed to generate fee income that’s not the [benefit] in the use of capital.
That is I think the most important message that I want to convey while we continue to work on the efficiency, and make sure the costs don’t go out. on the question of competition, the scenario has changed drastically. Definitely, we have seen European banks retreating and I have development here in this audiences. and they know what’s going on, but I have to tell your friend the traditional trade finance, more short-term trade finance that banks us to an active.
What we have seen European banks retreating from is the more structured trade finance, the medium-term type of transactions. The traditional trade finance you know that the few countries in the region they preferred to have the euro instead of the U.S. dollar as their currency. And you imagine that where this deposits might be, so this allows this bank to have competitive advantage if you will to do this more trade finance short-term trade finance.
So we still see them in this arena. but we have seen also at least one American bank being more active in the trade finance throughout the region in a more comprehensive way, which is Citibank. we have seen Citibank very, very active and growing its participation in different markets, not only in the five major markets in the region, but also in Central America.
And we have seen something that we didn’t see in the past is the competition of local banks becoming more regional. and the good examples are the Colombian banks. Colombian banks are expanding in an important way. we have seen the two major groups in Colombia expanding and acquiring banks in the Central America. so we are seeing more often outdoor. their target is to increase their participation in the local markets, but it’s still they are competing with us in several different transactions. So this is the landscape has changed from a few years ago. But again, I think we’re well positioned, because we bridged the gap between country to country, and mostly on those banks they go, they are more interested in the local markets.
Michael Bunyaner – TLF Capital, LLC
Good afternoon, Michael Bunyaner, TLF Capital. As you shifted the mix of your business toward Commercial, share with us your philosophy of the credit losses and the reserves, because your traditional banking business has had very, very losses and share how you’re thinking about and how you’re heavily getting it, because your asset growth has been very significant in the last two or three years?
Rubens V. Amaral Jr.
Well, our provision methodology, it’s very conservative. We use the guidelines from Basel I adjusted to our reality in Latin America. And as you know, the default rates in our portfolio are minimal. so we have to use default rates provide either by being the rating agencies or by being a standardized approach of Basel I, Basel II and III. But this is the way we do and we used, we divorced a bit and that’s why we see that our provisions are very conservative, because we don’t want to take unnecessary risks, because the nature of our bank is such that we are a wholesale type of bank.
And then as you can imagine, we have concentrations. So we have to be very careful in managing these concentrations, and that’s when this also plays a very important role when we define the provisioning requirements for our portfolio. And that’s again when I mentioned before in my introductory remarks, we’re looking at this active credit portfolio management. so not only we can increase the margins, but also we can manage down concentrations that we have from time-to-time in the different types of clients.
Because we know the clients very well, that we know the trade finance the short-term we can see forward in that type of concentration, but we need to manage that down, because it’s not healthy to have this type of concentrations. So that’s the way basically we work our model. we’re now in the process of requirement of our Board of begin on methodology in terms of how we can further check this to reflect really the reality of our portfolio.
Michael Bunyaner – TLF Capital, LLC
And just one follow-up, I think you’ve mentioned that about 70% plus, 78% of your businesses doing one year. So you’re book of business turns quite a bit, how much of that is repeat business with the same customers that have been with you for more than three years or plus/minus?
Rubens V. Amaral Jr.
Well, we did once review of the attrition rate. And our attrition rate is very low, very, very low. So the majority of this business is the repeat business, although we were very pleased to continue to work in dividend scale. So only last quarter alone, we added, I think it was 50 new clients to our portfolio. and we have an average yield of the lines we approve of 60%, which is fairly in line with the standard of the financial industry that I’d tell you that it is proportion of 70% to 30%, 70% repeat business, 30% new business. Welcome.
Unidentified Company Representative
Good evening. My questions at this time from my live audience, but on our – on is connected via telephone. And we have a few questions coming in. So operator, if you could please open up, I think we have the first one coming Bill Jones from Singular Research. Thank you.
(Operator Instructions) Our first question is from Bill Jones from Singular.
William Jones – Singular Research
Hi guys, congratulations on the anniversary and the Bladex Day. I have a question in the press release; you mentioned that the quarter had a slow start. but the bank saw an acceleration of activity, several countries got the region, and I just wanted to get maybe more color on what you’re seeing in the economy throughout the region kind of now and what your feelings are there?
Rubens V. Amaral Jr.
Okay, thank you, John for your question.
William Jones – Singular Research
Rubens V. Amaral Jr.
Bill Jones, sorry. As we mentioned in the different presentations today, we saw during the third quarter that the quarter started very slow, and I mentioned the situation of Brazil, because Brazil was growing at rates below 1% and Brazil is an important market for Bladex and that had an impact in our portfolio. The other countries they continue to grow in a regular, stable way. and in Mexico, the other examples flowing in a more important way and we saw this quarter that our portfolio grew [substantially] in Mexico by $200 million in comparison to the last quarter while Brazil remained flat, basically our exposure in Brazil. So we saw a compensation between Mexico and Brazil in terms of the overall growth. But so the different countries in Central America, as I mentioned, Panama is expected to grow 10% and our portfolio continues to grow in Panama.
Peru is growing over its potential and our portfolio also is growing in Peru. And more recently, we saw the assumption of growth, industrial production in countries such as Brazil, which will help us to continue our growth in the fourth quarter.
So we see the region now I think with indicators of growth much more stable than we saw before. The trade volumes are also growing. so we are very positive about the outcome for the fourth quarter as we continue to grow our exposure in Mexico. We increase our exposure in Peru, and we continue to grow our exposure in Central America.
Just to give you a ballpark figure. in 2010, our total exposure to Central America was $500 million. Today, our exposure to that region is $1.1 billion. So we’re seeing also an important growth that we’re benefiting from in that region. So we see growth and if you see also the forecast for next year, Latin American as a whole in average terms, the forecast to grow 3.7%. Central America itself 4%, so it is a very positive outlook considering that we won’t have any big surprise coming from Europe and China mostly. So we’re very optimistic about these prospects, Bill.
William Jones – Singular Research
Okay. I guess is it fair to say that optimism is part of the confidence of increasing the dividend by 20%?
Rubens V. Amaral Jr.
Yeah. in that sense, one of the things that we always discuss with the Board is, what’s the message behind dividends? The answer behind dividends is, how we are performing and if we have something that’s extraordinary as we had in the past such as any extraordinary type of gain that we had in the asset management business and at the end of the year, we have to refill this and we would give back it to shareholders. This time for me and it’s my first results conference and we’re very pleased that to affirm to you and confirm to you that the reason behind this dividend increase is the strength of the core. And we see a much stronger core quarter in the fourth quarter, and we see a good year so far shaping up for 2013.
William Jones – Singular Research
Great, [Rubens]. thank you for taking my question. Thanks gentlemen.
Rubens V. Amaral Jr.
Thanks. Pleasure talking to you.
Thank you. And gentlemen, there are no further questions in the telephone queue at this time.
Rubens V. Amaral Jr.
Okay. Thank you very much. It’s a pressure to host this conference from the New York Stock Exchange. It’s a pleasure to have the Chairman and our distinguished Directors of the Board participating with us. It’s a pleasure to have shareholders and long-time shareholders here with us. and for us, the management team of Bladex we are committed to continue to provide you sustainable returns and superior returns. And I look forward to seeing you all again in our next conference call. Thank you very much. Have a great day.
Thank you. This does concludes the telephone portion of our call, you may now disconnect.
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