Banco Latinoamericano de Comercio Exterior, S. A.

Rubens V. Amaral - Chief Executive Officer, President and Director Christopher Schech - Chief Financial Officer and Executive Vice President of Finance

Christopher Delgado - JP Morgan Chase & Co, Research Division Jeremy Hellman - Singular Research

Thank you, David. Good morning, everyone, and thanks for joining us today.

I am very pleased to share with you the results we have achieved in the fourth quarter and the full year of 2014. As I have already mentioned in my comments in our press release yesterday, we continue to strengthen our core business by boasting solid growth in our credit portfolio, 10% year-over-year; by continuing to diversify our revenue streams, exhibiting sustainable and increased fee income further [ph] increasing [ph] the year; by keeping our commitment to improve efficiency [indiscernible] 28.1% for the fourth quarter and 31.8% for the full year; and last but not least, by keeping our focus on sound risk and liquidity management.

These results were achieved in a very challenging year, as 2014 was marked by an important slowdown of economic growth across the region, lower trade and more volatility in the capital markets caused by uncertainties in the more mature markets and largest emerging economies. Christopher will provide you with the detailed information about our performance.

Let me now share the main factors impacting the scenario for Latin America in 2015. As most of the challenges we faced last year still remain, we need to consider carefully the following: first, we will experience still sluggish GDP growth, which is projected to reach only 1.2% for the full year; second, modest rate flows increase, projections indicate an increase of 3.7%; third, investments in the infrastructure present uncertainty as to the capacity of the countries to keep up with their investment plans; fourth, a stronger dollar that could impact the availability of liquidity for the region and increase in prices of imports; fifth, interest rates, possibility of increasing the interest rates in the second half of the year; and sixth, the oil crisis, with a possible prolonged cycle of low oil price levels.

Although the combination of these factors may produce a discouraging scenario, in our analysis, we look at how these variables will impact the individual countries in areas within Latin America, as we are in a new cycle of moderate economic growth but [ph] divergent consequences on the countries across the region. Let's look at Mexico for instance.

The forecasted GDP growth for 2015 is 3.2%, well above the average for the region; and trade flows should increase by 7.8%, again above the average for the region. This figures points to a better year for Mexico for 2015 than it was last year in which we already increased our portfolio by 63%.

Let's also not forget that Mexico has managed well their exposure to oil prices volatility. The country is the less dependent on the exports of commodities, and the U.S.

economy continues to show signs of improvement. Therefore, we are optimistic about our prospects to increase our portfolio in that country this year as well.

Our sales team in Mexico is working already on a solid pipeline of new deals. We also expect to ramp up the business of our newly created [indiscernible] in Mexico.

Let me move on to another area in our region where we expect positive trends in 2015, which is Central America and the Caribbean. The forecasted GDP growth for the area is 3.9%, well, again, above the average for the region; and trade flows should increase by 4.1%, also higher than the average for the entire region.

Some of the countries are also exporters to the U.S. and similarly to Mexico, should benefit from improvement in the U.S.

economy. Our total exposure in this area rose from $1.5 billion in 2013 to $1.6 billion in 2014.

I can also say that our pipeline of deals looks very solid for this area. Moving on to South America.

We are all aware of the challenges of the Brazilian economy and the prospects of almost 0 growth in 2015. Our exposure continues to be mainly in trade finance, 83%, with 72% of the total portfolio maturing [ph] within 1 year.

We will continue our selective approach to new deals in Brazil, focusing on trade finance. In terms of Colombia, Chile and Peru, the prospects of growth are positive, with GDP growth increasing in each country around 3-plus percent, well, again, above the average for the region.

In these countries, we are focusing on selected corporate names associated with either with trade or regional expansion as well as being very active in our Syndication business. So summing up, as you can appreciate, as we break down the analysis on individual countries and areas, we are cautiously optimistic about our growth prospects for 2015.

Our expectation for the year is to post portfolio growth between 8% to 10%. We will continue to diversify, selectively, the mix of the portfolio towards more medium-term transactions and keep the momentum we have achieved in our Syndication business, further increasing our fee income.

And speaking of the Syndication Platform, let me share with you that we have a solid pipeline of possible transactions in diverse countries, such as Chile, Mexico, Guatemala, Peru and the Dominican Republic, among others. As you'll see in our presentation today, we have also prepared a special slide about our exposure to the oil and gas sector, explaining the reasons why we feel comfortable with the credits we have and why we do not anticipate any negative impact in our portfolio.

Christopher will go through it in a few moments. Last but not least, I am particularly pleased with the fact we have achieved a sustainable ROE of 12%, which was one of our important targets, and we continue to meet it [ph] to share the positive results with our shareholders by increasing dividends.

Our board, as you know, approved [indiscernible] increase of our quarterly dividend in December last year, making this the fifth year in a row that dividends have been increased. So with that, I thank you for your time today, and I will now turn it over to Christopher to guide you through our presentation.

Thank you. Christopher, please.

All right. Thank you, Rubens.

Hello, and good morning, everyone. Thank you for joining us on the call today.

In discussing our fourth quarter and full year results, I will focus on the main aspects that impacted our results, and I will make reference to the earnings call presentation that we have uploaded to our website, together with the earnings release and which is being webcast as we speak. Before we go into more detail, let's start on pages 4 to 6 with a quick rundown of the key financial highlights and drivers that shaped this quarter and the year 2014.

The fourth quarter 2014 closed with net income to Bladex shareholders of $36.1 million compared to $26.6 million in the previous quarter and compared to $23.9 million in the fourth quarter of 2013. For the full year 2014, we reached net income of $106.9 million compared to $84.8 million in 2013, which represents an increase of 26% year-on-year.

In order to accurately present performance in our recurring business activity, we focus on business net income, which is recurring net income derived from our principal business activities of financial intermediation, which generate interest, commission and fee income. We also refer to it as core income or income from core activities.

And this business net income reached $30.5 million in the fourth quarter, up 17% from $26 million in the third quarter, mainly due to net interest income growth brought about by the growth of our average commercial portfolio balances and due to higher fee income from our restructuring and syndication activities. Business net income was up 12% compared to the fourth quarter of 2013.

For the full year 2014, business income reached $103.5 million, an increase of $14 million or 16% [ph] over the previous year. Net interest margin remained relatively stable, 1 basis point below the previous quarter level, but it is 23 basis points above the level seen in the fourth quarter of a year ago.

For the full year 2014, net interest margin reached 187 basis points. That is up 12 basis points versus the previous year.

In similar fashion, the net interest spread, which represents the difference between average interest rates earned versus average rates paid, dropped, again, 1 basis point quarter-on-quarter but rose 25 basis points year-on-year. Full year interest spread was at 171 basis points, up 16 basis points from the prior year.

Business return on assets and return on equity metrics increased quarter-on-quarter and year-on-year because of the volume margin and spread drivers I mentioned before. The business efficiency ratio was 32% in the fourth quarter 2014, 2 points above the previous quarter but nearly 3 points below prior year levels.

For the full year 2014, the business efficiency ratio was 32%, again, some 5 points below the level reached in 2013. Our Tier 1 Basel I capitalization continues to be comfortable, reaching 15.3% at the end of the fourth quarter, slightly higher compared to the previous quarter and slightly below the level of the fourth quarter of a year ago.

This quarter, we make the move to report Tier 1 Basel III numbers going forward, and the Basel III ratio stood at 15.6% at the end of the year 2014, slightly above the Basel I level. So let's look into quarterly and full year results in a bit more detail, moving to the next slide, Page 7, which shows the evolution of net income compared to the previous quarter and compared to the fourth quarter of 2013.

Net interest income rose 4% compared to the third quarter 2014, benefiting from higher average loan portfolio balances and stable net margins. There was a lesser net change in the provision line this quarter, owing to relatively stable end-of-period portfolio balances.

Noncore income, which mainly represents the participation in the investment funds, was positive, as the turnaround performance, which started in the third quarter, picked up considerably -- considerable pace in the fourth quarter. Fee income also picked up on the back of foreclosed transactions in our structuring and syndication business, and increased activity in secondary markets were reduced again from the sale of corporate loans.

These fee income drivers are partly offset by lower fee contribution from the letters of credit business, which saw higher average balances of lower average margins, as we continue to shy away from overly risky markets. Quarterly expenses were up a bit this quarter as is oftentimes the case for us in fourth quarters, mainly through adjustments made to accruals for variable compensation and due to professional fees.

Year-on-year, quarterly net income was even more substantially ahead, up 51% compared to the fourth quarter of 2013. Net interest income was a significant driver for that, as we grew average portfolio balances, net interest spread and net interest margin.

Fee income increased year-on-year based on the same drivers I mentioned just a minute ago. The change in provision for loan losses is mainly driven by new reserve requirements from higher portfolio balances and the absence of recoveries this quarter.

As mentioned earlier, noncore results performed nicely this quarter compared to losses in the fourth quarter of a year ago. And operating expenses were slightly higher compared to a year ago, again, mainly from higher variable compensation and professional fees.

On Page 8, we look at the full year net income evolution, and we basically have the same story here: a rise in net interest income from higher average portfolio balances; higher net interest margin; improved fee income from syndication and loan intermediation activities; higher provisions for loan losses, mainly due to portfolio growth; and the swing in noncore results, as the funds turned around their performance. And all of this with basically stable expense levels.

On Page 9, we take another look at net interest income and margins, which are still our key income drivers, even if noninterest income is getting more and more share in our net revenues, which is, of course, what we want. Net margins were up 12 basis points year-on-year, which is a meaningful improvement for us.

The source of this net improvement came up [ph] and foremost from the funding side, where we've managed to reduce costs in all tender ranges [ph] at roughly twice the rate compared to the drop in average yield on the other side of the balance sheet. The relevant market base rates, in our case, LIBOR, were the most significant drivers of these silent [ph] movements.

But in addition to that, we exercise restraint on the asset side, where we favored margin stability over sheer volume growth. And on the liability side, we made careful use of diversified funding sources and fine-tuned the tender [ph] mix to further squeeze average funding costs, and we did that leveraging the strong appetite that markets have for our name.

Moving on to Page 10, we highlight the portfolio growth in segmentation. Demand from medium-size corporations remains the main driver behind this quarter's growth and the growth that we have experienced in the full year of 2014, as we continue our focus on companies that have already outgrown the size thresholds we use to categorize the middle-market companies.

Lending to financial institutions increased a bit quarter-on-quarter, as it oftentimes does toward year end, when banks tend to shore up liquidity to bridge both holidays and generally low market activity during that time of the year. On Page 11, we present breakdowns of our commercial portfolio balances by country on the left and by industry sector on the right.

Many things are being said and written about Brazil these days, so we've figured it would make sense to highlight some facts to run our business in Latin America's largest economy, where almost -- or over 40% of the region's GDP is generated. Compared to that number, if you look at our exposure levels in that country at currently nearly 28%, you could think that we are underweight that country but really has -- this really has more to do with our desire to limit and reduce concentrations in our book rather than lack of business opportunities.

We have moved in this direction for quite some time now, since right around the global financial crisis of 2008 or in 2009, when we had more than 45% of our business in Brazil. The business we have in Brazil now is the business we like, as short -- as strong trade finance bias, stronger than in our overall book, in our usual short-term focus.

Both elements make this portfolio solid in terms of credit quality, and our tender [ph] mix allows us to react very quickly to changes in market conditions, which is really also true for our entire book of business across the region. So in the industry sector graph on the right, we did a couple of things.

One was to include the financial sector and show the entire commercial book, not just the corporate or nonbank book as we have been showing in our previous earnings releases. And secondly, given the ongoing discussions around low crude prices, we broke out the oil and gas sector to 3 distinct segments, which have very different risk exposure profiles as we explained in Page 12, where we have -- where we offer a deeper dive into our exposure profile in the oil and gas sector.

We show our entire oil and gas credit portfolio, which includes loans, contingencies and securities, i.e., bonds. But first off, our segmentation of our client base into 3 segments, starting with upstream or production-oriented companies focused on exploration, drilling and production; then the vertically integrated clients, who really travel the value chain end-to-end from exploration all the way to retailing; and finally, the more downstream and distribution-oriented client base.

We should highlight the fact that the majority of market players in these segments are often government or quasi-government entities, many of which are of systemic and strategic importance to their respective economies. Our views on these segments in the current market context range from the negative in the case of the upstream activities, where we have 14% of our total oil and gas exposures equivalent to about 2% of our overall credit exposures, to the positive in the case of the downstream segment, where we have 43% of our total oil and gas exposures and 6% of our total credit exposures.

The rest is concentrated in the integrated segment, where both negative and positive influences largely offset each other providing for a relatively stable outlook. The reasons for our negative outlook in upstream are fairly obvious, given the low level of margins these clients are able to achieve in the current economic environment, net of their production costs, which impact cash flows and limits their ability to continue their normal [ph] very intense investment activities.

Perhaps mitigate these adverse factors is the signs in financial solidity of the companies themselves, their relative importance in the oil production chain that makes them strategically relevant in their respective countries, and the fact that local currency devaluation is helping them reduce cost pressures. Our stress test analysis [ph] points to resilient payment [ph] capacity, should current market conditions prevail for some time.

We are closely watching this segment, and to-date, we have not detected a change in payment behavior or credit quality deterioration. On the downstream side, which is relevant in the majority of countries of the region, as they are net importers of crude and refined fuels, we see a largely positive impact on local economies in general, as internal demand is generated, and on our client base in particular, as this internal demand is satisfied at lower procurement cost.

The fact that our business, in both integrated and downstream segments, has a short-term trade focus actually help us capitalize fairly rapidly on favorable conditions in these segments. Moving on to Page 13, a quick glance at operating expenses and efficiency levels, which continued their positive trends, as expenses remain stable while revenues rise.

The business efficiency ratio looks at our recurring base of expenses and revenues, excluding noncore revenues and expenses. Business expenses increased quarter-on-quarter as accruals for variable compensation and professional fees were adjusted based on latest estimates.

Year-on-year, the growth in the business expenses was fairly marginal, thanks to increased efficiency in both our business processes and headcount management. Normalizing variable compensation elements, we have attained a run rate very close to our stated interim target of 30% efficiency ratio.

However, we won't stop there, as we think we can do more, and we can and need to do more, to get to even better levels of efficiency that will help us to further differentiate our franchise in the markets. Moving on to Page 14, we focus on our fee income business, which we have talked about quite a bit in recent earnings releases.

The reason for that is, of course, the strategic relevance and importance that we see in these business activities, and we are encouraged to see some real progress, not only in our structuring and syndications platform, which over the course of 3 years have developed into a [indiscernible] business, but also in increased activities in secondary markets where we place [ph] business originated by us in order to free up capacity to do more business with our clients. We will look to develop more of these distribution channels in both primary and secondary markets, as we actively manage concentrations, exposures and margins to generate the consistent returns that our shareholders expect.

On Page 15, we make reference to our noncore income, essentially resulting from the remaining passive investment in the investment funds formerly owned by Bladex. Needless to say, we are very pleased with the turnaround performance of our investment, but this does not change our commitment to devoting ourselves entirely to further developing our core business activities.

On Page 16, we highlight return on average equity and capitalization trends. Return on average equity continues to be on track.

Capitalization levels remain strong, and as mentioned last time, we'll now make the switch to measuring our capitalization based on Basel III criteria going forward. As of year-end, the Tier 1 Basel III ratio stood at 15.6%.

And as we have said before, there is no regulatory requirement that would ask us to implement Basel III at this point. We just do it because we can and because we think it is helpful information for our stakeholders.

The only reason we are still showing Basel I on this slide and in our earnings release is to allow you to make period comparisons. And finally, on Page 17, we highlight our focus on total shareholder returns.

We are very pleased to see the stock price and liquidity of Bladex shares heading in the right directions. Recently, and as mentioned by Rubens, the Board of Directors authorized an increased quarterly dividend payment of $0.385 a share, further proof of its commitment to maintaining an attractive dividend yield based on the performance in our core business.

My apologies for taking a bit longer this time, as we expanded a bit on some current hot topics. But now with that, I'd like to hand it back to Rubens for his closing remarks and Q&A.

Thank you very much.

Thank you, Christopher. Now, ladies and gentlemen, we are ready for your questions.

I had 2 quick questions. My first question relates to fees.

That's been a good business for you guys. It's something that's been a focal point for you.

And I just wanted to get a sense of what are your thoughts on fee growth for 2015 and just kind of the long term? And then my other question relates just to growth opportunities in general.

Loan growth, 8% to 10% is pretty good, especially given regional GDP, but any thoughts on maybe risks to that number? What are potential upsides for that number?

Those are my 2 questions.

Thank you, Chris. First of all, fee income growth, you saw that we had a solid year 2014 with 38% growth in our fee income business.

As I mentioned, the syndications business has a solid pipeline of new deals, which points to us that we can experience another year of growth in our fee income. It is difficult to say to you how much we would expect of fee income growth in this sense, because you know that this is going to be a challenging year.

The pipeline looks solid, but we have the process of continue to develop this business activity, and eventually, have the deals done. This is the beginning of the year.

This is the slowest quarter of the year, as you know. So we are optimistic that the demand is there.

There will be possibilities of continue to develop this growth. But I would wait until next quarter to give you a more solid guideline in terms of the fee growth for this particular business.

What I can tell you is that, as Christopher alluded in his comments, letters of credit business, which has been important for us, it is a little more volatile now these days, as we are managing the risks we have in the region. So we don't see a lot of upside in terms of growing our traditional letters of credit fee business, but we do see the potential to grow on the syndications.

And also, as we continue to generate more activity in the secondary market, which leads me to your question of growth opportunities, we'll be able to rotate our portfolio more quickly. So in that sense, as I told you in my initial remarks, the growth will be diverse in different countries.

And we are very optimistic in Mexico. In fact, a big chunk of our growth can be -- can come from Mexico.

We've given you a very conservative guidance, 8% to 10%, but as we move forward during the year and as these trends confirm in Mexico, Central America and the Indian countries that I mentioned, Chile, Colombia and Peru, eventually, we might get some upside in that growth projections and increase a little bit up to 12%, I would say. But I wouldn't see more than 12% for the whole year in 2015.

Okay, great. That's really helpful.

Just kind of one more question relating to fees. Is there any particular country concentration where you guys see most of your business being done in terms of diversification?

Diversification of income?

Yes, is it coming from particular -- is it all Central America, mainly Mexico? Is it scattered across the whole region?

I just want to get...

It is well spread. Of course, because of the value-added we have for financial institutions and the smaller financial institutions, that tends to be a consideration of this industry.

We have seen more deals in terms of financial institutions. And basically, what we expect is that the increase this year will come from Central America and Peru.

Just one question going back to Slide 11, where you go through the exposure by industry, just wondering what sort of read-through you have with the financial institution bucket in terms of their exposure breakdowns.

We don't -- sorry, I didn't...

The breakdown of the financial industry.

Okay. As you know, Jeremy, Bladex started off as a lender to banks.

For the first 20, 25 years of our existence, our only client base were financial institutions, and so we can basically say that we know each and every single institution of relevance in across the entire region. So that makes our bank book, our lending to financially institutions, very diversified.

It goes from Mexico all the way down to Argentina, Chile. Of course, the larger the country is and the better bank it is by international institutions, maybe the case of Mexico, our penetration level in financial institutions may be less.

It would certainly be greater in the smaller countries, all through Central American countries and the Caribbean, but we have an important presence in places like Peru, Colombia and Brazil. So I would say it's a fairly well-diversified book of business.

Thank you very much, David. Thanks for your attention today, ladies and gentlemen.

As I have stated in my last call in 2014, we are looking with enthusiasm to a challenging but successful 2015, as the combination of our regional footprint plus our trade finance expertise positions Bladex to make the best out of the challenging economic environment. I am looking forward to sharing with you our first quarter results in April.

That's all. Have a good day.

Thank you very much.