Good morning, and welcome to Bladex's second quarter 2022 earnings call. A slide presentation of the company in today's broadcast, and is available in the Investors section of the company's website, www.bladex.com. There'll be an opportunity for you to ask questions at the end of today's presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode. Now, I would like to turn the line over to Mr. Carlos Raad, Investor Relations Officer. Please go ahead, sir.
Thank you. Good morning, everyone, and thanks for joining our second quarter 2022 earnings call. Before we begin our presentation, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. For a description of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and our earnings release. Speaking on today's call is our CEO, Jorge Salas, who will provide an overview of the second quarter and our strategic priorities. Annie Mendez, our CFO, will then discuss the quarter's financial results in more detail, and after that, we'll open the call for your questions. Also joining us today is Mr.
Sam Canineu, our Chief Commercial Officer, and the rest of the executive Bladex team. All will be available for the Q&A. With this, let me turn the call to Jorge Salas. Please go ahead.
Thanks, Carlos, and good morning everyone joining us today to discuss our second quarter results. Today, aside from sharing results, I would like to take the opportunity to provide an overview on the strategy that we have been working on for the last year. A strategy with clear objectives. Enhance profitability, ensure long-term sustainability, and of course, increased overall value creation for all of our stakeholders. As you all have seen, during the last few quarters, we have been consistently growing our book and expanding our margins. Today, I would like to highlight that the strong results we are presenting are largely the product of the strategic plan, a plan that is already in place and gaining traction. I will discuss the strategy behind this plan in more detail soon. Before, let me give you an overview of our second quarter results.
This was without a doubt a very strong quarter for Bladex. Our credit book maintained the growth momentum shown in the first quarter, reaching a historic record level of $8.7 billion. The commercial portfolio has now shown consecutive growth for eight quarters in a row, with NPLs close to zero for over two years now. Our net interest margin continued the positive trend observed in the last five consecutive quarters. Net income basically doubled compared to last quarter, reaching $23 million. That is an increase of 63% year-on-year, resulting in a 9.1% return on equity for the quarter. Annie will talk about these results in detail later on in this presentation. The point I wanna make today is that these strong results are driven by two main factors, an internal one, the new strategic plan, and an external one, the current uncertain global macro environment.
The current context of high inflation, raising interest rates, and high demand for commodities offers many opportunities for Bladex. Let me share our views on this second point first. Three main points here. One, in today's context, the short-term nature of our loan portfolio allows us to accelerate repricing, capturing the upside of the interest rate increases. Two, also, our focus on foreign trade financing in Latin America positions us well to benefit from higher lending spread from customers who are directly experiencing increased demand for higher price commodities. Finally, the disproportional increase in local rates in the region versus dollar-denominated rates is driving a higher demand for dollar loans. This happens precisely when some of the main global banks that traditionally provide hard currency financing in the region have been forced to focus their activities to other geographies due to their own internal risk-weighted asset limitations.
In short, the current uncertain macro environment is in many ways a perfect opportunity for Bladex. Having said that, obviously, this context carries important risk factors. Also, as we always stress, each Latin American country has its own unique fiscal reality that can be and will be affected differently in this uncertain context. The point remains. Overall, the current macro scenario is favorable for Bladex and has contributed, to some extent, to our strong results, including the ones we are reporting today. Moving on to slide four, I want to begin by explaining the process we undertook to build our new strategic plan over the last year. After successfully navigating the strongest parts of the COVID storm, Bladex's management team, together with the board of directors and a leading strategy consulting firm, began a collective effort to develop a five-year strategic plan.
The plan builds on the strength of our unique business model and aims to increase the bank's profitability to show consistent double-digit returns by significantly enhancing the stability and the resiliency of our underlying business. The plan includes a series of initiatives aimed at expanding both our customer base and our product offering. The plan also calls for an upgrade on our IT processes and processes infrastructure to support the incremental transaction volume we are anticipating. New key talent has been added as part of our talent acquisition and retention program. We have also established a new performance-based compensation structure that further align management and shareholders' interests. In this context, we also upgraded and relaunched our IR function, now led by Carlos Raad, our new IRO, who is tasked with building a team to enhance investor outreach and communications. Let's switch to slide five.
As I mentioned earlier, our new strategy is anchored in Bladex's competitive advantages. The plan has three main group of initiatives. First, group of initiatives to optimize and scale the commercial strategy through the expansion of our client base with the same low-risk profile that we have traditionally targeted. Two, initiatives to expand our product offering. And three, initiatives that we call enablers that have to do with talent, processes, and, IT. First, let me share a couple of thoughts on the commercial strategy. Just in terms of geographies, there is a clear and significant commercial potential in the two largest economies in the region, Brazil and Mexico, where we already have a foothold. We have decided to double down on these geographies by increasing our commercial strength.
Central America and the Caribbean, our most profitable region, continues to provide strong business opportunities, so we have also decided to strengthen the dedicated commercial team in the region. This effort has already resulted in a relevant expansion of our customer base. This year, we have already grown 9% the number of new active clients in our portfolio. In terms of volume, we estimate that between 30% and 35% of the credit growth for this year can be attributed to new clients. Secondly, I would like to expand on the group of initiatives geared towards the enhancement of our product portfolio. As you all know, today, our product offering primarily consists of syndicated loans, short-term bilateral trade-related financing, vendor finance, and letters of credit. Bladex enjoys a very loyal customer base that has consistently demanded a series of products and services that we do not yet offer.
I'm talking about basic treasury hedging products, local currency financing, such as the one we offer in the Mexican market, project financing, and also structured trade solutions. That is the type of solutions that allow arbitrage between clients and suppliers through structures that generate better margins without increasing credit risk. All of these products are currently being developed as part of our plan. Finally, attracting and aligning talent, as well as upgrading our processes and the underlying IT capability is essential to achieve the objectives of this plan. In this sense, as I mentioned before, we have implemented a new variable compensation scheme that includes scorecards with KPIs directly tied to metrics in the strategic plan. The new compensation structure has been key to attract top talent and aims at aligning the executive compensation with value creation for our shareholders.
My executive team today has four new members, two of them in recently created positions. Next slide, we'll focus on that. Finally, our Board wants to ensure that we do all this in a sustainable manner. To ensure that, the Board has brought oversight of our ESG practices to the board level through the newly named Compliance and Sustainability Committee. Moving on to slide six. In this slide, we show the four main changes that have taken place in Bladex's Executive Committee during the year. Number one, we created a strategy office. Olazhir Ledezma, with extensive experience in strategy and design, is the head of this office. Olazhir also manages the newly created PMO unit that has turned Bladex into a project-based organization.
We also hired a new Chief Commercial Officer, Samuel Canineu, also in the call, ex-head of ING in Brazil, has done a wonderful job expanding our client base and keeping a strong price discipline. We also hired a new Chief Audit Officer, Liz Díaz, who brings extensive experience in such controls, in charge of ensuring that our bank maintains its strong commitment to the observance of the best audit practice standards. Finally, as I mentioned, we decided to upgrade the IR function and now the board reports directly to me, and it's headed by Carlos Raad . By the way, as part of this new IR plan, we will host an Investor Day in the fourth quarter of 2022.
The idea is to take a deeper dive, of course, into our strategy and the initiatives that we have in place, as well as to give you an opportunity to meet some of the key executives in charge of implementing this plan. All of my colleagues come with significant experience and best-in-class credentials. Our team has not only strengthened at the most senior level, we have also hired new middle management talent in three main areas, treasury, sales, of course, and IT. With that, I will now turn the call to Annie, and then I will make some closing remarks before we open it up for questions. Annie?
Thanks, Jorge, and good morning to all. I will now go into more detail on the evolution of our business and results of operations during the second quarter of this year. Let's please move to slide seven. Once again, this quarter's credit disbursements of over $4 billion exceeded collected maturities that represented more than half of the commercial portfolio. This denotes the fast turnover and short-term nature of the portfolio characteristic of our business model, with 71% maturing within the next 12 months and the average remaining tenor at approximately one year. Lending spreads on new loans exceeded those maturing by 26 basis points, reinforcing the positive trend of recent quarters. In slide eight, we can see that quarterly growth continues to be evenly distributed across countries and sectors.
Exposure by country remains relatively stable, except for Brazil and Peru, each up by two and one percentage points to 16% and 8% respectively. In terms of sectors, financial institutions represent 41% of the portfolio, down by one percentage point from the prior quarter due to strong growth in other commodity-related sectors, such as oil and gas downstream, now representing 14% of total exposure. In the following slide, we present the quarterly evolution of our balance sheet structure at the end of each period. Total assets set record levels again this quarter, reaching close to $9 billion, as seen in the graph to the left, on the back of sustained loan growth, complemented by a credit investment portfolio, which allows us to further diversify our exposures by country, including investments in non-LATAM issuers, mainly from the U.S., representing 51% of the total.
As presented on the graph to the right, this asset growth has been consistently supported by a well-diversified funding base. First, a resilient level of deposits of over $3 billion, 51% of which is coming from our central bank class A shareholders, and 20% from our Yankee CD program, complemented by ample availability of bilateral credit lines from a wide range of correspondent banks, and by continuous access to the global capital markets where Bladex is a recurrent issuer, mainly but not exclusively in the U.S. and Mexico, as well as the global syndicated loan market. Turning to slide 10, we summarize our results of operations. Quarterly profits of $23 million more than doubled from the previous quarter and was up by 63% from last year.
As I mentioned in our last quarterly call, during this second quarter, we are seeing the full impact of strong loan growth experienced at the end of the first quarter, a tendency that has continued during this second quarter, combined with a sustained trend of margin enhancement. As a result, top-line revenue growth was mainly driven by solid NII performance, up 27% Q-on-Q and 56% year-over-year. While fee income from letters of credit denotes a positive trend, indicating activity has picked up and should be more relevant in the second half of the year, as we have three mandated transactions in execution right now.
In terms of asset quality, provisions for this second quarter were substantially lower at $0.8 million compared to the $8 million provision charge in the first quarter of this year, mainly associated with a $1 billion or 14% sequential increase in the credit portfolio balance at the close of March. During the second quarter, efficiency improved to 35% as strong revenue growth more than offset an increase in operating expenses, which totaled $13 million. As mentioned by Jorge earlier, the new variable compensation structure closely tied to strategy execution and financial performance together with new hires supporting the underlying business growth, drove an annual increase in salary-related expenses. In any case, by design, strategy execution expenses are programmed so that they can be covered by incremental revenues all along, as has been the case in this quarter.
As we scale up the business under this new strategy, we expect to see further improvements in efficiency in the medium term. Let's now move on to slide 11, presenting more detail on the quarterly evolution of NII. Strong combined loan and credit investment portfolio average growth of $1.9 billion year-on-year, and $851 million from the previous quarter, accompanied the related increase in financial liability and proactive liquidity management resulted in a positive net volume impact on NII of $7.3 million from last year and $4.3 million from the previous quarter.
At the same time, the positive trend in net interest margin reaching 1.54% in the second quarter resulted in an additional net rate effect increase in NII of $4.4 million year-on-year and $2.7 million with respect to the previous quarter. As presented in the graph at the bottom right of slide 12, average base rate of loans and liabilities, which are mostly set on reference US dollar market rates, have been increasing at a similar pace given the short-term nature of the bank's interest rate gap.
Moreover, the all-in rate differential between loans and financial liabilities shown in the graph to the left denotes a quarterly positive trend, mainly due to increased lending spreads, as shown in the graph at the top right, reaching 2.38% during the quarter, up 40 basis points from a year ago and 18 basis points from the previous quarter. This lending spread expansion reflects higher demand for US dollar financing across the region based on superior trade volumes and higher commodity prices, coupled with Bladex's increased lending to the corporate segment relative to financial institutions, the latter usually paying lower spreads. To our focus on extending the average debt maturity profile of our lending book when and if followed by higher profitability. As a result, spreads have increased in all sectors, countries, and business segments in which we operate.
Moving on to slide 13, Bladex's asset quality remains solid. First, unchanged level of NPL or Stage three credits remain at close to 0% of total loans. In addition, Stage two credit exposure with a reserve coverage of close to 10% was down by $21 million with respect to the previous quarter, releasing $1.1 million in credit provisions during the second quarter. This reduction reflects both the continued collection of scheduled maturity and risk-profile client improvements, allowing for reclassification to Stage one. In addition, Stage one exposure, which accounts for 98% of the total, increased by $295 million during the quarter on new loan origination, requiring $1.8 million in credit reserve at an average coverage of 41 basis points. Please, let's now move to slide 14, which shows our capital position.
As I mentioned, we have achieved a more efficient use of capital, having invested in loan growth at increasing returns while sustaining a strong capital position. At quarter end, Basel III Tier 1 ratio reached 15%, and the Panamanian regulators capital adequacy ratio stood at 13%, both still well above regulatory minimums and in excess of international standards. The bank's capital strength remains a pillar of our business model and a critical factor recognized in our ratings. In this respect, we remain open to capital management alternatives to support a continued trend in loan growth going forward. With respect to quarterly dividends, the board recently declared $0.25 per share, unchanged from preceding quarters, now representing 40% of second quarter earnings. Here, I would like now to turn the call back to Jorge. Thank you.
Thank you, Annie. Great job. As I said before, we are very pleased with the traction we are gaining, both in the financial front and also in the operational front. As we continue to build on our capabilities, we are also benefiting from the current environment and maintaining a robust asset quality while delivering enhanced profitability. I look forward to continue to share with you all the progress on the execution of our five-year strategy, and provide you with a deeper insight on the strategy later in the year on the Investor Day that we're planning to launch in Q4. Now I would like to open it up for the Q&A section.
Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you are dialed in by the telephone and would like to ask a question, please press star two on your keypad. That's star two on your keypad. If you're dialed in via the web, you may also ask a voice or a text question. We'll now give a moment or so for the questions to come in. Thank you. Our first question comes from Mr. Jim Marrone from Singular Research. Please go ahead, sir.
Yes, hello. Thank you for taking my call. I trust that you can hear me well.
Yes, please go ahead.
Okay, great. So, very good job. It seems Bladex is capitalizing very well from higher interest rates, so I think that's job very well done, and I don't wanna take that away from you. So, if I can bring the attention to just in regards to perhaps some headwinds, and that's mainly inflation and, you know, how that's impacting clients, perhaps with regards to lower consumer spending as a result of inflation going forward. The impact to Bladex currently, as well as going forward with regards to inflation and perhaps a softening of consumer spending, with respect to the clients.
Hi, Jim. Thank you. This is Jorge Salas. A very good question. As I said at the beginning of the call, we feel that the current environment is overall positive for Bladex. You know, having said that, of course, if this turns into a recession, which it looks like, and if in that recession, you know, prolongs itself in the region, we might, of course, see aggregate demand diminish. That will affect for sure our loan book size and our margins. We do not foresee, however, any material asset deterioration, especially considering after what happened during the COVID storm. I mean, we came out of the storm after a complete, you know, standstill of the whole world with a stronger asset quality that even before the storm.
Short answer is, so far, positive, potentially challenging in terms of asset size and margins, but not necessarily in terms of asset quality. I don't know if that answers your question.
I think we have lost for a second the investor. We will perhaps come back shortly once again. In the meantime, star two for any additional questions. In the meantime, I'll read two questions that came via the text message in the meantime. Congratulations on the very strong quarter. Two questions regarding capital allocation. Please expand on your decision not to bring the dividend back in line with pre-COVID levels in light of significant NII growth, expanding NIM and negligible non-accruals. That's number one. Number two, how do you think the BLX should trade relative to book value? Why is the company not actively buying back stock at nearly 50% of book value?
Yeah. Thank you for the question. Questions regarding capital allocation. We're clearly in a new asset size level. Bladex has not been here before. Our capital ratios have been obviously a shrinking. We remain well capitalized. I have to say that, of course, the board is managing all capital allocations decisions to make sure that we return the best value possible to our shareholders. That involves, of course, our dividend policy. I don't know, Annie, if you wanna add anything.
Yeah, that pretty much sums it up. In terms of our valuation, of course, we're definitely undervalued at current levels. Having a book value of close to $29,
You know, you asked about what would be the level that we aim at, and of course, it's way over that.
Okay, thank you very much. Our next question comes from Mr. Pedro Escudero from DOMA Perpetual. Please go ahead, sir, your line is open.
Hi. Hi, everyone. Following the prior questions, I don't think you all understand the relationship between price-to-book and return on equity, because if you are lending without a return on equity calculator, and obviously you're lending doing that because your return on equity so far is 9%. How do you expect that you're gonna return to a price-to-book over one? The reality is that is not feasible. While you're lending 40% of the book to financial institutions, you're outsourcing your credit decisions to someone else, basically. That's what it is to lend and secure to financial institutions. What are we doing here?
You're expecting to increase the price-to-book, you said that your net asset value, but the reality is that your return on equity is a disaster because of your lending, basically a strategy. It just doesn't make any sense. Additionally, my question is, you have a massive dividend policy in terms of percentage of earnings, which decreases the book value further, which is a disaster as a capital return strategy to shareholders. You should actually be buying back lots of the stock, which actually increases book value and increases the return to shareholders. I think the strategy is flawed. It comes from the Board, it's flawed, and actually, your lending standards, by the way, your lending standards, you claim that you have basically 0%, I would say 0% or something like that, non-performing loans.
Even if you have less than 1% of non-performing loans, it can wipe out your entire net income. Your whole strategy is being flawed for a long time, and I hope, actually as a shareholder, that the board actually starts to change all of this. I don't think they even understand what is going on. My question to you all is, what's going on on the lending side, and why are you lending to financial institutions at subpar, basically, spreads? The reality is that it creates a very low return on equity. While you have that low return on equity, you can't really create a price-to-book that is going to justify the price of the stock going up. Those are my questions.
Thank you. Thank you, Pedro. I find it curious that your point is the opposite of the previous caller. I would mention a couple of things. One is, as regards to lending to financial institutions, we have been decreasing that precisely, the COVID storm went by, to increase our margins, and we have seen that happening in a sustainable fashion. As far as a return on equity, we don't see many wholesale banks with this strong capitalization in such a clean book, that return between 9% and 10%, which is where we are today, and we're planning to increase that.
I guess in short, we have different views on how we manage this. I don't know, Sam, you're in charge of lending, if you wanna comment.
Sure, Jorge. This is Samuel Canineu, the Chief Commercial Officer. I would say you have to look here at the trajectory, right? I agree that there is definitely space or upside for us to improve the profitability on our lending. At the same time, you don't change this from one quarter to the other. You establish a direction because we are still very committed to our credit underwriting discipline. If you analyze the previous quarter, you do see that upward trajectory on margin. You see that downward trajectory in terms of lending to financial institutions, which is that there's nothing wrong, but there is we can place our capital with more profitable and not necessarily riskier sector, which is what we're doing. That's the direction that we're going.
I believe there's still a space to continue with that path, with that shift, without materially changing our credit standards and changing our NPLs. I agree that there is upside and we're executing on it, but of course, responsibly.
Okay, thank you very much. Our next question comes from Mr. Tom McGuire, Private Investor. Please go ahead, sir. Your line is open.
Good morning, and thanks for taking my question. You explained well how inflation is currently helping your business in terms of short-term loans and accelerated repricing, plus commodity prices are high. If it continues, it could lead to a recession. My question is, what does that do for business? Do you have a recession playbook? Would you be increasing reserves in a poor economy, or do you just put in reserves as new loans are originated?
Thank you. Thank you, Tom, for your question. Short answer is yes. As we do foresee a recession scenario in the near future, that will, of course, affect aggregate demand. We closely monitor all countries and sectors, and we will anticipate potential downgrades in some of our countries and perhaps clients. We do foresee if that is sustainable, that we will increase provisions accordingly.
Okay. Thank you. Now, one other question on the new manager in investor relations and the analyst day that you're going to have. Will that Analyst Day be in New York or will it be in Panama?
A good question. We're still deciding. We are originally planning for it to be in New York. We're also considering to do it virtually. We'll let everybody know when the time comes.
Okay, good. Secondly, would you guys consider hiring an outside IR firm to schedule meetings with investors, either virtually or in person? Because I do think your story is worth telling, and it's not well-known.
Carlos Raad, our new IRO, handles that, and we do have an external advisor that will help us set up calls and meetings if necessary.
Okay, good. Thank you very much.
Thank you.
Thank you very much. Just a reminder, once again, star two for any additional questions. That's star two. We'll give another moment or so. Our next question comes from Mr. Adam Hegarty, Private Investor as well. Please go ahead, sir. Your line is open.
Thank you. Hello, gentlemen. Congratulations on the quarter that showed a lot of growth, and I'm excited as a long-term shareholder to hear your plans for the company and the future. I would like just to make a quick comment and then ask my question. I also, in a little bit less harsh terms than some of your previous callers, would love to see some share buybacks continuing as well. You guys reduced your share count by almost 10%, and you could see the effect in the share price, and I realize it's a different environment then. At this book value level, I would love to see that.
Second, my question for you is, can you speak more to the roughly $1 billion in debt that you have on your balance sheet, not the debt that you've issued? There were some comments made last quarter about how you would use it to balance the loan book. I just had some concerns there with the, you know, some of the lower credit quality issuers, that, you know, the double B and single B that you own, as well as the rising interest rate environment and the effect that it's had on that portfolio value. Thank you.
Thank you for your questions. Regarding the investment portfolio that we have in a held-to-maturity, to complement our loan book, I'm gonna pass the word to our head of treasury and capital markets, Ed Vivone, who's here with me. Ed?
Hello, good morning. In the case of the investment portfolio, I mean, this is a portfolio that, as Jorge explained, has been constructed with two main objectives. One is to complement the loan portfolio, and the other one is to provide diversification. I mean, half of our portfolio roughly is invested in top quality Latin American names, and the other half is invested outside the region, predominantly with U.S. names. Around 50% of the portfolio is investment grade. What happens is that many of the good Latin American issuers have their country ceilings of their respective countries. For example, the case of Brazil or Colombia.
That inhibits the possibility of achieving a higher investment, a higher grade for this investment, even though the issuers may be very strong and very reputable corporate and financial firms. In a nutshell, we aim to maintain a very good rated bond portfolio with a short duration, taking into consideration the expectation of the evolution of interest rates, and all these are liquid global agencies that also have very, very fast access either to the bond or the repo market. In a nutshell, this is a complement to our loan portfolio, and it's designed to both generate incremental income and provide geographic diversification outside the region to balance our overall credit exposures.
I don't know if I have any further questions, and I hope I have answered your question.
Thank you very much. It looks like we have no further questions at this point. I will pass the line back to the Bladex management team for their concluding remarks.
Thank you, operator, and thank you, everybody, for your questions and look forward to share with you, the progress, of our strategic plan. Thank you, everybody, and stay safe. Bye.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and have a good day. Goodbye.