Hello everyone, and welcome to Bladex's Q1 2022 conference call on this fourth day of May 2022. This call is being recorded and is for investors and analysts only. If you are a member of the media, you are invited to listen only. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the bank's corporate website at www.bladex.com. Joining us today are Mr. Jorge Salas, Chief Executive Officer, and Mrs. Ana Graciela de Méndez, Chief Financial Officer. Their comments will be based on the earnings release, which was issued earlier today and is available on the corporate website. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934.
In these communications, we may make certain statements that are forward-looking, such as statements regarding Bladex's future results, plans, and anticipated trends in the markets affecting its results and financial condition. These forward-looking statements are Bladex's expectations on the day of the initial broadcast of this conference call, and Bladex does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in the bank's press release and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. With that, I am pleased to turn the call over to Mr. Salas for his presentation.
Thank you very much, Shelby, and good morning to everyone. I'm here today with our CFO, Annie Méndez. Our Chief Commercial Officer, Sam Canineu, is also on the line, and a few other members of my executive team to discuss Q1 results for this 2022. Please, let's go straight to slide three. Okay. This quarter was once again a record-breaking quarter in terms of asset growth. We reached $8.4 billion in our credit portfolio at the end of the quarter. That is up 14% from our previous quarter and 38% from a year ago. The commercial portfolio grew 12% quarter on quarter and 28% in the last twelve months, and it's now close to the historical peak of Bladex of $7.4 billion.
This is now the seventh consecutive quarter of continued growth, this time boosted mainly by the increase in commodity prices and trade flows. Net interest income for the quarter was up 4% compared to last quarter and 36% year-over-year. Having said that, interest income does not reflect the full impact of the increased volume of commercial assets observed during the period, as most of the growth took place in the last week, or last weeks, I should say, of the quarter. The bank maintained higher liquidity levels at the beginning of the year in anticipation precisely of this expected increase in the credit portfolio. However, this robust asset growth will provide strong basis for a sustained improvement in the bank's revenue flows in the forthcoming months.
Nevertheless, profits for the quarter were down 13% year-on-year due to additional credit provisions based, as you know, in IFRS 9, directly related to the significant growth of the credit portfolio during the quarter. Once again, all the growth has been accompanied by strong credit asset quality and non-performing loans remain close to zero. Annie will later elaborate a little bit more on this and she'll talk about the dividends recently declared from our board and, of course, no changes there, as you saw. Moving on to slide four. In this slide, we show the usual waterfall graph to illustrate the fast turnover of our portfolio during the quarter. In Q1, we had more than half of our commercial book maturing. That is almost $3.5 billion in maturities.
We were able to disperse $4.3 billion at significantly higher spreads in new loans for as much as 36 basis points on average. Therefore, lending spreads continue its positive trend. In slide five, we show the breakdown of our loan portfolio, both in terms of geographies and sectors. The commercial team, now led by Sam Canineu, has been actively taking advantage of the positive trade trend in trade volumes such as downstream oil and gas in Peru and Panama, and the food and manufacturing sectors in Mexico. This latter field is tied to the U.S.- Mexican trade corridor.
The exposure to financial institutions remained relatively stable in nominal terms at $3.1 billion quarter on quarter, but decreased its relative participation to 42% of the total, down 6% from the previous quarter. In slide six, we see the balance sheet quarterly evolution during the last year. On the asset side, to the left of the slide, we show consistent growth trend in both our loan and our investment portfolio, accounting for a combined total of almost 90% of total assets at quarter end. Let me mention a couple of things about our fixed income investment portfolio that has now break the $1 billion mark at the end of the quarter and has been growing steadily for the last 6 quarters now. This portfolio complements our commercial assets and provides further diversification to our credit exposures.
The main component is a credit investment portfolio of over $900 million, which increased $288 million during the quarter. At the end of the quarter, 48% of this credit investment portfolio was invested with non-LatAm issuers, mainly from the U.S. We also have a smaller liquidity portfolio of close to $170 million, 100% of which qualifies as high-quality liquid assets according to Basel III definitions placed on multilateral and U.S. issuers and aimed at providing diversification to our liquidity investments, otherwise invested mostly with the New York Fed. On the right, we illustrate the evolution of Bladex funding structure. Deposits were up during the quarter, reaching close to $3.3 billion, recovering from a typical seasonal behavior of the last months of the year.
In Q1, we also saw an almost $450 million increase in long-term borrowings and debt, having closed several relevant transactions, such as the reopening of the debt placement in the Mexican capital markets for 3 billion MXN, approximately $150 million, and a $300 million global syndicated transaction done by our treasury unit. These new resources will allow us to keep funding our commercial growth while maintaining our cost-efficient, diversified and very resilient funding base. I'm going to leave it here for now and turn it to Ana Graciela de Méndez so she can walk you through the P&L and its strengths. Then after Ana Graciela de Méndez comments on the P&L, I will share a view on the current macro scenario and the impacts on Latin America in general and Bladex specifically. Then we will open it up for questions. Annie?
Thanks, Jorge, and good morning to everyone. Let me now give you a little more color on our Q1 results, starting on slide number seven. Profit for the Q1 of 2022 for $11 million was down 13% year-on-year and 45% on a sequential quarterly basis. As Jorge commented, this lower bottom line results mainly reflect increased collective credit provisions during the quarter. If excluded, profits would have been close to Q4 2021 level. As Jorge just also commented, Bladex has capitalized on the strong demand for trade finance, boosted by higher commodity prices and trade flows. Loan growth was particularly strong during the month of March, so the related revenue stream was not fully reflected in Q1 results and remains to be seen in full in top line revenues in coming months.
While IFRS 9 credit provision charges are recorded upfront, as you know. Notwithstanding, revenues during Q1 were up by 38% year-over-year and remained relatively stable, up 1% quarter-over-quarter, mainly on higher net interest income. I will shortly expand on this. On a sustained growth trend in letters of credit fees, with increases above 30% year-over-year and in the mid-single digits quarter-over-quarter. Syndications fees were $2 million short of Q4 2021 levels, reflecting the uneven transaction-based nature for this business. There is, however, an attractive pipeline of transactions ahead for 2022, as we have seen this activity pick up since the second half of 2021.
Operating expenses increased 21% year-on-year and 7% quarter-on-quarter, mainly on higher personnel-related expenses, as we have been strengthening our workforce through new hires in order to support increased business activity. Impacting the quarter-on-quarter expense comparison was a one-time salary-related expense reduction during the Q4 of 2021. Now moving on to slide eight, I'd like to dive into the drivers on the quarterly evolution of net interest income or NII. The $6.8 million or 36% annual increase in NII mostly relates to the $1.7 billion expansion in the bank's combined average loan and credit investment portfolios.
Considering as well the $1.8 billion growth in average funding, the net volume effect resulted in an increase of $6 million in NII when compared to the Q1 of 2021. In addition, the net rate effect added another $0.8 million to NII year-on-year, mainly as the all-in rate differential between loans and financial liabilities increased by 11 basis points on higher credit spreads, reflecting growth in medium-term lending and market rates starting to pick up, aligned with expected Fed actions. Now, when compared to the Q4 of 2021, NII was up by $0.9 million.
Again, strong credit portfolio growth, with average loans exceeding prior quarter balances by $492 million and credit investments by another $142 million, was partly offset by the cost of increased liquidity position during the quarter, up $366 million on average, which in turn resulted from increased average funding for over $1 billion as the bank secured incremental funding towards late 2021 and early 2022 in anticipation of strong loan growth, which ended up fully deployed by March of 2022.
This average asset composition, with increased liquidity levels relative to total interest earning assets, had an impact on overall asset yield during the quarter, which in turn caused a 10 basis points quarter-on-quarter decrease in net interest margin, denoting net interest income to total average earning assets, reaching 1.32% for the Q1 of 2022. By the end of March, however, cash was reduced to $654 million, so overall liquidity, including the high-quality liquid assets bond portfolio, reached $825 million, in line with LCR regulatory requirements. As a result, net interest margin for the month of March recovered to 1.49%, a quick reversal from the downward trend in the first two months of the year and improving by 7 basis points from the Q4 2021 level of 1.42%.
Moving on to slide nine, the bank maintains a high-quality credit exposure in its commercial and investment portfolios, as evidenced by the low level of NPLs or Stage 3 credits, close to 0% of total loans, and by the relatively stable overall portfolio reserve coverage of 0.7%. Considering NPLs alone, reserve coverage exceeds 5 times. Provisions for credit losses during the quarter amounted to $8 million, as total credit exposure increased by over $1 billion. Most of this credit exposure, precisely 98%, remains classified as low risk or Stage 1 as per IFRS 9. Stage 2 credits with increased risk since origination remain at 2% of total exposure, relatively stable with respect to the preceding quarter and down from 5% a year ago. Please, let's now move on to slide 10, showing our capital position.
As of March 31, 2022, Basel III Tier 1 capitalization stood at 16%, down from 19% in the preceding quarter and from 21% a year ago, due to the higher credit risk-weighted asset base up 58% year-over-year and 20% quarter-over-quarter, impacted by increased loan and investment portfolios, while equity levels remained relatively stable at over $1 billion at the end of the quarter. In the same manner, still well above the regulatory minimum of 8%, the regulatory capital adequacy ratio reached 13.4%. Just to highlight, both these ratios follow Basel III methodology, but the first one takes the advanced internal risk-based approach in calculating credit risk-weighted assets, while the regulator applies the standardized approach. With respect to quarterly dividends, the board recently declared the same $0.25 per share in line with preceding quarters, representing 82% of Q1 earnings and a yield to current stock prices in excess of 6%. With this, let me now turn the call back to Jorge. Thank you.
Thank you, Annie. Great job. Let me just share a few high-level thoughts on the current macro scenario, the impacts on Latin America and on Bladex. First of all, with respect to the effects of the Russian invasion on Ukraine, let me start by saying that Bladex does not have any direct or material indirect exposure to Russia, Belarus or Ukraine. Moreover, Latin America does not have meaningful trade flows nor financial linkages with those countries. Although trade flows for certain products may be more substantial on a specific basis, such as fertilizers and meat products. Bladex, however, also does not have a material credit portfolio exposure in any of these sectors. Based on our analysis, which obviously included close communication with our client base, we see minimal effects or impact of this conflict on our clients' operations.
Having said that, the region is feeling the ripple effects of the conflict, some of which may even play to the region's advantage. There's no doubt that the surge in commodity prices, exacerbated by the conflict, has resulted in a positive trade shock for Latin America. With the exception of Mexico, you know, manufacturing-based economy, and most of Central America are net importers of commodities. All other major Latin American economies are key commodity exporters. Now, while the commodity price increase is favorable for the commodity exporters in Latin America, obviously lower growth and higher inflation are clearly not. As a result, growth forecasts for the region were revised down slightly, inflation rose, and official interest rates are now expected to move further into restrictive territory.
Irrespective of that, foreign trade in the region should still grow almost 10% for this year and close to 5% for 2023. With all this said, and given the quality of our customer base and the short-term nature of our portfolio, we at Bladex remain optimistic with our prospects. As illustration, part of the healthy increase in our loan portfolio this quarter was due to the fact that Bladex was able to capture demand for financing from large importers and exporters that was left off by the typical global commodity banks that either had their line stopped or were focused on managing the Russian- Ukraine exposure. We believe that such window of opportunity for Bladex should continue at least through the Q2 of this year, allowing us to continue on a trend to increase our lending margins.
The same way we did during the onset of the pandemic, we will continue to lever on our agile business model, our expertise in the region, and focus our lending in activities on winning sectors, countries, and clients. Finally, as we reach a more efficient use of our capital, we are confident in our ability to increase the profitability of our credit portfolio, given its high turnover, as well as several market dynamics that will benefit our business model. I'm gonna leave it there. Thank you. We will now open it up for questions.
Thank you. At this time, if you would like to ask an audio question, please press the star key on your touch tone phone now. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. We will pause for a moment to allow questions in the queue. We have our first question from Chris Sakai with Singular Research.
Hi, good morning. I'm in for Jim Morone. I just had a question on inflation in Latin America. You know, how concerned is Bladex with inflation? You know, which country do you see to be the most problematic in regards to inflation?
Yeah, it's a great question. First thing I have to comment is we see as very favorable the reaction of the most important central banks in the region, all shareholders of Bladex, by the way, that acted, you know, proactively even before the Fed did to contain inflationary pressures. Inflation, we're not really concerned in the short term. There has been an increase in local domestic real interest rates that obviously favors Bladex to an extent that the demand for hard currency financing increases.
Now that should bring a slowdown in some economies, and given the short-term nature of our portfolio, we think we can navigate through that. I mean, if you ask me the countries, particularly Argentina, we're worried to a lesser extent, but also Brazil. It's not necessarily something that keep us up at night. We're monitoring it closely, and we feel comfortable with the exposures that we have. Mostly, you know, exporters in hard currency. You know, we don't see, you know, maybe. I don't know if you wanna add something, Ana Graciela de Méndez, or?
No, I think it's very clear. In terms of particular countries, I think, you know, Argentina would probably be very much impacted by a higher inflation.
Which, by the way, we've reduced dramatically our exposure there from, I don't know, $800 million at some point.
Right
A few years ago to less than $100 million today.
That's right.
Okay. Great. Thanks. One question, I guess, on your investment portfolio. It's grown pretty well over the last year. Do you have any sort of idea, you know, how it's gonna grow for the rest of the year? You know, do you have any target there?
Yeah. Good question, Jim. As I said in the opening remarks, that portfolio is designed to complement our commercial loan portfolio. To the extent that we have increased demand in the loan portfolio, we see the investment portfolio slowing down. They work together. When and if we see less demand on the commercial side, when that happens, then you'll potentially see an increase in our investment portfolio. Today, demand for commercial in the commercial side is very strong, so we see a slowdown in the growth of our investment portfolio.
Okay, great. Thanks.
You're welcome.
We'll take our next question from Tom McGuire, Private Investor.
Good morning, and thanks for taking my question, and good conference call and good results. The one thing I don't understand is I see a disconnect between the market price of your stock and your book value, and it seems to me it's 40% or greater and, you know, your book value is a reflection of your balance sheet, which is a reflection of your loans, which is, you know, you have good loan quality, short term in nature, you know, very low non-performing, all that. Why do you think there's such a wide disconnect between your stock price and your book value?
Oh, thank you, Tom. Yes, you're definitely absolutely right. We're very much, you know, conscious of that. We in that respect. You know, we really want to enhance and going forward, you should be looking at that. Our IR, you know.
Sorry
IR team and capabilities and be able to better convey the growth prospects for Bladex, which we are very enthusiastic about. Hopefully, you know, see that reflected in the share price. As you did mention, our book value is you know well above what the market recognizes right now. We do have you know a super clean book, which pretty much reflects at present levels the book value of the bank.
Yeah. You're absolutely right. I mean, there is a disconnect. For us, there is no fundamental reason for that to happen, and we expect the share price to sooner than later reflect our true value.
Okay. Good. Thank you. So to paraphrase you're saying there isn't anything wrong that investors are concerned with. It's more that a whole bunch of investors don't know about you, and you've got-
Exactly.
to do a better job. Exactly?
That's part of it. I mean, you see Latin American banks, not necessarily peers, but because we're a sort of a different with a different business model and a different shareholder structure. You see Latin American banks trading, you know, clearly above book value. We see no reason why we shouldn't be at least there. We're confident that's going to happen sooner than later.
Okay. Hey, thank you very much. Like I said, very good call.
Thank you.
Thank you, Tom.
We'll take our next question from Brad Golding with CRC.
Hi, Jorge and Ana. Thank you for taking my call. I have a handful of questions. First is on the loan book. Are you seeing increased volume funding, or are you seeing your loan book go up because people are funding the same quantity of underlying commodity prices are going up?
Good, good question. Sam, do you wanna take that one? Are you on the line?
Sure.
Samuel Canineu is our chief commercial. All right.
Yes. I think, Brad, the answer is both. Of course, we see a lot more coming from, you know, commodity inflation and the fact that we're financing the big importers and exporters of commodity in the region, that they increase their working capital needs. We're happy that we can follow that because we had lines available for them. There is also an underlying increase in just our origination of new loans with new clients as well as with existing clients. Obviously, the more material is giving higher commodity prices. I hope I answered your question, let me know if not.
No, absolutely. I guess my next question is, do you see that continuing? Can you know, with stable commodity prices, will you continue to grow the loan book?
Yes. I think it will depend on when do you compare this information with. I do see, again, if commodity prices were stable since last year, I would still see an increase. Of course, would not be in the same magnitude because we're also being selective on how we increase. We're not increasing just for the sake of increasing, but it should help us to increase our profitability or help us to extend a little bit the average life of our portfolio. We're selective in that aspect. You know, based on the information that I have right now and the current market today, I do think there are good opportunities for us to continue to grow despite the underlying book, despite the commodity, let's say the higher demand for commodity. We're talking about big volumes that are driven by, you know, increased commodity prices. Of course they can, you know, alter the numbers depending on the magnitude.
Of course. I assume that higher commodity prices are enhancing the credit quality of your borrowers?
Yes.
Broadly.
I'll say on a net basis, yes. Again, we finance both importers and exporters. The LatAm region, a lot of the exporters are producers of commodities, so that has it does help their business or their profitability. Of course, there is a part also that we're talking about importers and in a big extent, we're talking about the national oil companies. That they, of course, that is not higher commodity prices not necessarily are positive for them because they're paying more for raw material or for finished goods in case of gasoline, for example. But we're talking about like a majority of sovereign entities or large, very large corporations. No concerns there.
Right. Your importers tend to be already better credits and your exporters lesser, and they will improve. That sounds like a very nice situation to be in. How much can you grow your loan book given the current capital? And can you continue to buy back shares?
Ana, do you wanna take that or should I take? As I said, we are a strongly capitalized bank. We will continue to be given, you know, the volatile nature of the region. Everything related to capital management, you know, dividends, stock repurchase, it's up to the board and it's continuously discussed at the board level. I prefer not to speculate about future dividends or buybacks. What I can tell you is, we're going to be strongly capitalized. We're not gonna risk that. Now we're entering into a territory as our capital ratios are tighter and just to make the portfolio more efficient and more profitable. I don't know, Ana or Sam, do you wanna add something, feel free.
Yeah. I'll add to Jorge that, of course, the business model that we have, which is predominantly short-term driven, trade-driven. It does benefit us in a moment like this that we see a rise in demand for working capital as well as rising interest rates, because we are able to turn the book fast and capture that. If we think that the vast majority of our portfolio has a maturity of less than a year, capital is really not a concern.
Okay, fantastic. A couple final points. We're always happy to have you visit New York. We'll certainly roll out the red carpet when you get out to promote the bank. It also looks like your treasury group did a great job of managing the rate risk on the fixed income portfolio.
Thank you, Brad. We constantly go to New York, and we love red carpet.
Okay. Well, please call me when you do. Thank you very much.
Most certainly.
Congratulations on another great quarter.
Thank you.
As a quick reminder, that is star one to ask an audio question. We do have a submission from the webcast. You indicated that net interest margin recovered in the month of March to a level of 1.49%. Do you see this as a sustainable level going forward?
Short answer is yes. We do believe that the net interest margin close to 1.50% in March is sustainable going forward. As we said before, the growth is fueled mostly by a significant, you know, trade-related demand and also the very significant, in some cases, rate hikes in local currencies in most countries in the region has increased, you know, the demand for dollar currency financing. That obviously helps Bladex.
Thank you. A follow-up question: How will expected Fed actions to increase interest rates impact the bank's margin and overall net interest income?
I'll take that. You know, like we've mentioned previously, and as you may know, you know, due to the nature of our lending business, which is predominantly made up of short-term floating rate notes, Bladex interest rate gap is very moderate. In addition, during the last couple of years, we have been entering into fixed rate medium-term debt capital markets transactions to provide protection against the risk that could be derived from our fixed rate assets, also in the longer tenor. I can comment that what we are observing so far is that the net base rate variation effect has been neutral to positive to our NII. In addition, over $1 billion of interest-earning assets are financed by non-interest sensitive equity.
As the process of repricing on both sides of the balance sheet materializes, the bank's bottom line will also benefit from the increase in gross yields of its assets. I'd like to put this into perspective, giving you high-level numbers. With over $1 billion in equity, let's say, 250 basis points increase in rates would add $25 million to NII on an annualized basis or approximately 30 basis points to net interest margin. That's of course once all repricing in assets and liabilities has finalized. Of course, as interest rate increases are gradual and ongoing, this full impact may take several quarters after rate actions subside.
Thank you. We do have another question from the website. The quarterly results and comments attribute $8.1 million provision for credit losses, approximately $0.22 per share on the expansion of the portfolio. It is also noted that the portfolio growth was concentrated at the end of the Q1 . These items imply that the Q2 should generate a higher NII without offsetting increase in loan loss provisions. Correct?
Correct.
Yeah, that's correct. As we said, a reflection of that is the net interest margin that we already saw in March for 1% close to 1.50%. Obviously everything else being equal, you know, with stable portfolio, assuming a stable portfolio in the next quarter, what you would see is increased revenues from that growth and stable provisions.
Yeah, that's absolutely right.
Thank you. Again, if you would like to ask a question, please press star one. We'll pause for just a few moments to allow everyone an opportunity to signal for questions. It appears that we have no further questions at this time. I will now turn the program back over to today's presenters for any additional or closing remarks.
I just want to thank everybody for their questions. We are extremely excited with the performance of the bank and looking forward to increase growth and profitability. Thank you very much, and take care.
Thank you.
That concludes today's teleconference. Thank you for your participation. You may now disconnect.