Banco Latinoamericano de Comercio Exterior, S. A. (BLX) Earnings Call Transcript & Summary

Good morning, and welcome to the Bladex Investor Day. Today's event is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Carlos Raad, Chief Investor Relations Officer of Bladex. Sir, please go ahead.

Good morning, everybody, and welcome to Bladex's Investor Day. My name is Carlos Raad, Investor Relations Officer of Bladex. Thank you very much for being here today. We are happy to host this event. In the next couple of hours, you will learn about our unique business model, our new strategic plan, its execution and its potential. Our Chairman, Miguel Heras, has recorded the message that we will share. And then our CEO, Jorge Salas, will provide an overview of the strategy, followed by the members of our executive team, who will provide more details of the plan and traction to date. We will have a 5-minute break, and after that, we will start with a question-and-answer session. [Operator Instructions] Before we get started, please take a moment to review our disclaimer on Slide 2 of this presentation. And with that, please listen to the message from Miguel Heras.

Good morning. Thank you all for joining us today. When I assumed the role as Bladex's Chairman in 2019, the Board and management were keenly aware of the need for a deep transformation of our operational business model. We were and remain today totally convinced of the great opportunity that the bank has to achieve a very profitable and sustainable operation, both in terms of its business model and the impact of its activities in the countries where we operate. We have good fundamentals to work with, an impeccable reputation and track record, a clean balance sheet with strong capitalization and a very professional, eager and committed team. A strategic decision was made to explore avenues for growth and enhanced value creation in a joint effort between management and the Board with the support of a global strategy consulting firm. After a necessary pause necessitated by the financial and operational challenges brought on by the global pandemic, the Board formerly adopted a new 5-year strategic plan in October of last year. Under the leadership of Jorge Salas, who came on as CEO of the bank in 2020 after a distinguished career in banking and financial services, we began laying the foundation and executing on the strategy adopted to realize significant new opportunities for Bladex. With the traction achieved so far and the team Jorge has assembled, today, I am even more convinced than ever that we are on the right track. Jorge and members of our executive team will share with you today details of this plan, which we have developed with the conviction that banks, given their capacity to channel resources, are key contributors to a more sustainable world. Bladex has the potential to contribute exponentially as it works with more than 130 banks in Latin America. We are certain sustainability efforts do not have a conflict with profitability and actually contribute to it. Sustainability initiatives, for example, lower our cost of capital, which in turn makes our operations more profitable. Digital transformation improves efficiency and reduces cost while expanding financial inclusion and education. As part of our commitment to ESG, Bladex has established Board oversight of sustainability initiatives. We will continue to operate, monitoring the impact that our actions have on our clients, our people, our investors, our shareholders, our suppliers and our communities, with sustainable profitability as the main goal. Thank you again for your presence today. Jorge, the floor is now yours.

Thanks, Miguel. Hello, everyone. Today is a very important day for Bladex. I joined Bladex 2.5 years ago. My initial mandate was to put together a new strategic roadmap for profitable growth, gain traction through execution and then host an Investor Day to tell everyone what the plan is all about. Today is that day. As I announced a couple of weeks ago during the third quarter results call, the objective of today is for you to learn in detail directly from members of my management team the 5-year strategic plan that we began to execute earlier this year. Let me take a few minutes to tell you how this is going to happen. I will begin by reviewing the reasons why Bladex is such a unique banking franchise, the same reasons why it is difficult for analysts to find a clear peer group for us. I will then describe the objectives of the plan, the upside potential in the 3 main phases of our plan at a very high level. I will then pass the word to Samuel Canineu, who joined the team as Chief Commercial Officer 1.5 years ago to help us design and now execute this plan. Sam moved from Sao Paulo to Panama with his family mid last year. Since his arrival, Sam has managed to change the dynamics of the front line, injecting tons of energy, increasing the commercial effectiveness and installing a very firm approach to price discipline. In his section, Sam will not only share powerful, concrete, real life examples executed this year, but also show what we're working on to expand our value-added product offering, going forward. After Sam, Eduardo Vivone, our Head of Treasury and Capital Markets, will explain how our Treasury unit is transitioning from being a near funding provider to a fee-generating client solution platform to our growing customer base. After that, we will discuss execution. Olazhir Ledezma is in charge of this area. Olazhir also joined the bank about 1.5 years ago, just a few weeks before Sam did. He is our Chief Strategy Officer, a new executive position created to oversee precisely the execution of this plan. Olazhir, who is responsible for our PMO office, has managed to establish a very strong execution culture across the organization in record time. In his remarks, he will also discuss the recent changes in our variable compensation scheme that has proven to further align management and shareholder objectives. After that, we will discuss Bladex's inherent risk and risk mitigation strategies in the context of this plan. I also refer to the fact that we entered the pandemic with excellent asset quality, but came out of the pandemic with an even better asset quality. Credit goes to Alejandro Tizzoni, our Chief Risk Officer, and his team, who swiftly reanalyzed industry and country risk, which served as a guide to redirect our disbursements during the critical times of the pandemic. Bladex owes its investment grade, among other things, to a robust, comprehensive risk management culture that is built on a business model that it is inherently low risk, even though the banks operates in a very volatile region. In his section, Alejandro will explain how risk management will continue to accompany the evolution of the bank as the strategic plan progresses. Finally, Annie, our CFO, will put it all together from a financial standpoint. Annie will discuss the key assumptions behind the plan and then share with you our financial outlook. She will break down the effects of the different initiatives on the bottom line. After Annie, I'll give some closing remarks, and then we'll open it up for questions. So that's the plan for the next couple of hours. Bladex is truly a unique banking franchise. Three structural aspects make us unique and provide a powerful competitive advantage that is very hard to replicate, our regional reach, our shareholder structure and our business model. First, let me say a few words about our reach. Bladex is the only bank with a footprint across the entire region. This gives us the ability to diversify across countries in a way that most local banks simply do not have. We know local banks very well. We have known them for decades. In fact, we currently work with over 120 financial institutions in the region. On the other hand, foreign banks have a history of entering and leaving the region opportunistically. In the case of Bladex, having operated in the region for so long, we believe we not only have a better understanding of the economic cycles, but also stronger and closer ties to clients that most global banks simply do not have. Secondly, a portion of Bladex's capital in -- it's in the hands of Latin American governments through central banks or in some cases, other organizations designated by them. Having central banks as shareholders provide us with two main advantages: deposits and insights. So half of our deposit base today comes from central banks. This funding has traditionally been stable and very low cost. Also, through them, we gain valuable and timely insights, not only in the macroeconomic level, but also at the industry level within the different countries in the region. Unlike most multilateral institutions though, Bladex has no statutory obligation to lend in partner countries. Bladex is completely free to increase or decrease its exposure in any given country at any given time whenever it deems appropriate. And that brings me to the perhaps the most important aspect of all, Bladex's unique business model. Bladex is the only bank in the region, specialize in trade with a very short-term portfolio that lends to top corporates NFIs. That is zero direct exposure to retail, and this is key in a region as volatile as LatAm. The rest of the banks have a significant portion of long-term portfolios, which limits their ability and the flexibility to contract as critical times happen, not Bladex. The rest of the bank have a portion of retail exposure, which suffers tremendously during recessions, not Bladex. Obviously, our traditional model has low risk and consequently low returns. The plan that we're going to share today aims at better leveraging Bladex's competitive advantage to increase profitability without materially increasing risk. In fact, we are already doing it in multiple ways, and we will share that with you shortly. Bladex was founded to promote foreign trade and regional integration across Latin America. The plan that we are about to discuss strengthens our commitment to that [ notion ] and does it in a very sustainable way. Beyond our excellent ESG rating by MSCI and the main sustainability-linked initiatives that we have undertaken, we are creating a longer-term ESG roadmap for Bladex, which is aligned with our business objectives, including plans to measure and then start reducing our own carbon footprint while better understanding the ESG approaches of our clients. We are initiating these plans and recognize that there is a lot of work ahead of us, but more importantly, as Miguel mentioned in his opening remarks, we recognize that given our regional reach, we not only have the opportunity, but also given our mission, we have the obligation to influence positively sustainable progress in Latin America. Bladex has a very clear upside opportunity to increase profitability by leveraging its advantages without changing its business model. The client base can be expanded without shifting our target customer profile. We have significantly more clients that we can reach that fit the same profile, particularly in some of our larger markets like Brazil or Mexico. Our existing clients are demanding more treasury and working capital, value-added solutions for quite some time now. We have sizable opportunities to increase the customer deposit base through new channels. We can expand capacity and realize efficiencies through key process automation. The goal upon my arrival was very clear, design a plan to strengthen Bladex's business model, better leverage its competitive advantages, expand the customer base and improve the value proposition to customers to improve in turn the profitability while remaining faithful to the mission of promoting foreign trade and regional integration in a sustainable way. On the next slide, I will share with you how we are approaching this challenge. The strategic plan was developed through a collective effort between Board and management over a 5-month period. More than 80 managers participated, preparing business cases and presenting them to the Board, all guided by a global strategy consulting firm. The effort started once we already had some visibility coming out of the dynamic with Bladex proving its business model in an extreme stress scenario. Today, there is a team that understands the plans well because they developed it themselves and is very committed to it. We commenced execution of the 4 phases of this plan earlier this year. The first phase included the design and setup. The second phase, to optimize our commercial effectiveness, has already begun and is yielding very good results. Taking ROE from an average of 6% in recent years to our most recently reported ROE of over 10% in a very positive trend. The next phase is an expansion of our offer of service products, both commercial and treasury, which will also be automated and digitized. Finally, we will focus on scaling, with an ROE expected to reach mid-teens. Before giving the floor to Sam, I want to highlight 3 key actions that have laid the foundations for the proper execution of this plan. The first one is the creation of 2 new positions at the Executive Committee. The Investor Relations position has been upgraded and now reports to me. Carlos Raad, previously at Bancolombia, joined the team 4 months ago and has been charged with executing an active investor outreach program while serving to support a closer dialogue between our investors, management and the Board. Today's event is a clear example of that. Also, we created a position of Chief Strategy Officer that Olazhir Ledezma holds. He is responsible for coordinating the design of the strategic plan and then overseeing the follow-up. The second is strengthening the bank's execution capacity. Today, we have a PMO, a new product portfolio committee at the management level that are all operating under a very rigorous methodological approach. Finally, we redesigned and enhanced our incentive and variable compensation model for the entire organization. The new compensation model considers best practices and directly price KPIs of this plan to management compensation to increase transparency and align management incentives with that of our shareholders in a clear way. The last two were very important areas of opportunities for Bladex, and our Chief Strategy Officer, Olazhir, will delve into details in his section. With that, let me invite Sam to discuss our commercial strategy and the first part of our plan.

Thanks, Jorge. Good morning, all. Last year, when I was invited by Jorge and Miguel to join Bladex, I joined with the conviction that there were huge untapped opportunities for this franchise, which much more upside than downside. After a little over a year, I'm even more confident now and look forward to sharing with you initial positive results of the new strategy. Today, I'm going to talk about the initial 2 phases of our strategic program, optimization and expansion. The first phase is about how we have optimized our resources and commercial strategy just by making simple yet powerful changes that allowed us to increase ROE year-over-year by over 400 basis points as of September 30, 2022. Firstly, we redefine our value proposition to our clients from a low pricing, high volume and plain vanilla product player to a solution-based, creative and agile banking partner. We want to combine the sophistication and creativity of global banks with the reliability and consistency of local banks, but with less bureaucracy. We optimized our value proposition by focusing on introducing changes through origination, concentrating on profitability and working on our own infrastructure and processes. In terms of origination, many of our actions were oriented at reversing a trend of shrinking client base and product capabilities as we shift from a volume-oriented price [ taker play ] to proactive origination initiatives. We started with the reinstatement of old relationships and continue by adding new relationships, mostly brought by new bankers who joined Bladex in the last year. Secondly, we increased penetration of existing client groups. While we have many economic groups onboarded as clients, we're generally financing only a small part of it. We're now leveraging our relationship with owners to expand our penetration in such groups. This should also improve our likelihood of taking part of highly profitable, event-driven transactions for them such as acquisitions, divestitures or large projects. A third origination initiative has been to expand sector expertise geographically. For example, this year, we substantially expanded our coverage of LatAm national oil companies, discounting the import payables to global trading companies. I will expand on this strategy later. Another sector is automotive dealerships and financing. This is a niche we have developed over the years, deep understanding, managing a high-quality portfolio with zero losses. Such knowledge allowed us to onboard market leaders across the many countries we operate. Such sector experience has enabled us to syndicate almost $0.5 billion to a few clients in this sector in the last 12 months, and there's much more we can do. One crucial competitive advantage under our new origination strategy has been to offer a single point of contact to clients who operate in several countries in the region. Instead of dealing with an army of people and complex organizations, typical of our local and global competitors, at Bladex, a CFO or Treasurer, can establish and negotiate limits with one single banker for multiple countries. That allows us to offer a much faster response as well as arbitrage inefficiencies among such countries, maximizing the usage of our limits where spreads are higher. Such feature is becoming increasingly important in improving profitability. This is the perfect segue to speak about our profitability pillar. Under our new strategy, we value quality over quantity. We will no longer write big cheques at low prices to financial institutions in exchange for very little or no reciprocity in terms of other products, especially deposits. Those days are over. We now have a clear distinction between relationships and opportunistic transaction. Relationship clients are the ones who, besides borrowing, use at least one or more of our products. It doesn't mean that clients who seek the lowest pricing can be a target for us. It means that our approach for those will be purely opportunistic with little distinction, if we lend to them directly or by a loan on the secondary market or even a bond. As a matter of fact, using the secondary loan market as part of our commercial strategy has been instrumental for us to increase profitability. We have been able to buy loans from existing clients at discounts that range from 50 basis points to as high as 800 basis points in a signal transaction and to well-rated vectors. Most of such opportunities derives from mispriced syndicated transactions or relationship lending, which lead banks are forced to reduce its position. Keeping dry powder in terms of limits serves us well in those cases. In primary market origination, we have strongly increased our focus on improving cross-sell and introduced this as KPIs for our originators. Not coincidently, we have already seen average product per client increasing by over 10% and deposits from corporates by nearly 50% year-over-year. This seems small, but has been a big cultural change at Bladex. At the forefront of our pricing strategy is seeking out arbitrage opportunities. Our geographic footprint combined with our single point-of-contact feature and ability to take fast decisions places us in an advantaged position to identify such opportunities. The most common one is a geographic arbitrage by lending to higher-risk countries with a full corporate guarantee from a parent company located in a lower-risk country. This is a common need from multinationals and multilatinas and with lower competition as global banks do not cover most smaller countries in the region, and local banks simply do not go beyond their own country. We have many examples in our portfolio. One that I like is a long-standing Colombian client who pays us a significant premium to finance their Mexican subsidiary as they simply don't want to deal with Mexican banks. Finally, on the profitability pillar, we aggressively increased the activity in our syndicated financing business. This is a product that Bladex has been quite successful, leading over 60 facilities and onboarding over 100 investors since we started this business a few years back. Today, we have a large captive base of investors, who continue to join almost every facility we launched and constantly reach out with reverse inquiries. That gives us a clear advantage to originate deals we can distribute and help our clients who seek to expand their lender group. We see this as an opportunity to shift our strategy from originate to hold towards originate to distribute. This shift has already started, and there's great potential for Bladex. Moving to the last pillar, infrastructure and processes. These are internal changes that make Bladex faster, more flexible and reliable. More than often, CFOs accept to pay a premium for that. Some changes we have made include adding more capacity to our execution and origination and reorganizing our coverage model by country and region instead of by sector. The new model has allowed us to better identify risks and opportunities as well as have speedier response. Another important internal change has been to increase quality and efficiency of our client onboarding process. Among many improvements, we have separated onboarding from the credit process as we were wasting valuable resources in KYC for clients who ended up not having credit approval. As well, we integrated our onboarding team to the commercial area. Before, such team was under operations and not as focused on client experience as needed. In the next two slides, I'm going to give you an example from our Vendor Finance business that encompasses the 3 pillars of our optimization strategy. Just to recap, the Vendor Finance business at Bladex is mostly discounting trade receivables from national oil companies to global traders of commodities. Historically, we have worked with less than a handful of such traders, discounting their invoices mainly in the largest countries in the region. These global traders had an unserved demand to also discount invoices from importers located in many of the smaller countries. Such countries are typically too small and out of scope for most of the global banks who compete with Bladex in this segment. On the other hand, such importers are quite familiar to us, many owned by our founding members. As a result, Bladex started to gradually onboard these importers and quickly became the bank that discounts the largest number of importers in LatAm for most large traders. And that's what we illustrate in this first slide. In parallel to that, we have also increased our efforts to onboard new global traders active in LatAm, which allowed us to substantially increase our coverage of the biggest exporters of hard [ commodities ] division. That combination allowed us to create a virtual cycle within the Vendor Finance business, leading to massively increase our discounted volumes, reaching 4.5 billion in the first 9 months of 2022, 2.4x the volume discounted in the same period last year. Obviously, the higher commodity prices have had a material impact on the increase, but the majority comes from the new strategy. Even more importantly, we have also increased margins. For the same period, our average spreads have increased from 52 basis points, reaching an average of 1.83% per annum over [ pays ] in this business. The fact that we now cover most of the large traders in this market, coupled with Bladex providing the widest coverage of importers, significantly increases our pricing power. We were only able to do this with better origination, faster execution as well as having the right people who really understand this business. This is a clear example of the new Bladex. As you can see here, our optimization strategy has clearly result in higher commercial volumes, driven by an expanding customer base and increasing engagement. Our client base has expanded by 15% year-over-year in number of clients and our client engagement, measured by average product per client, by 10%. That combination plus higher volumes originated has allowed us to increase by 26% year-over-year our average commercial portfolio. Volumes have increased in all product lines, as you can notice in the chart in the right. In this slide, you'll see that average margins have increased dramatically by 42 basis points year-over-year, reaching 2.54% over base rate at the end of the third quarter 2022. We all know that increasing lending spreads, when you are increasing volumes, is even more difficult. This makes us believe we may have further upside in margins, if we don't further increase volumes going forward. Together, these have allowed us to increase income from lending spreads and fee products by 43% from the first 9 months of 2021 to the first 9 months of 2022, as shown in the chart to the right. Before moving to the expansion phase, I want to conclude that the optimization process is not fully over yet. There are still upside in terms of client engagement, efficiency and earnings quality. Now moving to the expansion phase of our strategy. It's very clear to us that our product offering has become too limited over time, making it more difficult to further improve profitability without investing. After much analysis, we have decided to expand into 3 different product lines: structured trade finance, project finance and local lending. A common feature of such products is that they are no longer playing vanilla as Bladex has been used to. Today, it's very difficult to achieve accretive returns with plain vanilla lending without taking prohibitive risks. For a credit-cautious bank like us, it's crucial that we use structuring to bring higher returns while mitigating risks. Most of our new hires in the commercial area are professionals who are highly experienced in that. Moving to the next slide. I will speak about the structured trade finance opportunity. Bladex is shifting from providing only simple trade finance products to more sophisticated working capital solutions. What we plan to offer can be split into buyer-side solutions, such as supply chain finance, dynamic discounting and reverse factory, and seller-side solutions, such as multiple invoice factoring, accounts receivable securitization and monetization. In this latter case, mostly data-driven solutions. There are a few reasons why Bladex is focusing on those products. First and foremost, there is ample arbitrage opportunity. Such arbitrage comes from switching in certain cases from direct lending to indirect to products such as supply chain finance. As an illustration, I can lend to a certain high-grade Mexican auto parts conglomerate for a certain margin or I can discount its invoices to hundreds, if not thousands, of its suppliers, charging a premium while running the same credit risk. Accounts receivable solutions following the same suit, but on the other side of the balance sheet. The arbitrage also comes from most of those structures being off balance sheet, which garner a premium for borrowers. Over the years, we have noticed a substantial increase in demand from large corporations for such products to reduce cost of working capital, improve loyalty and financial strength of its suppliers and clients as well as a more efficient balance sheet management. In addition, working capital solutions transactions are [ poor ] peer trade, which makes even more obvious, given our trade DNA. We also see a clear possibility of transferring product knowledge between the countries we operate. For example, countries like Chile, Mexico and Brazil are more developed when it comes to the use of such solutions compared to other countries in the region. That allows us to export products from one to another market, becoming a first mover. We're currently doing it with reverse factoring in the Central American region, where we see a strong client demand in a local market that has little experience in it. Other reasons to operate in this segment are to allow us to expand our addressable market, to create other sources of recurring revenue and last but not least, to tap into existing ecosystems, making Bladex a core part of them. Now that we talked about what kind of products we will focus on as well as why it makes sense for Bladex, I want to describe how we're going to develop products competitively. Based on my own previous experience in a global bank and a fintech, I have no doubt the best way forward for Bladex is to form alliances with fintechs and specialists to develop such products. Fintechs today are much more advanced than banks in working capital products as such solutions are increasingly technology-based. We believe embedding fintech products through alliances is not only better in terms of product quality, but it's also faster and cheaper to implement. Moreover, many fintechs and specialists have developed great solutions, but have failed to scale them, given their difficulty in landing large clients as well as to secure debt funding. Those are some of the reasons which make Bladex the perfect partner. Other reasons include our attractive geographic coverage and knowledge. Some of the best solutions come from fintechs that are not even present in LatAm and are seeking a partner to enter the region. Another attractive feature we offer is a flat organization structure and agile decision-making while still being able to provide sizable tickets. Finally, most of those fintechs are struggling to enter the most attractive local and regional Blue Chip clients in the region, given their lack of relationship and track record. This is clearly one of the Bladex competitive advantages built in 43 years of history. Given the attractive features Bladex offers, we need to be very clear and disciplined in our partner selection criteria. We have defined 4 main aspects which our future partner must have at least one: product capability that we don't have, a technology that allows us to improve and scale our execution capacity, access to new clients or market. This is the case for marketplaces. And lastly, potential to drive operational and efficiency improvements. This is the case of fintechs who are providing transactional monitoring and KYC tools. When it comes to form such alliances, we strongly believe in failing fast should we fail at all. With that in mind, for every new potential partnership, we aim to test a live transaction early on, and these slides are some examples of potential partnerships. My first example is eFactor Network, a Mexican-based supply chain finance and receivables exchange platform. eFactor has successfully onboarded several of Mexico's largest corporations, discounting payables to thousands of their suppliers using a fully digitalized online platform. eFactor brings us a product capability, but also new client relationships. To date, we have funded over 200 million through their platform, and we see ample opportunities to grow. The biggest neutral upside with this collaboration is to facilitate their expansion across the region. At the moment, we are working on a few pilot clients in Central America. It's important to mention here that we are also in negotiation with other SCF platforms as we don't want to depend on one only. Another fintech we're working on is Congo. Bladex has become the first bank in Latin America to join this platform. Congo facilitates trade finance business, where each participant can exchange authenticated messages and close trade transactions digitally. We're piloting Congo with a global training company to discount their invoices in LatAm through the platform. This should simplify and speed up our deal execution and free app capacity. Then we have TradeAssets, which is a marketplace connecting financial institutions around the world with over 80 members, of which we are also the first Latin American bank to join. TradeAssets gives us further access to the LatAm, EMEA and Asian trade corridors, where we have already identified several opportunities, mainly with India. TradeAssets enables us the negotiation and execution of transactions digitally. We see the most immediate opportunities confirming LCs issued by Asian banks in favor of LatAm exporters. The last example of a partnership is not a fintech, per se, but a working capital solutions adviser. This prospective partner brings great experience in structuring a highly complex off-balance sheet AR solutions to large corporations. Even though they have no presence in LatAm, we have already closed with them an account receivable portfolio monetization to a Mexican telecom client. This product is an alternative to securitization that we believe to be highly attractive to some of our client base. We continue the piloting phase. We selected Colombian clients, and if it's successful, we can move to a full partnership. There are numerous ways commercial banks can work with fintechs. I believe our plan, though relatively late, will benefit from many learnings from failed experience of our competitors and peers, and therefore, has a higher chance of success. We have a very promising pipeline of prospective partners. Now we move on to the project finance opportunity. Bladex is uniquely positioned to be a successful niche player in this segment. We also believe this is very much in line with our vision to promote regional integration in Latin America. The World Bank estimated a gap in terms of infrastructure investment in LatAm to be about $2 trillion until 2030. Not surprisingly, there were almost $250 billion worth of project finance transactions announced in LatAm from 2019 to 2021. However, we have noticed an important reduction in the supply of such financing in the region coming from some global banks, giving a shift in their focus to their home markets, triggered by a niche reduced RWA in preparation for Basel IV. This has opened a great opportunity for a bank like Bladex to step in. Project finance structures have many attractive features such as high visibility in the income stream derived, in many cases, from contracted revenues, a strong collateral package and a low historical correlation to other asset defaults during times of crisis. Project finance has also demonstrated a favorable track record of default and recovery when compared to other asset classes in LatAm. This business brings many benefits for Bladex like it's long-term asset nature, which brings some stability to Bladex, otherwise very short-term portfolio. Access to higher fees when compared to the other business we operate, higher potential to generate cross-sell revenues such as interest rate swaps, letters of credit and syndicated finance. It also enables us to access cheaper sources of funding for green energy and social infrastructure projects. Our good access to the largest sponsors as well as the governments in the region give us an important edge to become a successful player. Finally, we see a potential to reach 5% to 7% of the commercial portfolio by 2026 in this business, which from a volume standpoint, may not be so material, but from a profitability perspective, it can be. The last product initiative I'll talk about today is local lending. The idea is to replicate the success achieved in Mexico in other selected markets in LatAm, obviously, without incurring currency mismatches. If successful, this brings numerous benefits to Bladex such as the ability to tap a large base of potential clients that can only be financed in local currency. Those include subsidiaries of existing clients in the region. We have many examples in Mexico where we lend to subsidiaries of international clients at much better terms than lending to them in their home market. Another benefit is access to new sources of competitive funding, leveraging our position as a desired issuer in the region. Another one is to arbitrage opportunities in times of market dislocation, which in LATAM happens more than often among many other benefits. Our initial focus is on Chile and Colombia as those markets, like Mexico, offer better alternatives to foreign bank like us. Peru and Costa Rica have good potential and will be considered in a later stage. Well, with that, I conclude the commercial part. I would like to pass the word now to my favorite Bladex Treasurer, Mr. Eduardo Vivone. Thank you, all.

Thank you, Sam, and thank you, everybody, for attending our investor meeting today. My name is Eduardo Vivone. I am Bladex's Treasury and Capital Markets Executive Vice President, and I would like to talk to you about our team's role in Bladex's 2022-2026 Strategic Plan. Today, our area has two essential purposes: To procure a cost-efficient and robust funding base to support loan portfolio growth and to manage the bank's investments. We make relatively frequent use of [ derivative ] instruments, but only to hedge exposures from issuances in different currencies or to align the profile of our interest rate gap according to the expected evolution of interest rates, but they are not part of our product offering. However, our new strategic program envisages an expanded role for the treasury units. The objective of our plan is to develop the area's capabilities through the creation of the client solutions platform that will leverage the bank's regional reach across business lines, generating incremental income with margin and capital utilization to increase return on equity. Why do we specifically mean by this? Let me explain in more detail. Bladex's 2022-2026 treasury strategy is based on the idea of leveraging two pillars. The first pillar is made up of the different business units that will either be set up or further developed through the implementation of our plan. The other is Bladex's extensive regional footprint. Both can be leveraged to generate cross-selling opportunities for treasury products and to take advantage of enhanced treasury capabilities to increase the sophistication and diversification of our commercial offer. Many of our clients come to us looking for comprehensive solutions that we currently lack the capabilities to provide. For example, Bladex has been very successful in setting up a syndicated loan unit that has attracted both regional and global participants into facilities that we have structured for our clients all over Latin America. However, we are not able to offer them a comprehensive solution to manage the potential interest rate or currency risk arising from the financial facility they are contracting. The same rationale can be applied to other product lines like trade finance or our incipient project finance area. At the same time, Bladex has successfully implemented a local lending business in Mexico, which the bank carries out without incurring into any currency mismatch as all positions are either hedged or financed through bond placements in the same currency. There is appetite and potential to replicate this business model in other economies in the region. However, the bank today has limited capacity to scale this business into other geographies. Our treasury plan aims to fill this capacity gaps and generate ancillary income. In 2022, we have started the first phase of product development, which will be followed in early 2023 by the selection of an IT vendor to provide the required infrastructure that will support the sophistication and scale that we aim to achieve. As part of this process, during 2023, 2024, we will enhance our risk monitoring and valuation capabilities, put in place all required legal and suitability policies and more importantly, implement a client solutions platform through a coordinated business strategy between the commercial and treasury units to deliver a full set of scalable products. As for product offerings, we intend to start with a set of products that the bank already employs today to hedge its own exposures like interest rate swaps, cross-currency swaps and currency hedging, gradually expanding this offering to incorporate the versatile suites of solutions for our client base. We are very enthusiastic about the possibilities these new business lines will offer, but we are also conscious that this implementation must be set up within a rigorous risk management framework. The idea is to generate revenues primarily from intermediation without opening any new significant sources of risk for the bank. For this reason, implementation will be as gradual as sensible risk management requires, and we expect that the whole product offering will fully reflect these benefits by 2025, 2026. Now as exciting as setting up new business opportunities always is, our Treasury must also be consistently proficient in fulfilling its traditional role of delivering an efficient funding structure for the bank. As of today, 42% of Bladex expanding comes from depositors. While the bank shareholders have a relevant share, our young [ CD ] program provides granularity. Bladex's wide correspondent bank network is a source of geographical diversification, and bond issuances in both public and private markets add to the fund inputs resiliency, further enhanced by Bladex's access to the Federal Reserve's discount window through our New York agency. Having said that, there is always more to do to continue strengthening and diversifying our funding base. In this respect, the bank is engaged in enhancing and optimizing its operational and online capabilities to capture a larger share of its client deposits, especially from corporate clients. At the same time, we will leverage Bladex's strong regional reach to continue expanding our young [ CD ] pool through both direct investors and brokers. Another area we will focus on will be local debt markets in the region. With the exception of Mexico, where Bladex is a frequent issuer and has recently celebrated 10 years since its first bond placement, the bank has not established a presence in Latin American markets. We believe this is an opportunity we must pursue, both to support the commercial initiative to lend in local currencies by generating some currency liabilities and to capture arbitrage opportunities to fund the bank at efficient cost levels. At the same time, we will continue expanding the bank's franchise on a global basis to incorporate new investor markets that cannot further geographical diversification. Finally, we believe there is also a role for the Treasury to play in expanding the bank's sustainable financing sources by developing other capital markets initiatives as well as funding partnerships with development agencies. In a few words, the Treasury has a pivotal role to play in Bladex's renewed strategic roadmap. In the name of the whole Treasury team, I would like to thank you for your time and attention as well as express our enthusiasm to be part of this undertaking and our firm commitment to the success of our shared goals across the whole organization. Now, I would like to turn the presentation over to my colleague, Olazhir.

Thank you. As we said at the start of the presentation, I will be talking about how the bank plans to accomplish the previously objectives. We believe that we have the right pillars in place to support the achievement of this strategy. First, we have a robust governance model. We have ongoing Board and cost management leadership an oversight of strategy implementation. Second, we have a portfolio of over 30 projects. The objective of most of these projects is to develop the enablers that will support our strategy. And third, our new compensation plan. Our plan balances prevalence of current year results, our budget with the development of the strategic initiative, the initiatives that will bring the expected result for the next 4 years. I will go in some detail for each one of these 3 pillars. Now I would like to start with the governance model. Our governance model ensures an active participation of all Board members, our CEO and the top management in monitoring the implementation. I will describe the different roles. First, as you can see, we have the Board. The Board reviews the financial results of the strategy as well as the progress of the key projects. Our project leaders regularly report directly to the Board to review the progress and to seek approval of key elements of the strategy. Second, we have the Board Strategic Task Force. This Task Force is led by the Chairman of the Board that meets at least once a month. During these meetings, the main strategic KPIs are reviewed, KPIs such as financial results, number of clients, cross-selling figures, et cetera. The review of these numeric goals allow us to regularly track and monitor performance and assess if any changes need to be made. Going down, third, we have the Project Portfolio Committee. Also, we call it the PPC. The PPC is the management committee led by the CEO and meet every month. The objective of this committee is to review the complete portfolio of projects and to monitor, one, the overall resources, which is the time of the old employees used in the bank; and two, the demand, which [ deleases ] the projects that are being executed. We do that to ensure the right assignment of employees' times to the projects without compromising the result of the bank and the well-being of our employees. [ And last ] PPC, we monitor the [ Italian ] location of 40%, almost half of the workforce we were involved in at least one project. Fourth, we have the Project Steering Committee. Every project has a steering committee that oversees end products, get [ price ] on budget and on time and prevent potential risk. During this committee, the bank leadership problem solve issues facing the teams and ensure alignment of all the areas. These steering committees are members of the EVP from the executive team. And finally, we have the PMO, the Project Management Office, to support all the projects in our portfolio. Every project has assigned a project manager. The PMO ensures that all projects are aligned with the bank strategy and also monitors the time and budget of the whole portfolio. Moving forward, I want to like to talk about the portfolio of projects. As you can see in the chart, we have been working in 3 types of enablers, talent upscale, process improvement and IT and data readiness. I will go in each one of those. Enabler number one, talent upscale. During first -- during the first stage of the strategy, we focus on the traction of the requiring talent and skills. Incorporating new talent has been fundamental to the achievement of the real results. Also, the new talent is providing us with the skills required to advance the other 2 tech enablers that you see on this page. Enabler, number two, process improvement. Improving our key processes with key focus on those related to client service levels and to developing new products. And finally, IT technology readiness. Technology and data readiness. The bank is committing significant human and financial resources to the upscale of IT as infrastructure in order to support the strategy, especially the new product development. Before going into details of each one of these enablers, I would like to point out that we're currently working with the support of top strategic and management consultants. At this moment, we are working with 6 different consulting firms who are world-class experts in their fields. Let me go to the first one a little bit more detail, upscale talent. The bank expanded in workforce more than 30% in the last year. During this year, 2022, we have already incorporated almost all the additional resources that we need to deliver the expected results of our strategic plan 2022-2026. It is a clear commitment to have the required talent and capacity in place to carry out this strategic plan. The bank has decided to front-load the acquisition of the new talent to facilitate its onboarding, avoid operational risk and secure resources to support all the projects they have already described. Some key figures on the expansion of the workforce are. On commercial, we have strengthened the commercial sales force, specifically the client service team. They have been increased, not only in number, more or less 40%, but also newer skills required to develop, manage and commercialize the new suites of products and services. In IT and data, we have increased our IT and data team by 50%, and we have incorporated professional with the required skills in product development in order to reduce our time to market. And as Jorge said at the beginning, 2 new areas we're creating at the executive committee level: investor relations and strategy. In my area, strategy, we assembled a team of project managers worth 100% focus on supporting the team leaders in the implementation of all the projects that we're talking about. As previously mentioned, we have begun to improve the key processes of the bank. We have 4 goals in mind. One, improved client service. We're improving the main processes impacting client service levels. So far, we have achieved [indiscernible] milestones, such as reducing the new client onboarding time by 50%. Second, we streamline operational processes. Their main objective has been to reduce process inefficiencies, allowing new product in position and increase the number of transactions. At the same time, these streamlined processes allowed us to better identify and mitigate potential operational risk. Third, we want to facilitate product development. We're facilitating new product development, all those products and services described previously by Samuel and Eduardo. And finally, we're strengthened the IT processes. We have reviewed and improved key IT processes, such as demand management, production and QA with a clear focus on reducing the time to market all the products and requirements. And the third enabler, I think we have already started implementation of significant improvement in the IT platforms. The most reverent aspects, but the improvement are the following. You can see in the chart, one, robust integration platform. We are developing an IT layer that will allow us to improve time to market on new IT platforms and third-party connectivity. Key system update, we're updating critical functionalities such as CRIS, CRMs and BPM. Strong cybersecurity. We have committed significant investment to strengthen our cybersecurity with focus on aspects and data -- I'm sorry, on access and data encryption. These areas are key given the imminent introduction of new product rates. And finally, top-notch architecture and data management. We are already optimizing the design of the data warehouse to improve its performance and features. We estimate the required IT spending in the next 4 years to be around 3% of revenues, a figure in line with the key spending observed in comparable banks. And finally, we go to the fourth pillar, compensation. The compensation plan is the result of multiple interactions with consulting firms, specializes in management compensation and with renowned industry actors. The compensation plan has the objective to incentivize the achievement of short-term goals, basically the budget of the current year, while also encouraging the execution of the projects and initiatives that would allow us to reach the expected results for the '22-'27. I would like to go also some distinctive in the element of a new plan. One, top management has balanced scorecards with clear KPIs linked to the bank performance and the execution of the projects. The second one, we have between 20% and 40% of the individual variable compensation is linked to the success of the projects that you already described. And third, management received equity compensation. Thank you. Now I will let Alejandro, our CRO, talk to you.

[indiscernible] Thank you very much. As Jorge mentioned at the beginning of the presentation, I will be talking about some unique features of our business model from a risk perspective as well as discussing how we have been strengthening our enterprise risk management structure and culture and how we will continue to develop our risk management capabilities to support the strategic plan from the perspective of a second line of defense area. The first aspect that I would like to highlight from a risk perspective is that Bladex has maintained a proven BBB investment-grade track record over the years, consistently preserving its risk profile through different economic cycle and despite Latin American volatile macro profile. In time of economic downturn, political crisis, lockdown and our loss of investment grade of the countries from the region, that demonstrated being resilient. Even during the COVID-19 pandemic, when a large part of the banks in the region had to face large modified portfolios, increasing level of NPLs and credit rating downgrades has been a true testament to that resilience. Bladex was barely affected by the pandemic and prove it to be prepared to take advantage of the opportunities that arose with the rebound of the economies and foreign trend after massive vaccination was put in place during [ 2021 ]. Our investment-grade track record is a result of historically strong risk culture, particularly low risk business model, which we don't expect to change as a result of our strategic program. Let me start by telling you about our historically strong risk management culture. Bladex is best known for its prudential risk management, sound underwriting practices and low risk-tolerance. As many organizations, we follow the 3 line of defense model with a proactive and customer-centric risk management approach. At the same time, we maintain a robust risk governance with the CRO reporting directly to the Board of Director Risk Committee and having vito power. Additionally, the credit risk team maintained direct contact with clients performing regular on-site due diligence and visiting countries to have a better understanding of the market dynamics. On the other hand, following the U.S. regulations, we maintain an independent loan review officer functions, whose focus is to ensure the correct application our underwriting policies, portfolio and collateral monitoring while overseeing the watch list and NPL portfolio. After the 2015-'16 credit cycles, with a sharp fall in commodity prices and given political prices in major countries in the region, the bank made significant adjustment to its underwriting policies, incorporating many lesson learned with a clear and refined risk appetite. We strengthened our corporate governance, adding 3 different instances for credit origination approval with the participation of risk committee Board members in 2 of them. Additionally, we have reinforced our local credit risk presence in strategic markets like Brazil and Mexico. Moreover, we incorporated the position of Vice President of Cybersecurity Risk, a field in which the bank has consistently invested in different platform and security layers, as well as creating a specific committee to oversee this risk, in turn supervised by the Board Risk Committee. We also have been working on creating a more active operational risk culture by having all employees acting as a risk managers, first, supporting long-term business sustainability. Last but not least, with more than 20 years of analytical data embedded in our internal risk models, we completed early implementation of expected loss under IFRS 9 during 2016, having an active country with supervision with senior dedicated team. We also enhanced our forward-looking comprehensive risk management approach across all businesses and risk type. The other strong pillar supporting our consistent investment grade performance is our intrinsically low-risk business model, which is not expected, as I mentioned before, to change significantly with the implementation of the new strategic plan. In attributes of our business model that makes us intrinsically low risk are: An agile short-term loan book. Each quarter, we renew over 50% of our commercial portfolio, 70%, which mature within 12 months. The short tenure of our book allow us to adjust and resize the portfolio according to the opportunities and risks that the countries brings. Two clear examples of it are, first, the reduction in higher risk countries before the pandemic, like Argentina coming down from more than 600 million to less than 100 million. Two, 15 contraction of our total portfolio during the wake of COVID-19, collecting almost 100% of the maturities on time in both cases. High-quality, geographically and industry diversify assets. We continue to operate at the high end of the client pyramid with top-tier names who are, in general, more resilient and able to withstand negative credit cycles with a virtual network correlation of the fall to GDP downturns. As you can see in the figures, we have segmented the portfolio into 11 different client risk categories, highlighting the increasingly relevant weight of multi-latinas, corporates and multinationals with 30% of total participation and growing, looking for more individual diversification through new clients acquisition. These segments are characterized by sell exceeding $300 million per year, leadership in the industries footprint in several countries, strong corporate governance and usually graded by rating agencies locally and internationally. From a country and industry perspective, our regional reach with exposure to more than 20 countries, including Latin America and more than 30 industries also supported diversification and flexibility qualities of our portfolio, maintaining 43% of investment-grade countries in a challenging context with increasing possibility of economic recession is always positive. Strong capitalization, diversification and stability of funding, such as access to the Fed discount window. Our strong capitalization is one of the most relevant pillars of our model, which allow us to withstand any possible unexpected ways in region with high volatility and vulnerabilities. This, together with the short-term nature of our portfolio, our focus on top-tier clients and its ample diversification across countries and industries throughout the region, explain our NPL level remaining at close to 0. As we remain committed to a sound capital position, we intend to preserve our capital ratios to our 15%, 16% Basel III Tier 1 capital ratio and 14% according to Panama banking regulatory capital adequacy ratios well above the minimum requirement of 8%. On the other hand, as already mentioned by Eduardo Vivone, preserving a well-diversified funding structure by type and geography, including an important portion of stable deposits coming from our A-class shareholders with access to the federal discount window through our newer agency, as a last resort in a stressing scenario, support the strength of our balance sheet and liquidity ratios. A flexible and dynamic balance sheet positioning to take advantage of the rate hike cycle and without taking on currency risk. Throughout our C-level and Board committees, we closely monitor market conditions and interest rate outlook, among others, which allow us to probably react to changes in the federal research and other Central Bank interest rate policies as is occurring in the current environment. Our balance sheet structure and the short-term repricing nature of our assets and liabilities allow us to manage the bank interest rate gap, which in recent months, we have positioned it favorably for rate increases. Over 40 years of experience in the region with Central Bank as founding shareholders. Finally, being a Latin American bank that serves the region as its main purpose, with more than 40 years of operational experience, a seasoned team and the support of our case A shareholders, composed of Central Bank and governmental entities of 23 countries, Bladex has a competitive advantage with respect to foreign banks with headquarters outside the region with partial presence in Latin America. Last, one of the goal of the risk management area is to support the strategic plan and the technological transformation and digitalization. As such, we have online some priorities that represent our goals for the following years to support the organizational growth and increasing complexity. These goals include the following of captive preserve our risk discipline and underwriting standard in the process of carrying new clients to the portfolio; strengthen our structure; adding resources to meet the development of new treasury and commercial products, including valuations, rating models and monitoring IT platform tools. Given the operational reassessment process to support new products and streamline coring critical processes, becoming a business consultant and expert; leverage sector expertise geographically to maximize the commercial opportunities that can be generated; continue consolidating our layered in-depth defense cybersecurity model, which already has more than 15 monitoring platform with a focus on third parties, authentications and cloud. To integrate ESG factors into our credit risk assessment and origination processes; redefine our business continuity plan through an in-depth business impact analysis. And last, increase our analytical capabilities and model development with greater granularity and stronger back testing providing trailer value proposition to the business model. Let me please introduce the next speaker, our CFO, Annie de Mendez.

Thank you, Alejandro. I am now pleased to give you the financial perspective on how everything you have heard until now translates into sustainable earnings growth and profitability. Let me first highlight our recently published third quarter results as they already reflect 9 months of execution on our 2022-2026 strategic plan. Credit growth at record levels reflect both cross-sell in trade finance activity and a 15% growth in our client base, both of which are closely related to the optimization phase described by Sam earlier. On top of that, higher commodity prices and the trade activity in the region have also had a positive impact on increased loan volumes. Through this initial phase of our strategic plan execution, we have also been able to increase our lending spreads, gearing our portfolio mix to improve risk/reward. So this growth has in turn been more profitable. The positive impact of higher market interest rates, given a very short tenor asset-sensitive interest rate gap, has translated into an expansion of our net interest margin. And this is still showing an increasing trend going forward as I will further comment in a few minutes. Another important driver of profitability is fee income. Given the growth in our letter of credit business, one of the relevant products poised for expansion in our strategic plan. At the same time, we saw a pickup in our activity from our syndications business. As mentioned by Alejandro, our client risk profile remains unchanged as we grow revenue while continuing to operate at the high end of the client pyramid with top-tier names. This, together with the short-term nature of our portfolio, and its ample diversification across countries and industries throughout the region, explains our NPLs levels, which remain at close to 0% of total loans. At the same time, we are also improving operating efficiency, even while investing in our transformation, including new hires a performance compensation program and investments and related initiatives to improve processes and information technology, as previously mentioned by Olazhir. Their P&L impact is continuously offset by revenue growth. As we can see in this next slide, more than half of the 422 basis point increase year-on-year in ROE. Reaching 10.3% in the third quarter of 2022 was the result of the initial phase of our strategic program. We can see how the strong increase in revenues from net interest income and fees amply offset credit provisions and higher operating expenses. Hence, asset growth mainly from our loan portfolio has contributed to leverage our balance sheet, optimizing the use of our capital in a more profitable way and having contributed a 273 basis point year-on-year increase in quarterly ROE. In addition, higher lending spreads and change in asset mix composition, together with increased fees resulted in a combined additional contribution of 277 basis points in ROE increase. Deducting the impact of higher operating expenses representing 162 basis points and credit provisions for another 153 basis points, ROE expanded by 234 basis points year-on-year on Bladex's ability to execute on profitable growth with a focus on optimizing returns. On top of this, the impact of increased market-driven base rates has added so far another 188 basis points to ROE. Here, let me comment on the trends and perspectives for the following months and for next year. Our balance sheet structure and the short-term repricing nature of our assets and liabilities allow us to manage our interest rate gap, which in recent months, we have aimed to be positioned as asset-sensitive favorable for rate increases. Moreover, during the third quarter, the full impact of higher market rates was yet to be fully embedded in assets and liability rates. We have seen net interest margin increases during the second and third quarters of this year, and we expect this trend to continue in the following quarters given the laddered pace of interest rate increases. So we should see net interest margin positioned at the 200 basis points area in the following months. This of course is subject to future U.S. Federal reserve interest rate actions which we anticipate will continue will continue with 3 additional hikes for a total of another 100 basis points through the beginning of next year. Along with margin expansion on account of higher market rates, the anticipated slowdown in economic activity and trade flows in Latin America is expected to result in a deceleration of loan growth for the following quarters and for 2023. After an estimated GDP growth in the region above 3% for 2022, an increase in trade activity by more than 15%, the expected GDP growth in the region for next year is 1.6%, while trade flows are expected to grow only 2%. As a result, we see single-digit commercial portfolio growth in the near term compensated by incremental lending spreads as we will continue to focus on portfolio mix optimization and margin enhancement, allowing for continued top line revenue growth. As we remain committed to a sound capital position, we intend to bring Basel III Tier 1 capital ratio back to the 15% to 16% range and Panama banking regulators capital adequacy ratio to around 14%. Revenue growth is expected to continue on a positive trend supported by higher net interest margin reflecting wider net lending spreads and the repricing of market interest rates, as I just mentioned. This, along with our expectations for sustained growth in non-interest income from our letters of credit and syndications business, will allow us to maintain our efficiency ratio below the 34% level of 2022, supporting the investments contemplated in our strategic plan. Overall, we expect sustained ROE levels in the area of low double digits for 2023. Now looking at the longer term for 2026, we have established targets based on certain macro assumptions, such as a normalized U.S. dollar interest rate with Fed funds at around 250 basis points, annual economic growth in Latin America at around 2% to 3% and trade flows in the region increasing at 5% to 6%. Considering organic growth supported by earnings generation, we estimate commercial portfolio reaching a balance of between $10 billion to $11 billion in 2026 while maintaining a capital level of 15% to 16% Basel III Tier 1 ratio, congruent with our historical average and which defends our ratings. Importantly, this capital growth scenario is our base case as we continue to analyze capital management alternatives to optimize our capital structure and to support growth opportunities. In turn, we expect to see further lending spread expansion on the account of the offer of new structured products, corporate client expansion and deeper cross-sell, reaching a level above 2.80% compared with the 3 quarter '22 average at 2.46%. Increase in revenues is also expected to be supported by fees and non-interest income driven by the expansion of our letter of credit business, fees from increased project finance origination and revenues from the treasury activity. Cost of risk or total portfolio reserve coverage is projected at around 1%, while maintaining low levels of NPLs comparable with a relatively stable risk profile. The cost-to-income ratio or efficiency ratio is expected to improve to a target range of 27% to 29% as we advance on scaling the business and significantly increase transactionality through technology investments and process improvements as commented by Olazhir earlier. All of these factors sum up to an ROE target in the range of 13% to 15% by 2026. Let me now turn the presentation back to Jorge. Thank you. Jorge, please.

Hello again. Thank you, Annie. In closing, I'd like to highlight a few takeaways from today's presentation. As you have seen, many things have changed in Bladex in the last 1.5 years. We have a new strategic plan. We have expanded our executive committee and added key members. We have greatly strengthened our project execution capacity. We have revamped key processes. We have a new variable compensation scheme. The organization as a whole is very motivated and focused on the execution of this plan. Results are visible. We are achieving higher return on equity by using capital more efficiently. We are expanding our customer base and strengthening the existing relationships. Margins are also expanding from a more sophisticated set of products. Fee income has increased as well. Some things, however, will not change. Our overall risk appetite will remain conservative. Our customer profile will not change. And we will still stay true to our mission of promoting foreign trade and regional integration in a sustainable manner. Bladex is well positioned to continue building on our momentum and keep delivering higher ROEs to mid-teens in 2026. We'd like to thank you for joining us today and look forward to continuing to build closing relationships with you all. That's it on our end. Let's now take a short break, and then we'll open it up for the Q&A session. [Break]

Welcome back. We will now move to the question and answers session. [Operator Instructions] Our first question comes from Jason Mollin from Scotiabank. How Bladex thinks about capital optimization, what is the target core equity Tier 1 ratio? In this context, please speak about dividend strategy.

Thank you, Jason, for your question. I just start by saying that after 9 quarters of consecutive growth, Bladex has entered a new territory. Our capital ratios are at a low level. But as Annie and I mentioned in our previous call -- the quarter result call, there is -- from last quarter, there's clearly an inflection point regarding to capital. What you're going to see going forward, the pace of growth is not going to be a fast as you've seen recently. Remember that part of our growth comes precisely from commodity inflation. So that is slowing down, and the region is slowing down. So you're going to see our pace of growth slowing down. Our core equity Tier 1 ratio is going to be between 15% and 16% going forward. Capital will remain a core pillar of our model. In this context, capital management is more relevant than ever before. And I can tell you for a fact that the Board is constantly analyzing different capital alternatives, including dividends, including potential hybrid instruments that complement our capital. I don't know, Annie, if you want to add something.

Right on, Jorge. Definitely, going forward, look into a much more proactive capital management. But not only from the capital itself, it's the perspective of managing the capital, like you said, with everything on the table, dividends, buybacks, issuance of instruments or even core equity going forward, but also internally with a very, very strong discipline in pricing. We are -- after being able to lever in a very profitable way, our balance sheet, we are much more focused on enhancing our pricing and looking deeper into risk return opportunities, and that's what's really on the table right now.

Our second question comes from a retail investor. Results for the year so far are very encouraging, and you outlined the strategic plan in great detail. But what is the biggest challenge you face under this strategy?

Let me take that one. I think the biggest challenge was perhaps the cultural shift that the bank needed. Bladex has been historically a bank well-run, but installing a growth mentality was a big challenge because I feel that the bank today is already in that growth mentality. And I'm talking about not only in terms of balance sheet, but also in terms of products and in terms of clients. So shifting from where we were with relatively little innovation to where we are now in a growth, what I say, a growth mentality -- that cultural change was no doubt a very big challenge. Making the plan a collective effort with bottom-up ideas and then having the Board involved was crucial in that, and I feel today that the organization is very aligned and in executing this plan. It will remain a challenge, the execution of all the projects that we have in the pipeline. I feel confident that the structure that we've built with our PMO office and the rigorous methodological approach to execute the projects and also the Board involvement will guarantee that the execution keeps being a successful one. That's what I would say.

Thank you, Jorge. Our next question comes from Robert Tate from Global Rational Capital. Which one value-add product offering is your favorite for your profitability and growth targets?

I'm going to let Sam Canineu answer that. I would say it's in the realm of structured trade finance. But I don't know, Sam, if you want to...

Thanks, Jorge. Well, as Bladex's Chief Commercial Officer, I feel like I have to say that my favorite one, our clients favorite one. And in that regard, I feel like within the structured trade finance realm, the ones related to the seller side, finance, financing or discounting accounts receivable are the ones that enable us to provide a more customized or value-added solution and giving such the ones that our clients are more willing to pay for it. So I think combining offering a solution that the client wants that adds value and they're willing to pay would be my favorite one. So they're all important is some way. But the more we can really customize, I think the more that makes sense for us to invest. Thank you.

Thank you, Sam. Our next question comes from a retail investor. You discussed Bladex' approach to risk management. In the current macro environment and given your views for 2023, what worries you in terms of credit risk?

Yes. That's an excellent question, and we were expecting that question. There is no doubt that the region is slowing down. Credit risk is increasing. This is not new for Bladex. We've managed to navigate very difficult environments in the past before, the pandemic being perhaps the most recent and most critical ones. I'm going to let Alejandro explain a little bit what he feels as our Chief Risk Officer to complement this question. I don't know, Ale?

Well, thank you very much, Jorge. So yes, obviously, we are worried about a couple of things going forward in 2023. Interest rate going up. Obviously, the risk of a recession in the U.S. for the next year with the impact in the region, in Latin America, the lack of international liquidity. Right now, you see that debt capital market is closed for emerging markets. So obviously, there's many challenges for the region. It's not the first time we're going to go through this kind of situations. I've been like in 5 to 7 credit tranche or credit cycles in the past. A good example of what we did is the pandemic. Obviously, we take a more conservative approach. We reviewed the entire portfolio. We divided the country by risk and the capabilities the countries in a way have to support the shock. So obviously, we are not worried about the quality of our portfolio. I think we have a Tier 1 type of clients that are very resilient under this stress scenario even though we are watching and we are monitoring. And on the country side, obviously, I think the usual suspect, we are more worried about Argentina and Salvador, where we have very limited exposure. On the second tier, maybe we have Bolivia where we have also a very limited exposure. And maybe on the edge, we have Honduras, maybe Costa Rica and coming in maybe with a lot of noise, Colombia. On the other side, we are really, I think, very comfortable with other countries like Chile, Peru, Uruguay, Paraguay, Guatemala, Dominican Republic and Panama. Obviously, on the second tier, where we feel also comfortable, but we are closely monitoring political events is Brazil and also Mexico. So that's my final remarks.

Thank you, Alejandro.

Thank you, Alejandro. Our next question comes from Robert Tate from Global Rational Capital. By example, what 2 or 3 biggest historical mistakes has Bladex made in the past 10 years? How can you learn from such mistakes?

Okay. Thank you very much for this question. First of all, I will say technological underinvestment, I think, is something that we are really addressing as Olazhir mentioned, in his section. It's something that we need to transport the bank to increase the transactionality, to improve the processes, to bring new products. So obviously, for us or for myself, I think it's 1 of the 3 main reasons. The other one will say, well, taking naked commodity risk in high-risk industries, like oil and gas upstream or maybe sugar industry in several countries. So obviously, we took that as a lesson learned. And we improved, as I mentioned in my section, our underwriting policies. And the third one is changing the strategy and the profile of our clients trying to move down to midsize companies. The default of those companies usually are more related to the GDP, okay, performance, different from our actual portfolio and our actual profile of clients. So that's one of the key messages. We're going to keep the same kind of profile of our clients. We will not change the type of clients that we're bringing to the table. Yes, we are looking for more diversification that is always good for the business profile.

Thank you, Alejandro. Our next question comes from Bobby Eubank from Chevy Chase Trust. What has been the biggest change over the last several months in your outlook for LATAM trade for the near future?

Let me just -- and then I'll pass it on to you, Alejandro. There are a couple of changes in Latin America recently. First one is a very sharp increase in interest rates. There's no doubt that central banks in the region, our shareholders, reacted even more aggressively and way before the Fed did, so that's been a recent change, I mean, obviously, in the effort to tackle inflation. But then on the trade flows, we've seen -- I mean trade flows are a record high, 14% growth this year in trade volumes, and we are still expecting growth next year of around 2%. And so that is -- obviously, this is very good for Bladex because not only the volume but also the demand for dollar-denominated loans has increased recently. I don't know, Alejandro, if you want to add something?

No. I think as you mentioned, we took advantage of the cycle of the moment. Obviously, most of the economies had a rebound on the GDP after the lockdown of COVID-19. It also was helped by the commodity prices going up. So obviously, we took advantage of that moment. We realized that was not a permanent shock. We have not been seeing a normalization of the demand. Prices of the commodities are going down, obviously. We see some de-acceleration in the economies. And going to the future, as you mentioned, Jorge, 2023, the basis scenario is 2% increase. So obviously, I think we took advantage of that moment. And another thing that I want to highlight is comparing with other banks, we didn't -- we are not being affected by the restructuring profile of the portfolio. So we are not hit by the pandemic and the modified loans, so we didn't create any new nonperforming loans during the pandemic. And we took the advantage to growth at the right moment, and we are now seeing a normalization trend on the fourth quarter and 2023. That's my final remark.

Thank you, Alejandro. Our next question comes from Inigo Bega from Mao Securities. There is an ongoing cultural change within the bank that is also producing a change in the strategy, more ambitious overall. What triggered that change?

Yes. So there is no doubt, as I mentioned before, that there is a big cultural change. My feeling is that, that change came before the strategy. It was needed for the strategy to be implemented. The -- realizing the very clear upside potential needed a clear cultural change, getting rid of the silos and having the bank constantly working in a project type, advancing the strategy was very clear. I always mentioned that a good way to portray the cultural changes that every employee in Bladex has a -- their brains like has 2 parts. One is the ongoing operation that's going very well, and then the other part is all related to the project execution. There are more than 100 employees of the bank already involved in project meetings all the time. And that is, of course, as Olazhir mentioned before, tied to their compensation. So that cultural change was needed to be where we are today in the process of a very good execution.

Thank you, Jorge. Our next question comes from Pedro Lopez from Mura Capital. Unifin recently announced bankruptcy. What implications it has on the balance sheet and what went wrong in this operation?

That's a very good question. We feel -- in the case of Unifin, it's a non-bank financial institution based out of Mexico. Unifin is a client we know well. In fact, we did a syndicated loan for them, the third one. And in the case of Unifin, it still seems to us that it was more a contagious effect of other similar non-banking FIs in Mexico that went south more than an intrinsic problem within Unifin. Unifin has announced Chapter 11 very recently. We are closely monitoring the situation. Unifin represents less than 0.2% of our portfolio. But I'm going to let Alejandro as our Chief Risk talk a little bit more about it.

Okay. Thank you, Jorge. Well, as Jorge mentioned, we started doing business from our syndication desk in 2014. Obviously, I think what went wrong, the worst case scenario, just a contiguous then through the default of Crédito Real. I think AlphaCredit was not necessarily as big as Crédito Real. But Crédito Real default and maybe the risk of fraud on their accountability. So maybe a rise that the market went pretty nervous. And obviously, they depend on international funding. They have like over 50% of their funding coming from 144A. And due to the conditions specifically in the market changing with the interest rate increase in the U.S. and risk aversion in the region and with the vendor Credito Real, I think it was really difficult to predict these kind of events. Obviously, we always took a very conservative approach with the industry, With a non-bank FI. Our exposure expand on that syndication of over $100 million with a participation of more than 18 other financial institutions. Our final goal was $20 million. We have another $5 million of treasury investment. So we are -- obviously, we are worried about the case. We are -- we have a very conservative approach on the outcome and maybe the recovery that we can get on that loan. Due to the Chapter 11 in Mexico announced last week, we are moving on the fourth quarter, this credit into NPLs. As Jorge mentioned, is close to 0.2% of our credit portfolio. So it's not necessarily material. I think I'll give you an example of the capabilities to absorb the reserves that we need to build going forward because we are being building reserve already in the last couple of quarters because we took this credit early this year in watch list, and we move it to special mentions right now through NPLs for the fourth quarter. But we are bid building reserves, specifically for this loan. So if you see the figures through the year, we charged almost $15 million in reserves this year, mostly related to credit growth but also related to this specific case. So if you analyze the amount, so we will be, in a way, charging $20 million per year. So $20 million against an exposure of $25 million and considering that we already charge a certain percentage of coverage, I think it's totally manageable. I think it's something that we can, I think, manage without impacted the bottom line as in other credit cycles. And the other thing that I want to highlight because the question is very good, under this environment, if you are worried about other credits, I would say this is the only credit that is not performing and it's not paying on time. I think, obviously, we are taking really -- we have been very carefully monitoring the performance of our portfolio and stressing our clients, but we are not worried about all the clients. We've been reducing the Stage 2 consistently since the pandemic, and most of the portfolio that is in stage 2 is not related to the obligor, it's related more to the downgrade that we did during the pandemic to the countries. But obviously -- and we reduced it for over $300 million, the Stage 2, to less than $150 million. So we're really confident in that sense, and we don't see any yellow flag on other clients. But obviously, we are taking a more cautious approach, okay, to originations and monitoring our portfolio performance.

Thank you. Ale.

Thank you, Alejandro. Our last question comes from a retail investor. In terms of funding, given your current growth plans, how do you plan to fund this growth next year in the context of potentially lower liquidity?

That's a very good question. I'm going to pass it on to Eduardo Vivone, our Head of Treasury and Capital Markets, that I think he explained a little bit during his presentation, but I'm sure he can add some comments within the context that we are living today.

Sure, Jorge. Yes, certainly, we're not -- I mean liquidity is not what we were used to in the last few years. We follow market developments very attentively. As we explained a few minutes ago, the bank has a very robust and well-diversified funding base, both globally and regionally. Around 42% of our funding comes from deposits, and half of that from our Class A shareholders. But expanding the deposit base is one of the key initiatives of our -- of this plan from a funding perspective, and we have already started to see success in that respect with an expanded corporate deposit base. And another key pillar of our plan is to develop the bank's franchise in the regional markets. I mean these are markets where we have competitive advantage to procure very efficient funding, and this is something the bank is going to pursue, and this should translate in expanding an efficient funding base. I would like to add also that the bank runs a very prudent liquidity gap, and we don't have any significant capital markets maturing in the next few years. So taking all this in perspective, we are very confident that we can generate the resources, not going to generate it, but generate them at efficient cost to support our asset growth in the next few years.

Thank you, Eduardo, and thank you very much. Those were all today's questions, so I can hand back to Jorge for final words.

Thank you, Raad. So Raad, exactly 2 hours, which was in the agenda for the day. Very happy to host this first Investor Day. We plan to keep updating you in the plans going forward, in our progress and hosting another -- at least one Investor Day a year in the future. Thank you very much for joining, and stay safe.

Good afternoon. Have a great day. The event has now concluded. Thank you for attending today's presentation. You may disconnect.