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Edited Transcript of BLX earnings conference call or presentation 18-Oct-19 3:00pm GMT

Q3 2019 Banco Latinoamericano de Comercio Exterior SA Earnings Call

Panama City Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Latinoamericano de Comercio Exterior SA earnings conference call or presentation Friday, October 18, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ana Graciela de Méndez

Banco Latinoamericano de Comercio Exterior, S.A - Executive VP of Finance & CFO

* Natalio Gabriel Tolchinsky

Banco Latinoamericano de Comercio Exterior, S.A - CEO

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Conference Call Participants

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* Robert Tate

Global Rational Capital Management Ltd. - Founder & Investment Coordinator

* Robert Michael Maltbie

Singular Research, LLC - MD & President

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Presentation

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Operator [1]

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Hello, everyone, and welcome to Bladex's Third Quarter 2019 Conference Call on this 18th day of October 2019. 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. Gabriel Tolchinsky, 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. In these communications, we make certain statements that are forward-looking such as statements regarding Bladex's future results, plans and anticipated trends and 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 releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications.

And with that, I'm pleased to turn the call over to Mr. Tolchinsky for his presentation.

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [2]

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Thanks, Chantelle. Good morning, everyone. Thank you for joining us today. Before Ana Graciela delves into key aspects of our earnings results for the third quarter, I would like to discuss with you important developments that took place during the quarter and the impact of these recent developments on our perception of risk and financial results. I will address the global macroeconomic context, the economic and business environment in Latin America and relevant country and industry-specific developments affecting our portfolio.

During our last 4 quarters' conference calls, we mentioned that the credit quality of our portfolio, cost structure and allowances for expected credit losses set the base for our earnings generation capacity. Our third quarter 2019 results are another step in that direction. The global economy in 2019 is on course for its weakest year of growth since the financial crisis, weighed down by tensions that have significantly slowed international trade. Global growth is now expected to fall 3% this year according to new estimates from the International Monetary Fund, down from an estimated 3.2% in July. The IMF attributed the slowdown primarily to rising trade barriers that have impacted manufacturing and investment around the world. The IMF now forecasts that world trade volumes will expand by just 1.1% this year, less than half of the growth rate of a July estimate of 2.5%. For 2019, forecast for U.S. economic growth were cut by 0.2% to 2.4%. Forecast for the Euro area were cut by 0.1% to 1.2%, and China's economic growth was lowered by 0.1% to 6.1% from their last July report. Shockingly, the IMF expects slower economic growth in 90% of the world.

Given this macroeconomic context, we are once again downgrading our economic and trade growth expectations for Latin America for 2019. Today, we are expecting only a 0.2% economic growth for the region, down from 0.6% at the end of the second quarter, and trade is expected to grow only 1%, down from 2.6%. This tepid growth prospect masks significant disparities in economic performance between countries. Large countries like Mexico and Argentina are experiencing uncertainties and lower foreign investment flows, a key driver of economic growth. On the other hand, countries like Colombia and Brazil are showing a pickup in consumer demand that is supporting their economies despite low commodity prices and weak international trade. In other words, slow or no growth from the developed world and the consequences of protectionist measures on trade and commodity prices are having an uneven impact on the region, with some countries better prepared to withstand the prevailing environment.

Brazil, the region's largest economy, is a bright spot amongst the 3 largest countries with growth expectations of 0.8%. Mexico is expected to grow only 0.3%, and Argentina is in an outright crisis, its economy expected to shrink 2.9%. We will discuss Argentina in more depth later in the call. Although Brazil will grow significantly less than we expected at the beginning of the year, we are seeing some of the economic growth drivers stabilizing and starting to show some improvement. Both consumer demand and investment are showing signs of life. Both categories had sizable declines in 2015 and 2016 and had barely recovered since. With policies aimed at opening up the economy such as an aggressive privatization program and the passage of pension reform, we are optimistic on Brazilian economic growth and business opportunities there.

We see medium-term risks in Mexico resulting from the prospect of potential interference in state-owned entities that for the last 20 years were run independently and professionally. That said, we see 3 clear short-term priorities from the current administration that should keep Mexico on the relatively good side of the rating agencies. One is maintaining a small primary fiscal surplus; two, continued support for Pemex in restoring production; and three, keeping a good relationship with the U.S. Our base scenario is that Mexico will not be downgraded to below investment grade until 2021. As such, we maintain a short-term profile of 10 months of average life in our Mexico portfolio. The Andean corridor stands out with Chile, Peru and Colombia always pivoting good growth prospects. Although growth expectations for both Chile and Peru have been downgraded because of lower commodity prices, expectations for economic growth in Colombia have improved on the basis of macro stability and a regeneration of consumer demand. We are increasing exposure to these countries in our portfolio.

Most of Central America and the Caribbean continue to show solid economic growth prospects, although these have also been downgraded recently on the back of lower commodity prices for their exports. We continue to pay close attention to the economic performance of Ecuador and to the political ramifications of the implementation of its IMF program. The current Ecuadorian administration seems to want to follow through with this program, but with basically 0 economic growth, the contractionary elements of the IMF prescriptions such as the elimination of fuel subsidies are encountering strong opposition from political groups.

Costa Rica is also in our closely monitoring category. In particular, we're following the impact of the fiscal reform package passed a few months ago. Costa Rica has a sizable fiscal deficit. Fiscal reforms, mostly an increase in value-added tax, took many years and several iterations to be finally approved. These were aimed at reducing the primary fiscal deficit, which would then lower financing rate that exacerbate the overall fiscal imbalance. When the package was passed, we spoke about the rating agency's skepticism on the magnitude and potential effectiveness of the reforms. It's too early to tell, and we have a long way to overcome a larger than 6% of GDP deficit, but September was the first month of primary fiscal surplus in years.

Argentina. What can I say? Have we seen this movie before? Disappointment over the primary election results, which gave the leftist populist candidate a significant lead going into the general election, resulted in a run on the currency and the reprofiling of some of the country's debt. Argentinians demanded U.S. dollars, preferably in physical notes, at a rate that was fast depleting the Central Bank's low available reserve levels. After some currency controls, interest rates north of 80% and a few planes with physical cash from the U.S., the Argentine government managed to temporarily control the situation. But with a debt-to-GDP ratio approaching 90%, very few available reserves and constant demand for hard currency, Argentina remains in critical condition.

We will not make predictions on the outcome of next week's general election or the economic policies that a Fernández-Fernández administration would pursue. What is clear to us is that the country will remain very reliant on the U.S. dollar income it can generate from its main export, commodities. Whomever wins the election, we will likely -- they will likely maintain open trade and trade-related currency lines and continue to promote the development of oil and natural gas-rich Vaca Muerta shale for the eventual export of hydrocarbons. As you'll hear from Ana Graciela, we have reduced our exposure to Argentina and are very comfortable with our book concentrated in strategic industries and U.S. dollar generators.

We continue to believe that the current macroeconomic context offers no room for complacency. Furthermore, the combination of low growth and risk aversion is exacerbating liquidity for the top names in the region, compressing their margins not always compensating for the risk these credits represent. Against this backdrop, we continue to analyze the risk/reward function at the country level to adjust the portfolio accordingly and maintain a very vigilant credit underwriting posture. As we mentioned in previous calls, 76 of our Commercial portfolio have less than 1 year of remaining life. Bladex is in a privileged position to dynamically adjust portfolio exposures. We see growth opportunities in Brazil, Central America and the Caribbean, Colombia, Peru, Paraguay and Chile. This balances out reduction in exposure to Argentina.

Bladex is all about consistency in a challenging and changing context. Our book of business is solid. We are identifying new prospects, we are increasing share of wallet with our existing client base and are structuring value-added transactions with key clients. Although our focus on high-quality borrower and persistent U.S. dollar liquidity in key markets put some pressure on our origination margin, Bladex has been able to maintain relatively stable margins. Our pipeline of syndicated and structured transactions tied to Latin American integration is also solid and should help us continue to increase the exposure we look for in our medium-term loan portfolio as well as increase our fee income. Deposits, particularly from our Class A shareholders, represent 62% of our funding structure. We appreciate the trust and commitment of the region's Central Bank and the impact that these deposits have in improving our cost of funds. On the cost side, expenses for the quarter continued to be under control.

As you'll hear from Ana Graciela, our credit impaired loans experienced a slight decrease from last quarter as well as a reduction in our watch list category. Our credit reserve coverage and Tier 1 capital ratio remains strong, and our book value remains solid, above $25 a share. That is why our Board of Directors approved to maintain a $0.385 a share dividend for the quarter. Against this backdrop, the management of Bladex as well as its Board of Directors is cautiously optimistic for the remainder of 2019 and look for a continuation of the profitability path we embarked on in the last 4 quarters.

With these brief comments, I will now turn the call over to our CFO, Ana Graciela, to provide you with more color about our financial performance in the third quarter 2019.

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Ana Graciela de Méndez, Banco Latinoamericano de Comercio Exterior, S.A - Executive VP of Finance & CFO [3]

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Thank you, Gabriel. Good morning. I will now go over the third quarter and year-to-date 2019 results into more detail, making reference to the presentation uploaded on our website.

So on Page 4, profit for the third quarter of 2019 totaled $20.4 million or $0.52 per share compared to a $40.7 million loss in the third quarter of 2018 when the bank recorded impairment losses on financial and nonfinancial instruments totaling $60 million mostly related to impaired credits. Third quarter 2019 profits were down 8% on a quarter-on-quarter basis on account of decreased structuring and syndication fees and lower net interest income. Profit for the first 9 months of 2019 totaled $64 million compared to a $9.6 million loss a year ago. During the first 9 months of 2019, the bank has maintained a relatively stable level of top line revenues, which increased by 2% with respect to the same period of 2018; improved efficiency with a 20% reduction in operating expenses, achieving a 31% efficiency ratio; and sustained high-quality portfolio origination evidenced by a substantial decrease of credit provisions, which totaled $2.4 million for the period.

On Page 5, net interest income for the third quarter of 2019 was down 2% year-on-year and 5% quarter-on-quarter on lower average loan portfolio balances, which decreased by 3% quarter-on-quarter and by 5% year-on-year to $5.3 billion. Lower average portfolio balances during the quarter reflect reduced exposure in Argentina, coupled with lower credit demand from certain countries in the Central America and Caribbean region, partly offset by increased high quality loan origination in countries like Chile and Colombia toward the end of the quarter. The quarter-on-quarter decrease in net interest income was also impacted by a 4 basis point decrease in net interest margin to 1.77% mostly related to the effect of decreasing LIBOR-based market rates on the bank's asset and liability interest rate gap position. For the first 9 months of 2019, the bank's net interest income increased by 1% year-on-year to $82.6 million, and the net interest margin increased by 3 basis points to 1.77%, mostly reflecting the benefits from an increasing market rate environment throughout most of the period compared to the year before.

Now moving on to Page 6. Fees and commissions totaled $2.8 million for the third quarter of 2019, representing a decrease of 25 -- I'm sorry, 24% year-on-year and a 45% quarter-on-quarter mainly on account of lower fees from closed transactions in the structuring and syndication business. Year-to-date fees from the business remains stable at close to $3 million, while total fees fell 13% to $10.3 million due to reduced revenues from letters of credit.

From Pages 7 through 9, we present the evolution and composition of our Commercial portfolio. At September 30, 2019, Commercial portfolio totaled $6.2 billion, representing a stable level quarter-on-quarter and a 1% decrease year-on-year. Total Commercial portfolio continued to be mostly short term with 76% maturing in the next 12 months and an average remaining tenor of close to 11 months.

More than half of the bank's short-term Commercial portfolio is specifically trade related. Financial institutions, sovereigns and quasi-sovereigns represented 71% of total Commercial portfolio as of September 30, 2019. Aside from financial institutions, the largest industry exposure accounting for 55% of the total, the other relevant industry sector in our portfolio is oil and gas, both integrated and downstream, with a combined total of 12% of total Commercial portfolio. The remaining exposure is well diversified among several industries with no sector exceeding 5%.

Brazil, Mexico, Colombia and Chile represented the highest country exposures, together totaling 55% of total Commercial portfolio. While Brazil and Mexico remained relatively stable at 17% and 14%, respectively, we were able to increase our portfolio in Colombia to 13% and Chile to 11% on our continuous effort to optimize risk/reward opportunities in high-quality countries. Exposure in Argentina was reduced to 4% of the total portfolio as we continue to execute on our plan to reduce the exposure in the country in view of the macroeconomic, political and foreign exchange rate volatility. 84% of our exposure in the country is with exporting, state-owned and private corporations with U.S. dollar generation capacity. The remaining 16% is with banks. Central America and the Caribbean remain a relevant regional exposure to the bank at 26% of the total, mostly focused in top-tier banks, sovereigns and quasi-sovereigns, accounting for 65% of the exposure in that region. The remaining 35% is with top-tier private local corporations, which are leaders in their respective industries and with regional players or multilatina.

On Page 10, credit impaired loans, or NPLs, totaled $61.8 million, down $2.9 million from the previous quarter related to the sale of an exposure that was 100% reserved. In this transaction, the bank collected $0.5 million, and the remaining $2.4 million were written off against existing reserves. At September 30, 2019, NPLs represented 1.11% of total loans with a reserve coverage of 1.7x and accounted for a single client exposure in Brazil with an IFRS 9 Stage 3 individually allocated allowance of 88%, reflecting a book value of around $8 million.

Stage 2 exposure decreased by $55 million during the quarter mostly due to repayments of scheduled maturities on our watch list portfolio. Credit reserves allocated to these Stage 2 exposure increased by $3 million impacted by downgrades on internal client ratings. All of the exposure in this category remains current. Origination in our Stage 1 portfolio increased by $66 million, while the related credit reserves decreased by $2 million, reflecting improved quality on the increased portfolio origination in countries like Chile and Colombia. This Stage 1 exposure, which relates to the performing portfolio with credit conditions unchanged since origination, continued to be the most relevant with 95% of total exposure at quarter end.

On Page 11, third quarter 2019 expenses amounted to $9 million, representing a decrease of 17% year-on-year and of 15% quarter-on-quarter. During this third quarter, we recorded an expense level somewhat below the run rate of expenses recorded in recent quarters, which should partially revert in coming quarters. Nonetheless, the bank's sustained effort and focus on expense control and process improvement has been effective, evidenced by the decrease in trading expenses and efficiency levels below 31%, both on a quarterly and on a year-to-date basis. For the first 9 months of 2019, expenses were down 20% from the year before, totaling $29.4 million. This reduction mostly relates to lower salary base and other employee-related expenses resulting from the personnel restructuring process in the first half of 2018. Reductions in other expenses partly relate to the adoption of IFRS 16 during 2019 whereby the bank's office space lease expenses are now accounted for as depreciation and interest expense. Other expenses were also reduced on the absence of extraordinary charges recorded in 2018 as well as other cost savings across the organization.

On Page 12, we present our capital returns with a positive trend in ROE reaching 8% for the quarter and 8.5% year-to-date on a sustained level of capitalization above 21% at quarter end. Total shareholder return was supported, like Gabi mentioned, by the quarterly dividend payment announced today, which the Board kept at $0.385 per share, representing a 75% payout ratio over quarterly earnings.

I will now turn the call back to Gabriel to open the Q&A session. Thank you.

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [4]

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Thank you, Ana Graciela. Chantelle, why don't we open up the Q&A session? Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Robert Tate, Global Rational Capital.

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Robert Tate, Global Rational Capital Management Ltd. - Founder & Investment Coordinator [2]

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I was just wondering if you could just elaborate on what factors you think may lead to an improvement in the net interest spread over time.

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [3]

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Yes. Thank you, Robert, for the question. What we see from -- and I'm going to go approach this from a top-down perspective -- is a very challenging global and regional environment in which we have to be very diligent and careful with respect to our credit underwriting. And we are in a happy position to be able to maintain our credit spreads where they are. We are looking for value-added transactions with key customers. And that is essentially what should be able to make us sustain those credit spreads on a go-forward basis. We are identifying some opportunities, as we mentioned, in the Andean region, in Chile, in Colombia, in Peru. And I think that we are about to see more opportunities, particularly in Brazil. It's very difficult as of yet to determine the potential there, but we see very good signs starting with the fact that they are opening up their economy with an aggressive privatization program.

And very importantly as it relates to the impact on overall credit demand is the fact that this administration is not keen on maintaining the subsidy that previous administrations had with respect to the involvement of national development banks in lending to industry as a whole. So as we see the privatization program progressing, we should see credit demand go up. And if the private sector is the one that needs to fulfill this credit demand, that should be a good sign in terms of margin improvement, particularly given that short-term rates in Brazil have come down to a very low historical levels. The Selic rate right now is about 5.5%, and we believe that, that should stimulate credit demand growth. And we could see a pickup in margins as the private sector banks start fulfilling that demand for credit.

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Robert Tate, Global Rational Capital Management Ltd. - Founder & Investment Coordinator [4]

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Right. And just noting that your Tier 1 Basel III capital ratio is quite high at 21%, do you see the opportunity to make use of more leverage over time? And you mentioned that you're optimistic for the business over the remainder of 2019. Do you think that a return on equity of closer to 10% is achievable in, say, the next 12 months in light of your optimism?

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [5]

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12% continues to be our goal on a long-term basis, but we will grow exposure, portfolio, leverage on what we consider to be a prudent and solid credit underwriting strategy. And as such, we will approach it opportunity-by-opportunity. And as you've well known, we don't give projections on how our different ratios will evolve over time. But we are very happy with our portfolio. We're very happy with our capacity to maintain relatively stable margins, and we continue to find good opportunities to deploy our capital. If it's okay, we should open it up for more questions if there are any.

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Operator [6]

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(Operator Instructions) Our next question will come from Robert Maltbie, Singular Research.

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Robert Michael Maltbie, Singular Research, LLC - MD & President [7]

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Gabriel, I'm here for Jim Marrone today. I wanted to ask you a little bit about the impact of the rate cuts in the U.S., the short-term Fed funds, et cetera, and the trends there and how you see that impacting your forward margins.

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [8]

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Thank you, Robert. That is a very good question, and let me start with saying that, of course, lower U.S. dollar interest rate will have an impact on our margins. That said, we believe that we will be able to maintain our margins with incremental origination exposure on a go-forward basis and be able to counteract that. Now for a more granular perspective, let me turn it over to Ana Graciela to answer.

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Ana Graciela de Méndez, Banco Latinoamericano de Comercio Exterior, S.A - Executive VP of Finance & CFO [9]

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Thank you, Gabriel. Robert, yes, as we have mentioned before, with respect to our interest rate gap position, like I mentioned in this particular quarter, we were negatively impacted because of the decreasing rate environment, but that should correct because we are usually able to -- I mean we have a very short tenor both in our asset and liability side. So with respect to the repricing, we don't see a continuous deterioration there. On the contrary, we should benefit from also lowering rates on our funding side, which eventually -- what happened in this particular quarter is that because of the way we were positioned, our lending book repriced a little quicker, but that should correct itself in the coming quarter. So with that perspective, we -- in the overall even in increasing or decreasing rate environment, the bank is able to reprice its assets and liabilities within a short period of time. And yes, I mean, the lower rates at the end of the day with the high capital balance that we have, obviously, has an impact on the return of that capital invested in our assets.

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Robert Michael Maltbie, Singular Research, LLC - MD & President [10]

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A follow-up question on operating expenses. It looks like you've done a very good job reducing your operating expenses. And I'm wondering in terms of that trend over the next 12 months, do you see that ability to continue or remain about even or just a little bit of color around -- on that.

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Ana Graciela de Méndez, Banco Latinoamericano de Comercio Exterior, S.A - Executive VP of Finance & CFO [11]

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Well, as Gabi mentioned, we don't necessarily give prospects of our figures. Going forward, what I can tell you is we are seeing the average trend in the recent quarters at about $10 million, $10.2 million, $10.5 million. And that is what we call today the run rate of expenses, understanding that during the fourth quarter we may see some cyclical impacts on expenses. But if you see the year overall, we should be around $10.5 million in quarterly expenses on average.

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Operator [12]

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(Operator Instructions) At this time, we have no further questions in the queue. So I'd like to turn the conference back over to management for any final remarks.

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Natalio Gabriel Tolchinsky, Banco Latinoamericano de Comercio Exterior, S.A - CEO [13]

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Thank you very much, Chantelle, and thank you, everyone, for joining us today. We look forward to talking to you guys again when we issue results for the fourth quarter and the full year 2019. In the meantime, for any questions, we always remain open and available. Thank you very much, and have a good day.

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Ana Graciela de Méndez, Banco Latinoamericano de Comercio Exterior, S.A - Executive VP of Finance & CFO [14]

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Good day. Thank you.

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Operator [15]

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Thank you very much. Ladies and gentlemen, at this time, this now concludes today's conference. You may disconnect your phone lines, and have a great rest of week. Thank you.