Banco Latinoamericano de Comercio Exterior SA Bladex (BLX) Q1 2020 earnings call dated Apr. 15, 2020
Corporate Participants:
Jorge L. Salas Taurel — Executive President
Ana Graciela de Mendez — Executive Vice President of Finance
Alejandro Tizzoni — Executive Vice President of Comprehensive Risk Management
Analysts:
Jim Marrone — Singular Research — Analyst
Solomon Peter — — Analyst
Patrick Brennan — — Analyst
Kerry — HSBC — Analyst
Unidentified Participant — Analyst
Rob Tate — Global Rational Capital — Analyst
Presentation:
Operator
Hello, everyone, and welcome to Bladex’s First Quarter 2020 Conference Call on this 15th day of April 2020. This call is being recorded and is for investors and analysts only. If you are a member of the media, you are invited to listen-only. Bladex has prepared a PowerPoint presentation to accompany their discussion. It is available through the webcast and on the Bank’s corporate website at www.bladex.com.
Joining us today are Mr. Jorge Salas, Chief Executive Officer; and Ms. Ana Graciela de Mendez, Chief Financial Officer. Their comments will be based on the earnings release, which was issued earlier today and is available on the corporate website. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934.
In these communications, we may make certain statements that are forward-looking, such as statements regarding Bladex’s future results, plans and anticipated trends in the markets affecting these results and financial conditions. 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 of knowledge.
Various risks, uncertainties and assumptions are detailed in the Bank’s press release and the 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 vary — may differ significantly from results expressed or implied in these communications.
And with that, I am pleased to turn the conference over to Mr. Salas for his presentation. Please go ahead.
Jorge L. Salas Taurel — Executive President
Thank you, Stephanie. Good morning, everyone. Thank you for joining us today to discuss our first quarter 2020 results and how we are navigating the current and clearly extraordinary economic environment. On the call with me today are our Chief Financial Officer, Ana Mendez, as well as our Chief Risk Officer, Alex Tizzoni.
As many of you know, I started working in Bladex this year on Monday, March 9 as CEO. Two days later, Wednesday the 11th, the World Health Organization declared the rapidly expanding coronavirus as a global pandemic. The next day, Thursday, the 12th, the Bank successfully activated its business continuity plan. Since then, all of our staff, a total of 177 employees, have been operating remotely from their homes in six different countries, and the Bank’s day-to-day operations have been running smoothly without interruption.
As of today, I’m very happy to report we have no cases of COVID-19 in our workforce. Furthermore, the team is working with enduring commitment, sharp focus and an amazing collaborate spirit across the whole organization. I have to say, I’m honored and also grateful to lead an organization that can adapt so fast to such extreme circumstances. I want to thank our employees and our Board of Directors who have made this possible.
Those of you who know Bladex know that our strength and adaptability are built in and have been so for a very long time. These qualities are vitally important today as the world is confronted with a crisis like no other. Before we talk about business, I want to take a moment to note that this pandemic is having more than an economic impact. It is taking a worldwide human toll and thousands of lives lost. Our deepest sympathies and prayers are with all of those affected. Before COVID-19, we were expecting a slight recovery in Latin America’s GDP. It is clear today that that is not going to happen.
Experts are estimating an average GDP contraction for the region that ranges from negative 3% to negative 6%. Obviously, the magnitude of the shock for each country will depend on the length of the shutdowns, the structure and the shape of the economy, and the extent of the government’s assistance programs and the potential access to multilateral aid.
Against this complex and uncertain reality, I want to cover two main topics today. One, a high level overview of our first quarter results, and why our — clear demonstration of our unique strengths and adaptability in these difficult circumstances. Secondly, the dividend decision made by our Board and how it reflects our commitment to maintaining a solid capital base. Then I will turn the call over to Annie where she can discuss our first quarter financial results in more detail. After Annie’s presentation and my closing remarks, we will open it up for questions.
So let’s start with the highlights of the results. I’ve heard some express the sentiment that historic results are less important right now given the uncertainty we are all experiencing. I have a different view. The health and fitness of a patient usually determines both the severity and the symptoms and the speed at which they recover. Bladex is a fit and healthy patient. Our results for Q1 2020 show a well capitalized, highly liquid bank with a strong balance sheet, industry-leading efficiency metrics, very healthy portfolio, and perhaps more importantly, the ability to adapt to the rapidly changing circumstances.
So starting with our balance sheet. By March 31st, our cash position was $1.3 billion, equivalent to 19% of total assets, up from 16% at the end of 2019, and well in excess of Basel III liquidity ratios. As soon as COVID-19 storm started, Bladex was able to significantly increase liquidity, actually in a matter of weeks, thanks to its historically diversified and stable funding sources that include many long-lasting relationships with correspondent banks across the globe as well as deposits from central banks across the region, who are also our Class A shareholders.
On the assets side, the Bank has maintained the high quality portfolio with a country mix that, thanks to the strategies implemented during the last several quarters, is weighted toward lower risk countries, quasi-sovereign corporations, and perhaps more importantly, top tier banks across the region that account for 55% of our total exposure at quarter. Our capital was over $1 billion in equity quarter end, which translates into a Basel III Tier 1 ratio of 22%.
Moving on to our P&L, our net income for the quarter was in excess $18 million, which is 14% lower than Q1 2019. These profits resulted in an average ROE of 7% and average return on assets of 1.1%. This decline mostly resulted from lower net interest revenues as market rates decreased and from lower structuring fees. It’s worth mentioning that the operating expenses remained on track for the quarter contributing to our resilient efficiency.
I’m going to leave my general comments here. Annie will share more details about our results and we can talk more about them in the Q&A session.
Now let me talk about our dividend. In the view of the Bank’s strongest balance sheet, together with our demonstrated capacity to generate capital through earnings, the Board decided to continue to distribute dividends. However, now that capital preservation is a top priority, the Board agreed to reduce the first interim dividend to $0.25 per share, which equates to a payout ratio of 54% on our first quarter earnings. Because of the volatile nature of the region in which we operate, the Bank has historically maintained solid levels of capitalization, which in this context, become a unique strength enabling us to serve our clients’ needs in difficult times like this one.
I will now pass on the call over to Annie, and after she finishes, I will make additional remarks before we open it up for questions. Annie?
Ana Graciela de Mendez — Executive Vice President of Finance
Thank you, Jorge, and good morning to all. I will now go through the results for the first quarter of 2020 into more detail, making reference to the presentation uploaded on our website. So let’s start with slide number 3, on our current financial position. Given today’s uncertainty in global markets, I want to emphasize Jorge’s comments about the strength of our balance sheet.
Our solid liquidity position of $1.3 billion or 19% of total assets at quarter end is mostly placed with the Federal Reserve Bank of New York and is the result of the Bank’s top priority in response to the situation created by this global pandemic, which is to ensure a robust liquidity pool. Liability deposits accounted for 47% of average funding sources during the first quarter of 2020. Class A shareholders, represented by Latin American central banks, continued to maintain a relevant participation in the Bank’s funding base of about one-half of total deposits.
Although quarter-end deposit balances decreased by 15% compared to the end of 2019, average balances for the quarter have remained within normal ranges and the deposit base has continued to evolve quite favorably during the first two weeks of April, now at similar levels of quarter and year-ago.
The rest of the Bank’s funding sources are short-term facilities, which on average represented 25% of the total for the quarter and which increased by 5% at the end of the quarter compared to December 2019 end-of-period balance. The remaining 28% of average funding came from medium-term facilities and debt capital market issuances. We have a fluent dialogue with the major depositors and funding providers, both global and regional financial institutions and investors from different geographies and markets who have widely reaffirmed their commitment to the Bank as a strategic business partner even in this stressed financial environment.
A second pillar of the Bank’s solid financial position is our strong capitalization, having recorded over $1 billion in equity at quarter end, which consists entirely of issued and fully paid ordinary common stock. Our 22% Tier 1 ratio and 7 times leverage of assets to equity represent conservative levels way in excess of regulatory requirements and Basel III guidelines.
In addition, and also significant, the Bank maintains its high quality portfolio profile with a country mix that continues to weigh more on lower risk countries, as exposure to investment grade countries accounted for 55% of the total and with a concentration in lending predominantly to top tier financial institutions and quasi-sovereign corporations with a combined total of 70% of total exposure at quarter end, and which constitutes the Bank’s traditional and long-standing client business relationships and represents key systemic players in each of their markets.
The remaining exposure is mostly placed with top-tier private local corporations across the region, which are leaders in their respective industries and with regional players or multi-Latinas. In this environment, we are serving our strategic customer base focusing on client segments and industries that are better suited to face the challenges posed by the current crisis.
Now moving on to Slide 4 on our P&L results, net income for the quarter totaled $18 million or $0.46 per share, down 17% from the previous quarter and down 14% from a year ago. This decline mostly resulted from lower net interest revenue as market rates continued to decrease and from lower structuring fees related to the uneven nature of fee generation for this business on a quarterly basis.
On the other hand, there was virtually no impact from credit provisions recorded as impairment loss on financial instruments, and operating expenses remained adequate at stable run rate level. I will go into more detail on quarterly results later in this presentation. But now, I will refer to Slides 5 and 6, which provide details on the evolution and composition of our commercial portfolio, which includes loans and off-balance sheet exposures, such as letters of credit and guarantees.
Average commercial portfolio during the first quarter 2020 remained stable with respect to the previous quarter at $6.2 billion and experienced a 10% decline in end-of-period balances to $5.8 billion, mainly due to strict credit underwriting parameters that we activated in March when the COVID-19 crisis rapidly intensified. We believe the Bank is defensively positioned to face this crisis, on the account of its sound portfolio quality, in view of the substantial impact of COVID-19 on Latin American economies.
After the commodity prices from 2014 through 2016, the Bank shifted its origination strategies and adjusted its underwriting policies to reduce exposures to commodity-related risks and increased the participation of regulated top tier financial institutions throughout the region. At quarter end, exposure to these top tier financial institutions represented 55% of total portfolio. Under this COVID-19 scenario, we consider these financial institutions, which are the most relevant and key players in each of their markets among the most defensive sectors with better tools to mitigate the impact of the crisis.
In the past several quarters, the Bank has also adjusted its country exposure, focusing origination towards investment grade countries in Latin America and non-LATAM OECD countries, the latter related to transactions carried out in Latin America, mostly with multinationals operating in the region. We believe that these countries should be better positioned in the current global context. With short-term nature of our portfolio with 69% maturing in the next 12 months, coupled with the quality of our clients, play to our advantage in managing our portfolio exposure with a focus on maintaining credit soundness under strict and prudent credit underwriting standards.
Under COVID-19, we have implemented a continuous review process of our entire portfolio on a name-by-name basis. We have classified sectors in risk categories with those included at high risk representing close to 12% of our portfolio at quarter end. Sectors in this high-risk category include airline, oil and gas upstream and supply chain, sugar, and this includes our NPL exposure already 89% reserved, retail and auto industry. None of these sectors represent more than 2.5% of total portfolio. Furthermore, most of these exposures are with relevant players in their respective markets and/or with sovereign and quasi-sovereign institutions with a track record of no default even in previous crisis that could have adversely impacted them.
We have also classified country risk exposures identifying two countries at high risk, mainly Argentina and Ecuador. We have been reducing our exposure in both of these countries for the last several quarters. At the end of March 2020, the exposure in Ecuador was $355 million or 6% of total portfolio, down 17% quarter-on-quarter; 62% of the total is off-balance sheet exposure related to letters of credit confirmations on the import of refined oil products, with a track record of more than 20 years without any default even during sovereign international default given the strategic nature of these oil imports for the country.
In the case of Argentina, the exposure was $195 million at quarter end or 3% of total portfolio, down 14% quarter-on-quarter and down 66% from a year ago, as the Bank decided to reduce exposure in Argentina, since the beginning of 2019. Most of the country’s exposure is with the largest state-owned integrated oil company with interest in energy generation and a history of non-default even under sovereign default in the past.
On to Slide 7, credit impaired loans or NPLs remained stable at $62 million at March 31st, 2020, and accounted for a single client exposure in Brazil, still under a complex and prolonged restructuring process. This exposure has an individually allocated credit loss allowance of 89%, reflecting a book value of around $8 million. NPLs represented 1% of total loans with an overall reserve coverage of 1.7 times.
The remaining 99% of the loan portfolio remains current. The Bank’s total allowance for credit losses were relatively unchanged with respect to December 31, 2019 balances, having recorded virtually no impact to credit provisions for the first quarter of 2020. This was the result of lower reserve requirements on decreased end-of-period credit portfolio balances offset by increased Stage 2 exposure that is exposure which has deteriorated sales origination as the Bank made a downward revision in the outlook for certain industries impacted by the current environment, which I commented on before.
Net interest income, presented on Slide 8, decreased to $25.8 million for the quarter, on the account of a 6 basis point decrease in net interest margin to 1.59%, as market rates continued to decline impacting the overall yield of assets financed by our ample capital base. This was offset by lower cost of funds also on lower market rates and by stable levels of average loan portfolio balances and on net lending spreads and net interest spreads during the quarter.
Continuing on to Slide 9, operating expenses for the first quarter of 2020 decreased by 6% quarter-on-quarter to $10.5 million on the account of the typical first quarter seasonal effect. Year-on-year, expenses increased by 7% on higher personnel-related costs, mainly associated to the CEO transition, and to increase salary base on employee vacancies in 2019 that were filled towards year-end. Efficiency stood at 37% for the quarter, up from 36% a quarter ago and 31% a year ago, mainly on lower revenues.
With this, I will now turn the call back to Jorge. Thank you.
Jorge L. Salas Taurel — Executive President
Thanks, Annie. As you can see at the heart of Bladex results lies its ability to adapt to rapidly changing circumstances. On the assets side, the short-term nature of our facilities coupled with our geographic diversification and the unique access to blue-chip clients, gave us the ability to rearrange the portfolio, as we did throughout 2019.
On the liabilities side, our diversified and stable funding sources have enabled us to increase our liquidity significantly in a matter of weeks. Similarly, our strong capital gave us the ability to pay out 50% of our net income in dividends and still maintain a solid capital base.
In summary, starting with the seamless activation of our business continuity plan, Bladex has clearly used its levers to take early action to navigate the COVID-19 storm. We recognize the uncertainty created by the COVID-19 storm. We know it will have an impact in Latin America and in our portfolio in the months to come.
Having said that, Bladex is not only in very good shape to face this storm, but has gone through many storms over its 40 years history in the region and we are determined to emerge from this one, and continue serving our clients.
That’s all I have to say for now. Operator, please open the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first questioner.
Jim Marrone — Singular Research — Analyst
Yes, good morning. My name is Jim Marrone with Singular Research. And I guess my first question is in regards to the shift to the cash position. So I believe it’s very strategic. It’s a wise move. But can you give us an idea going forward on what the position is going to be?
Is it going to take a defensive stance as far as just ensuring that there is liquidity or could there be an opportunistic position with regards to lower asset values in the marketplace that you could take advantage of or increasing the loan portfolio? Can you give us a sense of what the capital position is going to be going forward? Thank you.
Jorge L. Salas Taurel — Executive President
Thank you for your question. The short answer is that as long as there is uncertainty, we will have excess liquidity to sustain the Bank’s resiliency in an environment like this one. As soon as we have a gradual opening of the economies and the progress if we are opening up the debt capital markets, then we will rethink our liquidity management approach. But in the meantime, the Bank’s priority is to ensure that it maintains a robust liquidity pool. I don’t know, Annie, if you want to, or Alex, if you want to comment on that too.
Ana Graciela de Mendez — Executive Vice President of Finance
Yes, I can add that, of course, we will continue to monitor the evolution of financial and debt capital markets and the expected behavior and availability of different funding sources as well as our expected payment capabilities of our clients and then we will, as Jorge said, we will be watching closely how all these factors behave going forward and act accordingly.
Operator
Thank you. [Operator Instructions]. Your next questioner.
Solomon Peter — — Analyst
Good morning, my name is Solomon Peter [Phonetic]. My question is on the payment of dividends. What would be the — can you repeat what would be the cost, the cut and is the number quarterly or yearly please? Thank you.
Jorge L. Salas Taurel — Executive President
Yes, so the dividend for the quarter is $0.25 a share, which is a 35% decline for the quarter.
Solomon Peter — — Analyst
Thank you. Do you know until when you will keep this policy or it all depends on the influx of cash?
Jorge L. Salas Taurel — Executive President
So, good question. I prefer not to speculate on future dividends at this point, not only because the dividend policy is up to the Board, but also because it’s a decision that is made every quarter and it’s still very early in the storm to think on how Q2 and Q3 are going to behave. I would say though that we have a historically high capital ratio and that responds to a historically volatile region in which we operate, and I don’t see that changing in the future.
Solomon Peter — — Analyst
Thank you very much.
Operator
Thank you. Our next questioner. Rodrigo, your line is live. Rodrigo, are you on the line?
Patrick Brennan — — Analyst
Hi, this is Patrick Brennan [Phonetic], and I had a couple of questions. One, can you just comment specifically on some of the jurisdictions where you sort of had — that are higher commercial portfolio exposure, for instance, in Chile, in Colombia, what you just sort of seeing on the ground and then maybe comment on a couple of your larger countries in sort of Mexico and in Brazil, what you sort of see both on the ground in terms of just opportunities, to provide credit in this current environment. Thanks.
Jorge L. Salas Taurel — Executive President
Yes, sure. I’m going to let our Chief Risk Officer answer this call. There is information though on Slide 6 of our presentation, and you can see there that 55% of our exposure today is in investment, great countries including Colombia and Brazil, but I’m going to let Alex shed some more light on what we’re seeing in the ground there.
Alejandro Tizzoni — Executive Vice President of Comprehensive Risk Management
Yeah, good morning. Well talking about Colombia, I will say that most of our exposure is with financial institution — top tier financial institutions. So, as Annie mentioned before, I think we believe under this scenario with the projections of the GDP contraction in Latin America of 5.2% from IMF, we believe we are in a defensive sector — one of the most defensive sectors. And I think this exposure is resilient under this scenario, the same thing happens in Chile. Clearly, our main exposure is also in financial institutions.
We also have exposures in other sectors with quasi-sovereign risk and also we have a minor exposure in airlines industry. We believe in that case that we are — we have exposure in the top companies in the industry that they’re going to start this storm in a better way, they have liquidity buffers right now to manage this lockdown of their airline industry. So I will say that actually, yeah, we are concerned, there is a lot of uncertainty around. We don’t know right now the length of the COVID-19 knockdown in the economies and the impact that as we — I will reinforce the message from Annie that 55% of our exposure globally and in the main economies because in Brazil it’s the same situation, 80% of our exposure is in financial institutions — the top tier financial institutions. And as you may be seeing in those countries, central banks, okay.
They are actually right now implemented measures to have the financial systems and to compensate the impact of COVID-19 in the local economy. So in my point of view, in general, those countries, well I didn’t mention nothing about Mexico, but Mexico, as you may be seeing in the figures, we reduced our exposure almost over 30%, we reduced exposure mainly at the quasi-sovereign level entities, we narrowed down the scope. We decided several quarters ago to reduce the tenure of our portfolio of less than one year.
So, actually we have a maturity or a tenure of our portfolio Mexico mostly within a year. So we are very well diversified in defensive industries in Mexico. We also have exposure in local currency and match it with a local funding. So that’s defensible under this scenario of devaluation of the currency.
So in general, I think, you can see in that 55% of our exposure is in financial institutions, the rest is with quasi-sovereign strategic companies with a very important footprint in the local economy, and the rest are mostly multinational multi-Latinas corporations. I think we are on the top of the pyramid under this type of scenario. So I think, as Annie mentioned before, my final message is, we are mostly in defensive sectors all across the region.
Jorge L. Salas Taurel — Executive President
Just one more comment on that. Having said that we are in defensive sectors, we have seen though an increase in rates, we are between 300 basis points and 400 basis points even with the top-tier companies in some of the best countries in the region.
Operator
Thank you. Our next questioner.
Kerry — HSBC — Analyst
Hi. This is Kerry [Phonetic] from HSBC. I wanted to understand a little bit better what is driving the decrease in the yields on interest earning assets and also how you are being able to fund at a lower cost as you see here, as cost of interest bearing liabilities has also increased in the first quarter. Thanks.
Jorge L. Salas Taurel — Executive President
Sure. I had some trouble hearing the question. Can you repeat? Can you talk a bit louder please? I am sorry.
Kerry — HSBC — Analyst
Okay. The first part of the question is, trying to understand why the yield on interest earning assets has decreased between the fourth quarter and the first quarter of this year and also understand how the funding costs have also increased over the same time period. Thank you.
Jorge L. Salas Taurel — Executive President
Annie, you want to comment on that?
Ana Graciela de Mendez — Executive Vice President of Finance
Sure. If I understood correctly, you wanted to understand the trends in asset yields and funding costs. So our balance sheet on both sides of our balance sheet, our assets and liabilities are priced based on LIBOR market rates. So any impact, and this is what we actually experienced in the last quarter and several quarters as a matter of fact, of lowering interest rates will have a similar impact on our assets and our liabilities.
The repricing occurs within a very narrow interest rate gap. And so, and that’s why this repricing occurs simultaneously and the net impact in net interest spreads, which are the difference in rates of assets and liabilities have kept nearly stable over the past quarter reflecting precisely that these repricings occur quite simultaneously. And like I mentioned, the reason why net interest margin decreased quarter-over-quarter is because obviously as lower yields both on our assets and liabilities occur, there is a portion of assets that it is financed by our ample equity base. And so as asset yields go down, that decrease, it goes right to the bottom line. I don’t know if I answered your question.
Kerry — HSBC — Analyst
Yes. And have the spreads of the LIBOR then maintained or have they — have those increased a little bit, because we know that [Speech Overlap]
Ana Graciela de Mendez — Executive Vice President of Finance
What we have seen actually is pretty stable overall average spreads, both on our assets and our funding. Of course, as Jorge mentioned, we are seeing some repricing also on both sides, as you know, I mean, international markets overall have overall as the cost of money has increased overall and we obviously have been impacted by that on our funding side, but of course, that is also being deployed into our asset pricing right now.
Kerry — HSBC — Analyst
Okay, thank you.
Ana Graciela de Mendez — Executive Vice President of Finance
You’re welcome.
Operator
Thank you. Our next questioner.
Unidentified Participant — Analyst
Good morning. My question is [Technical Issues] before. Have you looked at the long-term effect on the reduced yield on the loans, since majority of your loans are long-term loans, you can have more or less an effect on the yield, how it’s going to affect?
Ana Graciela de Mendez — Executive Vice President of Finance
Jorge, if you want, I can —
Jorge L. Salas Taurel — Executive President
Sure. Go ahead.
Ana Graciela de Mendez — Executive Vice President of Finance
Again, well, first of all, you mentioned that our asset duration is long term and it’s not. I mean, we actually have a duration of about less than a year, so — but independent of that, again, the repricing, we have our loans and liabilities are based on floating rate, LIBOR based. And so you could have lower yield and lower net interest income on obviously on lower rates, precisely because of the portion of the assets that is financed by our equity. So if we have $1 billion in equity that’s financing our LIBOR assets. If you reduce 50 basis points in LIBOR-based rates and the asset yields are reduced by 50 basis points, that represents about $5 million —
Unidentified Participant — Analyst
Nothing happens —
Ana Graciela de Mendez — Executive Vice President of Finance
I’m sorry?
Unidentified Participant — Analyst
If you get a lower LIBOR rate and your spreads I think the same, then your yield is going to be the same, because you reduce from both sides.
Ana Graciela de Mendez — Executive Vice President of Finance
Right. But except for that portion that is financed by equity, which doesn’t have a financial cost. It doesn’t have interest cost. So there is a small portion that will be impacted. But you’re right, the repricing on both sides, again, it’s going to be quite simultaneously. The net interest spread, everything else being equal, should keep stable.
Unidentified Participant — Analyst
Okay, so you’re basically only expecting to get a hit if there is any type of default by any of your customers?
Ana Graciela de Mendez — Executive Vice President of Finance
Well, right now —
Jorge L. Salas Taurel — Executive President
I think the short answer is yes. And I think there is more just to give a little bit more context in Slide 8 of the presentation, in the top right, you can see the net interest spread maintain between 1.15%, 1.17% throughout the year and you can have an idea of how short-term our loans are, $3 billion we originated in the first quarter and we had $3.5 billion loans maturing in that same quarter.
Ana Graciela de Mendez — Executive Vice President of Finance
He then asked about potential losses. What I can tell you there is the estimation of expected losses is already incorporated in our quarterly results as of today, and we cannot speculate on that going forward.
Unidentified Participant — Analyst
Okay, thank you very much.
Operator
Thank you. [Operator Instructions] We do have a question submitted via the webinar. To what extent, if at all, do you expect benefit in spread widening in the credit portfolio? Are there early indications that risk is being repriced? Have competitors reduced exposure to trade finance in the region?
Jorge L. Salas Taurel — Executive President
I will take the latter part of the question. As I said before, we do see repricing in the region significantly, 300 basis points, 400 basis points even in the top-tier countries, even with the top-tier clients in those countries. I don’t know Alex or Annie, if you want to comment a little more on that.
Ana Graciela de Mendez — Executive Vice President of Finance
No, I think, maybe I’ll address the first part of your question, that had to do with widening spreads, like I just mentioned, we are seeing some of that already. And so it’s hard to tell the end result right now because obviously like I also said, we are also experiencing some repricing in our funding. But overall, we should have a net positive effect on the repricing, but I’m going to leave it there.
Operator
Thank you. We will move back to our audio questioners, questioner?
Rob Tate — Global Rational Capital — Analyst
Hi there, this is Rob Tate speaking from Global Rational Capital. Hi Jorge, Alex and Annie. Thank you for your comments, very useful. I just have a few questions. The first question is on the portfolio exposure and I was just wondering why has the percentage of the portfolio exposure to oil and gas and airlines increased and perhaps this is a question for Alex, the Chief Risk Officer, on that point, what makes you comfortable with these exposures not requiring increased provisions, and can you give more detail on where — on the nature of these exposures and where they are and how you’re managing the risk in these hard hit industries?
Alejandro Tizzoni — Executive Vice President of Comprehensive Risk Management
All right, thank you for your question. Well, where we increased exposure in oil and gas is basically in downstream okay, with quasi-sovereign rates that we have a long-lasting relationship and you know these are short-term tenor transactions, usually vendor finance where they buy refined products abroad. So actually, this is something that we are doing business not necessarily this time that there is sometimes at the end of the period you don’t have the balance sheet, but this is very short-term tenure with quasi-sovereign risk in Peru, Chile, Uruguay. So we believe those countries right now under this COVID-19 as an area are better prepared and they have the support from the sovereign level, proven track record. So I’m not worried about the kind of transactions we’re doing there. So that’s my answer this morning for oil and gas where we actually increased.
And the other thing is, yeah, we also increased in upstream, okay. We have an exposure 2%. If you compare with the beginning of the last year in the first quarter of 2019. So we used to have a company that was integrated in the industry, they used to have a refinery and they shut it down. They did a liability management and we support them. We have a long-lasting relationship. They have the support from the sovereign level and in other prices you know the Latin America has been in with commodity prices in the period 2014, ’16. So in the past, we in a way experienced this kind of a scenario with prices of oil at $20.
So actually, we have the experience and we believe the link between sovereign in that case, I think it’s mainly focused in Trinidad & Tobago, the link between the sovereign and the company is 100%. So we believe in that case, we are well covered and the foreign support, the sovereign support will stay there I think depend. And you also talked about airlines. So we only approach this industry airlines very carefully. It’s a very conservative approach. We know this is a very volatile industry. So we only have exposure with two companies that we believe they are going to survive this scenario and well looking to their figures, what they have been doing right now, they’re saving cost, variable cost, they are in a way extending the tenure of their leasings and they have liquidity buffer that in my point of view gives the chance to survive under distress scenario for more than a year.
And we have the relationship with them, a long lasting relationship, not only in the asset side but also in the liability side. So, actually we are pretty confident even though we know that we are under uncertainties — major uncertainties in this scenario on the length of the COVID-19 impact and the closedown or the lockdown quarantine in different economy, we are pretty comfortable with the kind of risk that we have in this industry, now we’re talking about top-tier companies that are better shaped to weather this storm.
Rob Tate — Global Rational Capital — Analyst
Great, thank you Alex. That’s very useful. My second question is in regard to the interest rates generally. And I think this maybe a question for Annie, is just the — since the rates — market rates declined in the last month of the first quarter in March and assuming rates remain low, would you expect the net interest income and margins to decline further in the second quarter given that the second quarter will have the full effect of the lower interest rates for the full quarter not just one month?
Ana Graciela de Mendez — Executive Vice President of Finance
Thank you, Robert. Well, like I just mentioned, there is several factors impacting our margin. But you’re right, as rates continue to decline, we’re probably going to continue to see the repricing of these LIBOR-based assets and liabilities. But at the same time, I also mentioned that we are obviously also seeing some increase in net lending spread. So I really cannot speculate because it will depend on the size of our balance sheet and so forth and the length of this contained and management of the liquidity as we are doing, but the repricing effect is probably going to continue to happen, but it’s going to be offset by higher net lending margins as we anticipate. Thank you.
Operator
Thank you. We do have one additional question. With BLX portfolio having an average term of 12 months or less, your turnover is 8% plus per month on average, do you see current activity, deals in process, loan origination keeping pace or are they substantially lower than average?
Jorge L. Salas Taurel — Executive President
So, as I said before, we are in a business, we are — we’ve been originating over $3 billion for the quarter. We are — there will be [Technical Issues] but we do see some interesting deals in the region with a good risk-reward return.
Operator
Thank you. That concludes today’s question-and-answer session. At this time, I’d like to turn it back to our speakers for closing remarks.
Jorge L. Salas Taurel — Executive President
Yes, thank you. I just want to thank everybody that joined our call today for their interest and their support to Bladex and wish everybody to stay safe. Nothing more on our side. Good-bye now.
Operator
[Operator Closing Remarks]