206 2014 CAF ANNUAL REPORT Management s DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Summary of financial statements Loan Portfolio Liquid assets Funding Capital Asset Liability Management
CAF ANNUAL REPORT 2014 207
208 2014 CAF ANNUAL REPORT MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION In 2014, CAF reaffirmed its position as one of the most important sources of multilateral financing for its shareholder countries in Latin America and the Caribbean, as shown by levels of approvals (USD 11.7 billion) and disbursements (USD 6.1 billion), mainly directed toward medium and long-term project financing. During 2014, the rating agencies recognized CAF s credit worthiness and its role as one of the main multilateral institutions in the region. In this regard, Fitch Ratings, Japan Credit Ratings, Moody s Investors Service and Standard & Poor s reaffirmed CAF s short and long-term ratings as shown in Table 1. This reflects the strength and stability of CAF s operational results, the prudent management of its financial and credit policies, the independence with which it undertakes its operations and the continuous support of its shareholder countries. In addition, Standard & Poor s changed the Institution s long-term credit rating outlook from stable to negative, due to sovereign rating downgrades of some of CAF s shareholder countries. Table 1 Credit Ratings Long term Short term Outlook Fitch Ratings AA- F1+ Stable Japan Credit Rating Agency AA - Stable Moody's Investors Service Aa3 P-1 Stable Standard & Poor's AA- A-1+ Negative During 2014, shareholder countries continued to make substantial paid-in capital contributions, for a total of USD 878 million. Also in 2014, net income reached USD 138 million, representing a decrease of 33.4 percent compared to the amount registered in 2013. Nevertheless, excluding the adjustment to the methodology for calculating loan loss allowances made in 2013 (one-off credit), net income for 2014 would have increased 10 percent. Operating earnings continued to be negatively affected by the reduction of the average LIBOR rate,
CAF ANNUAL REPORT 2014 209 which went from 0.41 percent in 2013 to 0.33 percent in 2014. As a result, the main profitability indicator - Return on Equity- was 1.7 percent, in line with the established benchmarks. With respect to bonds issued in the international markets, 2014 marked a record breaking year in regards to the amount issued. In that year, the institution issued 13 bonds for approximately USD 3.9 billion. In addition, CAF continued diversifying its investor base, issuing in different capital markets in America, Europe and Asia. Graph 1 Balance SHEET AS OF DECEMBER 31 (in millions of USD) assets liquidity loan portfolio other assets 4,127 13,783 5,656 14,981 7,186 16,355 18,003 8,305 19,144 10,148 liabilities & net worth liabilities net worth 5,753 12,794 6,351 15,184 6,865 17,739 7,817 19,602 8,763 21,731 Regarding short-term borrowing, time deposits represented the main source of funding, with a year-end closing balance of USD 3.7 billion. Commercial paper in the US and European markets constituted another important source of funding, with a total balance of USD 1.9 billion.
210 2014 CAF ANNUAL REPORT Graph 2 net income and Profitability For the year ended December 31 (in millions of USD) net income profitability ratios 3.0% 2.5% 2.5% 2.9% 166 153 160 207 138 1.0% 0.0% 0.7% 0.8% 0.7% 0.5% 0.5% 1.7% 0.4% 0.4% 0.3% ROE ROA 6-Month LIBOR Summary of financial statements During 2014, CAF s total assets reached USD 30.5 billion, representing an increase of 11 percent with respect to the previous year (Graph 1). This rise was not only due to an increase in the loan portfolio -which closed at USD 19.1 billion, exceeding the previous year by 6.3 percent- but also to a growth in liquidity, which totaled USD 10.1 billion, 22.2 percent higher than 2013 and equivalent to 33.3 percent of total assets and 46.7 percent of total indebtedness. At year-end 2014, CAF s net worth reached USD 8.8 billion, with a paid-in capital of USD 4.3 billion, additional paid-in capital of USD 1.9 billion, and USD 2.6 billion in the form of reserves and retained earnings. Also, net worth represented 28.7 percent of total assets and 35.8 percent of risk weighted assets, according to the methodology established in the Basel Agreement. Despite the decrease of the LIBOR rate during the period, in 2014 net interest income rose by 23 percent due to the good performance of the liquid assets portfolio, an increase in loans and an important reduction in the cost of funding. The decrease in net income and ROE in 2014 was mainly due to the change in the methodology for calculating the allowance for loan losses in 2013, which resulted in an increase of earnings in that year because of a one-off credit to the allowance. Net income reached USD138 million, ROE was 1.7 percent and Return on Assets (ROA) for the year was 0.4 percent, in line with the established benchmarks (Graph 2).
CAF ANNUAL REPORT 2014 211 Loan Portfolio At the end of 2014, the total loan portfolio was USD 19.1 billion, which represented an increase of 6.3 percent with respect to the USD 18.0 billion of the previous year. Loan portfolio distribution continued to be largely concentrated in public sector projects, representing 83.1 percent of the total portfolio as of December 31st, 2014. Regarding the distribution of the portfolio by countries, Venezuela had the largest exposure, with 15.7 percent of the total, followed by Ecuador with 14.8 percent, Argentina with 14.2 percent, Peru with 12.2 percent, Brazil with 10.1 percent, Bolivia with 10.0 percent, Colombia with 9.2 percent, Panama with 6.6 percent and Uruguay with 2.7 percent. The increasing participation of the new full-member shareholders contributes to the diversification of the loan portfolio. In this respect, the new full-members represented 34.8 percent of the loan portfolio at year-end 2014. The main activities financed by CAF at the end of 2014 are transportation infrastructure projects which represented 36.0 percent of the loan portfolio, energy projects with 28.4 percent, social services and health projects with 10.1 percent, among others. The loan portfolio maintained its excellent credit quality (Table 2). At year-end 2014, 0.09 percent of the loan portfolio was in nonaccrual status and provisions for loan losses totaled USD 55.8 million, representing 0.3 percent of the loan portfolio. During 2014, a single loan for USD 4.1 million was written-off. Table 2 Asset Quality (in USD million) Overdues 0.0 0.0 0.0 0.0 0.0 Loans in non-accrual status 0.0 8.2 7.9 0.0 16.5 Allowance for loan losses 141.4 130.6 125.8 38.3 55.8 Overdue as a percentage of loan portfolio 0.0% 0.0% 0.0% 0.0% 0.0% Non-accrual loans as a percentage of loan portfolio 0.00% 0.05% 0.05% 0.00% 0.09% Allowance as a percentage of loan portfolio 1.03% 0.87% 0.77% 0.21% 0.29% Liquid assets As of December 31st of 2014, liquid assets totaled USD 10.1 billion, equivalent to 33.3 percent of total assets and 48.5 percent of the institution s total indebtedness. In this regard, liquidity levels keep strengthening, in line with the trend of recent years. The investment portfolio was characterized by its short duration, which averaged 0.64 years, and its excellent credit quality (Graph 3). The portfolio
212 2014 CAF ANNUAL REPORT was rated 96.7 percent investment grade, with an average rating of AA/Aa2, and only 3.3 percent was rated below A-/A3. CAF s policies require that at least 90 percent of the liquid assets be held in instruments with credit ratings of at least A-/A3. Graph 3 liquid assets as of december 31, 2014 3.3% non investment grade 96.7% investment grade (average risk rating aa) Funding At year-end 2014, total financial liabilities were USD 20.9 billion, while total liabilities reached USD 21.7 billion. As of December 31st, 2014, 75 percent of CAF s funding came from international capital markets. Bond issues represented the main source, with 66 percent of total funding (Graph 4). Time deposits received from institutional investors represented 18 percent, followed by commercial paper with 9 percent, and other medium- and long-term loans and credit lines, which represented 7 percent. 2014 was a very active year for CAF in the international bond markets. The institution issued 13 bonds for an approximate amount of USD 3.9 billion, the largest amount issued by CAF in a single year. In addition, CAF continued diversifying its geographic distribution, issuing in six different markets of America, Europe and Asia. During 2014, CAF made a benchmark placement for EUR 750 million, which represented its return to this market since 2011; and a benchmark issue for USD 1.0 billion, the first in this market since the upgrade of CAF s credit rating to the AA level. These transactions were successful in terms of achieving competitive funding costs and diversifying CAF s investor base. The institution returned to the Uridashi market with two bond issues with a four-year maturity for South-African rand 253 million and Turkish lira 157 million. These two placements were issued under favorable financial conditions.
CAF ANNUAL REPORT 2014 213 CAF made its debut in the Norwegian market with two placements with ten- and twelve-year maturities, for NOK 900 million and NOK 1.5 billion, respectively; being the first Latin-American issuer having access to this prestigious market and its investor base. Also, CAF made two issues in the Swiss market for CHF 300 million and CHF 225 million with ten- and fourteenyear maturities, respectively. This last placement was its longest maturity issuance in this market, which consolidates the curve for CAF in CHF and reaffirms its position as the most frequent Latin-American issuer in the Swiss market. Finally, several private placements were made in different currencies such as U.S. Dollars, Euros, and Hong Kong Dollars, aimed at investors that have an important strategic value for CAF. With respect to short-term borrowings, CAF has maintained its presence in the commercial paper markets in the United States and Europe. It should be noted that borrowing spreads have been decreasing, which contribute to lower funding costs for the year. In 2014, time deposits represented the most important source of short-term funding, reaching USD 3.7 billion at the end of the year. Thus, these instruments have maintained their importance as a stable and competitive source of funding. Regarding medium- and long-term loans from development financial institutions, international agencies, and multilateral banks, new credit facilities have been negotiated for USD 120 million with KfW to support the financing of projects related to energy efficiency. The loan program in local currencies for microfinance institutions continued, specifically in Peru, Mexico, Colombia, Paraguay and Bolivia. Additionally, USD 142.6 million was obtained through loan portfolio sales. Graph 4 financial liabilities as of december 31, 2014 7% loans and other obligations 9% commercial paper 18% term deposits 66% bonds
214 2014 CAF ANNUAL REPORT Details of CAF s 2014 debt issues can be seen in Table 3. Table 3 2014 Debt issues in the international markets Date Market Amount in original currency of issuance (in millions) Equivalent in USD million Bond issuance February Swiss CHF 300 331 February Euro EUR 65 88 February Euro EUR 200 273 February Norway NOK 1,500 246 February Norway NOK 900 145 February Hong Kong HKD 1,257 162 March Euro EUR 50 69 May USA USD 200 200 May Euro EUR 750 1,019 August USA USD 1,000 1,000 December Swiss CHF 225 233 December Uridashi ZAR 253 23 December Uridashi TRY 157 70 Sub-total 2014 3,859 Total 1993-2014 23,125 Short-Term issuance programs Commercial paper (USA) USD 2,000 2,000 Commercial paper (Europe) USD 3,000 3,000 Capital During 2014, CAF received USD 878 million in new capital contributions from its shareholder countries. Most of these contributions came from payments under the capital subscription programs approved in 2009 and 2011, for a total of USD 2.5 billion, and USD 2 billion, respectively. At the end of 2014, the institution s net worth reached USD 8.8 billion, 12.4 percent over the amount registered at the end of the previous year, strengthened by the capital contributions made by the shareholder countries and by retained earnings. Favored by the increase in shareholders equity, the capitalization ratios remained in line with the levels established by the Institution s internal policies (Table 4).
CAF ANNUAL REPORT 2014 215 Table 4 capitalization ratios Gearing (times) 1 2.5 2.4 2.4 2.4 2.5 Leverage (times) 2 2.2 2.3 2.5 2.4 2.4 Capital/Risk-Weighted Assets (BIS) 3 37.2% 38.7% 40.2% 39.3% 35.8% 1 According to internal financial management policies, this exposure measure should be less or equal than 4.0. 2 According to internal financial management policies, this indebtness measure should be less or equal than 3.5. 3 According to internal financial management policies, this level of capitalization calculated according to Basel methodology, should be greater or equal than 30%. Asset Liability Management In order to mitigate foreign exchange and interest rate risks, CAF s lending and borrowing activities are primarily conducted in floating rate U.S. Dollars. As of December 31st, 2014, 99.8 percent of assets and 99.1 percent of liabilities were denominated in U.S. Dollars after swaps, while 99.6 percent of the loans and 96.8 percent of the financial liabilities were based on LIBOR after swaps.transactions that are not denominated in US Dollars and based on the 6-month LIBOR rate are converted through swaps to those terms. The swaps book reached USD 13.6 billion at year-end 2014. CAF s policies establish that swap counterparties must be rated at least A/A2, or have a collateral agreement. Thus,CAF establishes Collateral Agreements (CSA) with its derivatives counterparts, reducing the credit risk, since valuations are made on a Mark-to-Market basis and the debtor party must place the corresponding collateral within certain predetermined parameters. CAF does not trade derivatives on its own account. These instruments are used solely for hedging purposes. CAF seeks to maintain a conservative relationship between the average term of its assets and liabilities. As of December 31st, 2014, the average life of its assets was 4.1 years, and that of its liabilities was 5.2 years. The latter value does not include the portion corresponding to capital, which constitutes a high percentage of CAF s funding, and favors the maturity profile of liabilities. At the end of 2014, the institution s net worth reached USD 8.8 billion, 12.4 percent over the amount registered at the end of the previous year, strengthened by the capital contributions made by the shareholder countries and by retained earnings.