Popular, Inc. Q1 FY2021 Earnings Call

Good morning, and welcome to the Popular, Inc. First Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to Paul Cardillo, Investor Relations Officer of Popular. Please go ahead.

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Good morning, and thank you for joining the call. I hope that you and your loved ones are well. We began the year with a very strong quarter, achieving net income of $263 million. Before I discuss the highlights for the first quarter, I am pleased to report that earlier this month, we announced a series of planned capital actions that we intend to execute this year. These actions include a 12.5% increase in the company's quarterly common stock dividend from $0.40 to $0.45 per share and a common stock repurchase program of up to $350 million. These actions evidence the strength of our capital position, which allows us to return capital to our shareholders, while we continue to invest in our franchise and serve the needs of our customers. Our current net income of $263 million was $86 million higher than the fourth quarter. These results were $228 million higher than the same quarter last year. Both quarters were impacted, albeit in opposite directions due to changes in economic forecasts due to the pandemic and its impact on the season. First-quarter results were primarily driven by an $82 million benefit in the provision for credit losses as well as higher revenues. The increase in net interest income was driven by higher PPP-related fees, an increase in our investment portfolio, and lower deposit costs. Our noninterest income increased due to higher mortgage banking income driven by higher MSR valuation. Credit quality trends were positive in the quarter with lower NPLs, lower NPL inflows, and lower net charge-offs. Our results reflect the ongoing rebound in economic activity experienced over the past few quarters, in large part due to the unprecedented level of government stimulus as well as our diversified sources of revenue and prudent risk management. With respect to the PPP program, we have funded 42,000 loans totaling $1.9 billion in both rounds. In Round two, we have originated nearly 13,000 loans for $478 million. Of the loans originated in Round 1, close to $650 million, or 46%, have been forgiven as of the end of the first quarter. In Puerto Rico, as of March 31, we had funded 62% of all PPP loans that have been originated on the Island in both programs. We have seen an acceleration in the adoption of digital channels. Active users in our Mi Banco platform in Puerto Rico have grown by 17% since March 2020. We covered 69% of deposits in the first quarter through digital channels. While slightly lower than the 71% observed in the fourth quarter, it was considerably higher than the 56% registered in the first quarter of last year. We believe that these trends may adjust downward somewhat as the economy continues to reopen, but we expect them to remain higher than pre-pandemic levels. Finally, our customer base in Puerto Rico continues to grow, increasing by 12,000 in the first quarter to reach more than 1.9 million unique customers. Please turn to Slide 5 for an update on the current macroeconomic environment in Puerto Rico. In the first quarter, business trends and customer activity continued to improve, building upon the momentum seen in the second half of 2020 as many of the restrictions that were in place were gradually loosened. Vaccinations in Puerto Rico have progressed along a similar trajectory as in the Mainland. While the number of cases on the island has increased in recent weeks, COVID-related hospitalizations remain below national levels. Employment levels had improved but are still lower compared to last year. Total non-farm employment has increased by 2% since December 2020 but remains 4% below the March 2020 level. New auto sales have remained robust with sales of 32,000 units in the first quarter. This is the second-highest quarterly level, only exceeded by the prior quarter's record level. Cement sales increased by 68% in the first quarter compared to the year-ago period, which is the highest level since at least 2016. The tourism-hospitality sector continued to improve. With much of the world travel limited, Puerto Rico has become a popular destination for Mainland residents during the pandemic. Airport traffic is improving at a rapid pace. While year-to-date arrivals were down 20% from the year-ago period, arrivals during the month of March were 40% higher than the previous year. Hotel demand has also picked up significantly. The current hotel booking rate for the remainder of 2021 is above the booking level at the same time in 2019, which was a record year for tourism in Puerto Rico. Within Popular's clientele, credit and debit card sales in dollars increased by 39% compared to last year's first quarter and have been higher than pre-pandemic levels. Auto loan originations at BPPR increased by 15% compared to the year-ago period. Similarly, we have continued to see strength in the housing market. While the dollar volume of mortgage originations at BPPR decreased by 15% compared to last quarter, it has increased 127% versus the first quarter of 2020. All in all, we are extremely pleased with our results for the first quarter and encouraged by the economic outlook. I now turn the call over to Carlos for more details on our financials.

Thank you, Ignacio. Good morning. Please turn to Slide 6. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the fourth quarter. Net interest income for the first quarter was $479 million, an increase of $7 million from Q4 driven mainly by PPP loan activity. Q1 noninterest income increased by $9 million to $154 million, this was primarily driven by higher mortgage banking income by $7.6 million due to a positive quarter-over-quarter variance in MSR valuation of $9.2 million, closed $3.5 million higher net earnings from portfolio investments held under the equity method. A provision for the first quarter decreased by $103 million to a benefit of $82 million. Total operating expenses were $376 million in the quarter, down slightly from Q4. The fourth quarter included $23 million in expenses related to branch closure actions at Popular Bank as well as the reclassification out of the expense category of $10 million for unfunded loan commitments, which moved to the provision for credit losses. Excluding these two items, the net increase in expenses in the first quarter would have been $12.8 million. For 2021, we continue to expect average quarterly expenses to be between $375 million and $380 million. Our effective tax rate for the quarter was 23% compared to 20% in the fourth quarter. For 2021, we expect the effective tax rate to be between 20% and 24%. This is higher than the range indicated last quarter, as we now anticipate generating a higher proportion of taxable income this year. Please turn to Slide 7. Net interest income for the quarter was $479 million, an increase of $7.5 million from Q4. NII on a taxable equivalent basis was $430 million, $9 million higher than the fourth quarter. The primary drivers of the increase in taxable equivalent NII were higher interest income from commercial loans by $9 million, mostly driven by an increase in PPP interest income and fees of $11.6 million and lower deposit costs, primarily at Popular Bank. These guidances were partially offset by a few days in the quarter, which reduced NII by roughly $8 million. Deposits grew by $1.9 billion in the quarter. This increase was mostly seen in BPPR's commercial and retail segments. NIM improved by 3 basis points to 3.07% in Q1. On a taxable equivalent basis, net interest margin was 3.39%, an increase of 4 basis points. The higher margin is mostly due to higher PPP-related fees and lower deposit costs. Total loan yields increased by 15 basis points in Q1 as a result of higher PPP-related income of $23.1 million compared to $11.5 million in the fourth quarter. Due to the accelerated recognition of fee income on forgiveness, these loans yielded approximately 7.21% in this quarter compared to 3.23% last quarter. We expect margins to be stable for the rest of 2021. Our capital levels remain strong relative to mainland peers and well-capitalized regulatory requirements. Our common equity Tier 1 ratio in Q1 was 17.2%, up 90 basis points from Q4. As Ignacio mentioned at the start of this call, our announced 2021 capital plan includes two actions. First, an increase of Popular's quarterly common dividend of 12.5% or $0.05 to $0.45 per share. We expect our Board to declare the dividend in Q2 for payment in the third quarter. Secondly, we will execute a common stock repurchase program of up to $350 million. We will continue to explore opportunities to manage our capital during the remainder of 2021 and in future periods. However, we do not expect further dividend increases or common stock repurchases this year. Annual book value decreased by $1.65 per share to $61.42. This decrease was driven by lower cumulative unrealized gains on investments, partially offset by our quarterly net income. Our return on tangible equity was 21.4% in the first quarter.

Thank you, Carlos, and good morning. During the first quarter of the year, the corporation exhibited improved credit quality metrics and lower credit costs, driven by the improving economic environment, as a result of the unprecedented amount of government stimulus in response to the pandemic. Notwithstanding our positive results, given the uncertainty and the economic disruption caused by the pandemic, we'll continue to monitor the impact of COVID on our entire loan portfolio. Nonperforming assets decreased by $50 million to $774 million this quarter, mainly driven by an NPL decrease of $40 million, coupled with another decrease of $11 million. The NPL decrease was mainly in Puerto Rico, driven by lower mortgage NPLs of $24 million, reflecting improved post-moratorium payment activity. At the end of the quarter, the ratio of NPLs to total loans held in portfolio was 2.4% compared to 2.5% in the prior quarter. Compared to the fourth quarter, NPL inflows, excluding consumer loans, decreased by $30 million, driven by a decrease of $36 million in Puerto Rico due to lower mortgage NPL inflows by $32 million. Net charge-offs amounted to $21 million or an annualized 29 basis points of average loans held in portfolio compared to $42 million or 58 basis points in the prior quarter. In Puerto Rico, net charge-offs decreased by $22 million, primarily driven by lower commercial by $19 million. The decreases were partially offset by higher construction net charge-offs by $7 million related to the reserve loan that was partially charged off during the quarter. The corporation's allowance for credit losses decreased by $96 million to $801 million driven mainly by the improved economic outlook and improved credit quality.

Thank you, Lidio and Carlos, for your updates. Our colleagues continue to achieve impressive results under very challenging circumstances. Popular started off 2021 with positive momentum, driven by strong earnings, improved credit quality, record deposit levels, continued customer growth, and planned capital actions. We are optimistic about the economic environment and our opportunities for the remainder of the year. The pace of vaccination is also encouraging. We are proud of how we have been collaborating with local authorities and community organizations by lending our facilities and personal health to help accelerate vaccination efforts in Puerto Rico. Our team is focused on supporting our customers and our communities through the transition to a post-COVID reality. We're in a strong position to contribute to that recovery and leverage the opportunities that lie ahead. We are now ready to answer your questions.

Our first question is from Brock Vandervliet of UBS.

I guess, starting off as a big picture on Puerto Rican GDP. I believe that baseline number is looking for 3.4%. If you could just talk and kind of put that in context when was the last time we saw a number like that for Puerto Rico?

Wow, I'm having trouble. I mean, I don't think we've seen that since maybe 2000.

Yes, exactly. The first few years after 2000 it's probably the last time that happened.

Yes. That's kind of what I figured. I guess, given your market share and continued momentum in growing customers, could the gearing to this recovery be greater than what you project where you really don't sound like we should expect material loan growth to overpower the PPP runoff until next year? Could it be sooner than that?

I mean hopefully, it will be sooner, maybe we could see something at the end of the year, but it takes time for this money to come through the economy. What we expect the pace of the funds to flow is because I think the government of Puerto Rico with the federal government have agreed on procedures for much of this money. But that doesn't mean that it doesn't take time to work out for example, most of these projects require some kind of a bidding process. So we believe it's going to take time for that money to flow.

As far as timing is concerned, we feel that it is in the past, it's just in the short term, the liquidity and the payouts of PPP probably outweigh what we're adding to the portfolio.

Ignacio, could you share with us maybe an update on the Puerto Rican debt restructuring?

Okay. The public debt is moving along. I mean, it's really mediation, and it looks like they're getting pretty close to an agreement that a significant amount of creditors can sign on to. I think that the fiscal board has put a goal of trying to get this done in 2021, which would be optimistic. But I think they've made some significant progress.

Yes. No, very good. Now can we now take it to the next step?

Yes. We do not know the exact execution plan for the restructuring. However, the information we have suggests that there will be a one-time upfront payment of approximately $7 billion. A significant portion of that payment will likely be financed from the accounts the government maintains in Popular.

Very good. And then just finally on capital. As you know, the Federal Reserve came out and we're going to go to the stress capital buffer construct for our largest banks on the mainland here starting in the third quarter.

Yes. I believe we have built a strong relationship with the Fed. They do not approve the stimulus checks, which is something we have been careful to communicate in our releases. Therefore, I think we will continue with this approach as it has been beneficial for us.

Just following up on the debt restructuring. Beyond just the deposits going out, how do you expect that to kind of flow through to the island in terms of either new business development or new business? And how would that impact Popular?

I personally believe it's going to be a positive. If we can get the restructuring, it's one more stripe off the tiger here, I guess. It will show the world that Puerto Rico is moving forward. We had a lot of negative headlines in the past. I think we're going to start seeing more positive headlines.

The balance is about $670 million in the first PPP and $478 million in PPP 2. As far as whether we see some growth excluding that, it will depend on when they get forgiven, right?

We are seeing strong growth in areas like auto loans. Definitely, that is a portfolio that's growing. We believe that New York will come back faster than most people expect. We just need to see it materialize.

First off, just a couple of questions around some modeling stuff. As I look at NII, maybe you can talk about some of the levers that you have or that you've been doing to see NII actually increase this year even if we don't get any change in rates or anything like that.

Yes. You are right, Alex, in that we did some movement of cash into the investment portfolio in the fourth quarter. A lot of the effect in net income of that movement will actually happen in the second quarter.

We have the resources and we are talking closely to our clients. We are not just waiting for people to come to our office. We're trying to predict what's going to happen in the future.

This concludes our question-and-answer session. I would like to turn the conference back over to Ignacio Alvarez for closing remarks.

Thanks again for joining us today and for all your questions. We look forward to updating you on our progress in July. And please stay safe as we work our way out of this COVID crisis. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.