Popular (BPOP) Q4 2023: Tangible Book Value Jumps 19% as Loan Growth Outpaces Deposit Cost Pressure
Popular’s Q4 saw tangible book value surge and loan growth remain robust, even as consumer credit normalization and rising deposit costs weighed on profitability. Technology transformation and fee income initiatives are beginning to yield results, while management signals a cautious but optimistic stance for 2024 capital actions and credit quality. Investors should focus on the interplay between deposit cost stabilization, loan mix, and the evolving consumer risk environment as the bank pivots toward its 2025 return targets.
Summary
- Loan Growth Outpaces Deposit Flows: Core lending expanded across segments, supported by asset mix shift and local economic strength.
- Fee Income Resilience Emerges: Strategic repricing and digital initiatives offset regulatory headwinds in non-interest revenue.
- Capital Return on Hold: Buybacks and further capital deployment await regulatory clarity and macro stability in the second half.
Business Overview
Popular, Inc. (BPOP) is a leading Puerto Rico-based bank with significant operations in the U.S., offering commercial, consumer, and mortgage lending, deposit services, and fee-based products. The company’s primary segments are Banco Popular de Puerto Rico (BPPR), its core franchise, and Popular Bank in the U.S., with revenue generated from net interest income, fees, and digital banking services. Popular’s business model is anchored in loan growth, deposit gathering, and technology-driven service expansion within its regional markets.
Performance Analysis
Popular delivered stable earnings in Q4, with adjusted net income holding flat sequentially after excluding the FDIC special assessment. Loan balances grew by $1 billion in the quarter, led by commercial and construction lending, and full-year loan growth reached 9.3%. Net interest margin (NIM) inched up to 3.08%, aided by higher loan yields and improved asset mix, though offset by rising deposit costs, particularly in public and online channels.
Non-interest income rose $9 million quarter-over-quarter, reflecting the early impact of repricing and digital initiatives. Operating expenses, excluding the FDIC hit, declined by $6 million, benefiting from lower credit card processing costs and volume incentives. Credit quality remained generally solid, with non-performing loans (NPLs) trending lower, but consumer credit normalization continued, especially in unsecured portfolios. Tangible book value per share surged by $9.54, or nearly 19% from Q3, driven by lower unrealized securities losses and retained earnings.
- Deposit Cost Moderation: Deposit betas rose but at a slower pace, with cost increases in public deposits flattening into Q1 2024.
- Consumer Credit Normalization: Net charge-offs increased, yet remain below pre-pandemic averages, with allowance ratios steady at 2.1%.
- Digital Penetration: 54% of customers now use Mibanko, Popular’s digital platform, driving efficiency and deposit capture.
Despite macro headwinds and regulatory fee pressure, Popular maintained strong capital ratios and is positioned for continued asset growth, while closely monitoring consumer portfolio risks and deposit cost trends.
Executive Commentary
"We have already began to see tangible revenue uplift from several of our early stage initiatives. In Puerto Rico, these include enhanced pricing segmentation in our commercial cash management business and streamlined processing of small business loans. Our technology and business transformation continues to be a priority."
Ignacio Alvarez, CEO
"We expect net interest income to increase by approximately 9% to 13% from 2023 levels, driven by loan growth of 3% to 6% and the continued improvement in our earning asset mix in a higher rate environment."
Carlos Vasquez, CFO (Retiring)
Strategic Positioning
1. Asset Mix Shift to Lending
Popular is actively redeploying cash and maturing securities into higher-yielding loans, rather than targeting overall balance sheet growth. This shift is designed to optimize returns in a rate-neutral environment and supports NIM expansion, as confirmed by management’s guidance for continued margin improvement in 2024.
2. Fee Income Diversification and Resilience
Despite regulatory challenges to overdraft and interchange fees, Popular offset lost fee income through repricing of commercial cash management services and growth in small business credit card interchange. This flexibility in fee generation is critical as further regulatory changes could impact non-interest revenue streams by up to $50 million annually.
3. Technology-Driven Transformation
Technology investments are foundational to Popular’s multi-year transformation, with half of 2024’s projected expense increase allocated to digital and data initiatives. The Mibanko platform now serves over 1.1 million active users, enhancing customer engagement and supporting deposit growth through digital channels.
4. Capital Return and Regulatory Strategy
Capital return actions, including buybacks, are deferred until the second half of 2024, pending clarity on rates, regulatory expectations, and macro conditions. Management is considering a shift toward a more flexible, authorization-based buyback approach, aligning with industry peers and providing optionality amid evolving regulatory capital requirements.
5. Credit Quality and Risk Management
Credit normalization in consumer portfolios is being proactively managed, with tightened underwriting and allowance ratios maintained at historical lows. The commercial and mortgage books remain strong, with NPLs declining and charge-offs within pre-pandemic ranges, but management remains vigilant as normalization trends persist into 2024.
Key Considerations
This quarter highlights Popular’s ability to balance growth and risk amid shifting macro and regulatory conditions. Management’s focus on technology, asset mix, and fee resilience is shaping the bank’s path to its 2025 return targets.
Key Considerations:
- Deposit Cost Stabilization: Slowing increases in deposit costs provide relief to NIM, but further rate cuts or competitive pressures could alter this dynamic.
- Consumer Credit Risk: Ongoing normalization in unsecured lending segments requires close monitoring, as charge-offs and delinquencies trend higher even with a strong local economy.
- Fee Income Regulation: Potential changes to interchange and overdraft fee rules could materially impact non-interest revenue, though Popular’s proactive repricing helps mitigate this risk.
- Capital Deployment Flexibility: Strong capital ratios offer optionality, but management is holding off on major buybacks until regulatory and rate clarity emerges.
Risks
Consumer credit normalization remains a key watchpoint, as rising delinquencies in personal loans, credit cards, and auto finance could pressure allowance needs if macro tailwinds fade. Regulatory risk around fee income is elevated, with potential for up to $50 million in annual lost revenue depending on final rules. Deposit cost competition and rate volatility could also compress margins if funding markets tighten or if rate cuts accelerate. Management’s conservative charge-off guidance and deferred capital return reflect these uncertainties.
Forward Outlook
For Q1 2024, Popular guided to:
- Net interest income growth of 9% to 13% year-over-year
- Loan growth of 3% to 6% for 2024
For full-year 2024, management maintained guidance:
- Annual operating expenses of $1.89 to $1.95 billion, with half of the increase tied to technology spends
- Effective tax rate of 19% to 23%
- Net charge-offs expected in the 65 to 85 basis points range
Management highlighted several factors that will shape 2024:
- Deposit costs expected to remain flat in Q1, with public funds balances peaking in Q2 due to tax seasonality
- Capital actions and buybacks to be revisited in the second half, post regulatory and macro clarity
Takeaways
Popular’s disciplined asset mix shift, digital transformation, and fee income agility position it for continued growth, but consumer credit normalization and regulatory headwinds require vigilance.
- Asset Mix and Digital Leverage: The bank’s strategic redeployment of liquidity into loans and digital channel growth are supporting NIM and customer engagement.
- Fee Income Adaptation: Management’s proactive approach to fee income offsets regulatory losses, but watch for further rule changes impacting revenue.
- Capital Return Watch: Investors should monitor the timing and structure of future buybacks as macro and regulatory signals become clearer in the back half of 2024.
Conclusion
Popular’s Q4 results reflect a bank navigating a complex rate and regulatory environment with prudent risk management and a focus on technology-driven growth. The next phase hinges on deposit cost trends, consumer credit outcomes, and the ability to flex capital return as macro conditions evolve.
Industry Read-Through
Popular’s experience underscores common themes for regional banks: asset mix optimization, digital adoption, and fee income resilience are increasingly critical as regulatory and macro headwinds intensify. Deposit cost competition and consumer credit normalization are sector-wide issues, with banks needing to balance growth and risk amid shifting rate expectations. Technology investment is no longer discretionary, as digital engagement and operational efficiency drive both top-line growth and cost control. The regulatory environment for fee income remains fluid, and banks with diversified, adaptable revenue streams will be better positioned as new rules emerge.