Digital Infrastructure And Puerto Rico Projects Will Improve Efficiency

Key Takeaways

• Investments in digital platforms and infrastructure modernization are set to improve operational efficiency, customer growth, and long-term revenue expansion.
  
• Strong regional presence and prudent risk management position Popular to benefit from rising loan demand, financial inclusion, and consistent earnings growth.
  
• Dependence on Puerto Rico, lagging digital transformation, public sector exposure, rising deposit competition, and regulatory pressures threaten Popular's earnings stability and long-term profitability.

Catalysts

Through its subsidiaries, provides various retail, mortgage, and commercial banking products and services in Puerto Rico, the United States, and the British Virgin Islands.

• Ongoing investments in digital infrastructure, including the launch of a new digital platform for commercial cash management and branch modernization, are expected to enhance customer acquisition, retention, and operational efficiency, supporting long-term revenue and margin expansion.
  
• Increasing financial inclusion and private investment activity in Puerto Rico, combined with a strong regional presence, position Popular to capture above-market deposit and loan growth, directly driving top-line revenue and supporting sustainable earnings growth.
  
• The continued shift towards electronic payments, as seen in 4% year-over-year growth in credit and debit card sales and targeted enhancements in fee-based services, is likely to boost non-interest income and improve net margins over time.
  
• Prudent risk management and improved credit quality-evidenced by lower nonperforming loans, charge-offs, and tighter credit standards-are expected to reduce credit losses and stabilize earnings, enhancing future return consistency.
  
• Federal disaster recovery funds and a strong pipeline of infrastructure projects in Puerto Rico are set to drive sustained commercial loan demand and economic activity, positively impacting loan growth and net interest income for several years.

Popular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Popular's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.7% today to 24.0% in 3 years time.
• Analysts expect earnings to reach $900.9 million (and earnings per share of $14.54) by about July 2028, up from $719.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the US Banks industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 6.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Popular Future Earnings Per Share Growth

Risks

• Continued high geographic concentration in Puerto Rico exposes Popular to local economic volatility, demographic shifts (such as net out-migration), and natural disasters, which could negatively impact loan demand, asset quality, and ultimately revenue and earnings stability.
  
• Slower adoption of digital banking offerings versus global peers, coupled with the nascent stage of their transformation program, increases the risk of losing market share to fintech competitors-potentially pressuring fee income and net margin growth over the long term.
  
• Elevated exposure to Puerto Rican government and public sector deposits and loans heightens balance sheet risk if there are fiscal or political disruptions, potentially resulting in increased credit losses and lower capital ratios, directly affecting long-term profitability.
  
• Persistent competition for deposits, especially from yield-seeking retail customers and alternative investment options like stablecoins, could drive up funding costs and compress net interest margins, reducing overall net income and earnings growth.
  
• Increasing regulatory complexity, particularly around digital innovations, open banking, and anti-money laundering compliance, may elevate operating expenses and slow product innovation, weighing on net margins and dampening long-term earnings potential.

Valuation

• The analysts have a consensus price target of $133.5 for Popular based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $155.0, and the most bearish reporting a price target of just $116.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $900.9 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of $114.82, the analyst price target of $133.5 is 14.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.