Robust Economic Environment In Puerto Rico And US Fuels Strong Loan And Earnings Growth

Key Takeaways

• Strong economic conditions in Puerto Rico and the U.S. drive loan growth, enhancing revenue through increased interest income.
  
• Modernizing customer channels is likely to improve efficiency, reducing costs and potentially boosting net margins over time.
  
• Reduction in deposits and rising expenses may challenge Popular's profitability and goal to achieve higher return on tangible equity.

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.

• Popular is experiencing strong loan growth, particularly in the commercial segment, and expects continued loan demand driven by a strong economic environment in Puerto Rico and the U.S. This is expected to positively impact revenue through increased interest income from an expanded loan portfolio.
  
• The company anticipates benefiting from the repricing of its investment portfolio and loan originations in a higher interest rate environment, which should enhance net interest income and support earnings growth over the coming quarters.
  
• Popular is undergoing a business transformation to modernize customer channels and improve customer experience, which could lead to enhanced efficiency and potentially improve net margins by reducing operational costs over time.
  
• The significant amount of federal funds yet to be disbursed in Puerto Rico is expected to support economic activities for several years, providing an opportunity for revenue growth through increased loan demand and financial service needs.
  
• Popular's strategy of reinvesting investment maturities in U.S. Treasury notes is a hedge against lower interest rates and is anticipated to support net interest margin stability, thus positively influencing earnings growth in the longer term.

Popular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Popular's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.2% today to 24.4% in 3 years time.
• Analysts expect earnings to reach $885.0 million (and earnings per share of $13.83) by about October 2027, up from $529.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2027 earnings, down from 12.1x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to decline by 3.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Popular Future Earnings Per Share Growth

Risks

• The reduction in deposit levels, particularly in Puerto Rico, could pressure the balance and mix of earning assets, impacting future net interest income and earnings.
  
• Popular experienced an increase in their provision for credit losses, which was higher this quarter partly due to loan growth. This could impact net margins if credit quality were to decline.
  
• The company's net interest income increase was below expectations, driven by an unexpected reduction in deposits. This could strain profitability and future earnings targets.
  
• Expenses are expected to rise, with increasing costs related to technology transformations and personnel, which could compress net margins if revenue does not grow as anticipated.
  
• Popular has revised its long-term goal of achieving a higher return on tangible common equity (ROTCE) downwards, now targeting at least 12% by late 2025 instead of a previous higher target, which indicates potential challenges in achieving strong growth and profitability.

Valuation

• The analysts have a consensus price target of $104.0 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 $117.0, and the most bearish reporting a price target of just $96.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $885.0 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $89.41, the analyst's price target of $104.0 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.