Innovative Platforms And Critical Capital Management Drive Positive Financial Outlook

Key Takeaways

• Introduction of the digital platform and strategic management of deposit flows are set to improve operational efficiency and earnings.
  
• Strong capital strategy, including debenture redemption and dividend payouts, may enhance investor sentiment and drive EPS growth.
  
• Higher operational costs and uncertain deposit growth could pressure margins, while consumer loan risks and commercial prepayments challenge revenue and balance sheet expansion.

Catalysts

Operates as a bank holding company for FirstBank Puerto Rico that provides a range of financial products and services to consumers and commercial customers.

• The anticipated reduction in unexpected commercial prepayments should stabilize loan growth, potentially leading to an approximate 4% loan growth in 2024, supporting future revenue growth.
  
• The introduction of the nCino digital platform is expected to enhance efficiencies in the commercial lending workflow, which could improve operational efficiencies and potentially bolster net margins.
  
• The environment is potentially favorable for commercial customers due to improved asset quality and a decline in nonperforming assets, which could lead to better earnings quality and reduced credit-related costs.
  
• Strategic management of deposit flows and pricing opportunities given the rate environment is projected to improve net interest income (NII) into 2025, which can positively impact overall earnings.
  
• Strong capital flexibility and capital return strategy, including the redemption of debentures and dividend payouts, while maintaining growth in tangible book value per share, could boost investor sentiment and EPS growth.

First BanCorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First BanCorp's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.8% today to 27.5% in 3 years time.
• Analysts expect earnings to reach $310.3 million (and earnings per share of $2.09) by about November 2027, up from $302.5 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 13.0x on those 2027 earnings, up from 11.1x today. This future PE is greater than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 3.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

First BanCorp Future Earnings Per Share Growth

Risks

• Higher-than-expected commercial prepayments are impacting loan portfolio growth, lowering the expected growth rate from 5% to closer to 4% in 2024, which could affect future revenue growth.
  
• An increase in the allowance for credit losses on the consumer loan portfolios due to charge-off trends indicates potential risk in the consumer segment, potentially impacting net margins negatively.
  
• Expected reductions in net interest margin (NIM) could flatten in the near term due to repricing of the commercial floating rate portfolio, which may manage to balance out but can challenge NIM improvements if conditions change, impacting earnings.
  
• Increasing operational expenses, including higher personnel, consulting, electricity, and rental costs, as well as ongoing technology projects, could pressure net margins if revenue growth slows.
  
• Deposit growth remains uncertain, with limited growth expected apart from reinvestments and government inputs, affecting the ability to expand the balance sheet and potentially impacting net interest income (NII) projections in 2025.

Valuation

• The analysts have a consensus price target of $23.0 for First BanCorp 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 $25.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $310.3 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $20.54, the analyst's price target of $23.0 is 10.7% 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.