Repricing Yields And Digital Upgrades Will Improve Future Position

Key Takeaways

• Anticipated net interest margin expansion through strategic cash flow reinvestment and funding cost reduction could drive earnings growth.
  
• Ongoing digital investments and stock repurchase plan aim to enhance customer engagement, deposit stability, and earnings per share.
  
• Economic policy uncertainty, credit risk growth, and loan yield pressure may impact sustained loan growth, interest margins, and future net income for First BanCorp.

Catalysts

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

• First BanCorp is expecting net interest margin expansion over the next few quarters, driven by the repricing of investment portfolio cash flows at higher yields, reduction in funding costs, and reinvestment in higher-yielding earning assets, which could positively impact earnings.
  
• The company anticipates continued growth in residential loans and mid-single-digit overall loan growth for the year, supported by a strong and building pipeline, which is expected to enhance future revenue streams.
  
• First BanCorp plans to deploy approximately $1 billion in additional cash flows during the second half of the year at higher yields, which is expected to further improve net interest income and contribute to earnings growth.
  
• The financial institution has resumed its stock purchase program, with plans to repurchase up to $100 million in common stock in the second half of the year, aiming to enhance earnings per share by reducing the number of shares outstanding.
  
• Continued investment in digital initiatives, including a transition to a centralized FIS cloud and improvements to digital banking capabilities, is expected to drive growth in customer engagement, support deposit stability, and potentially improve cost efficiency, thereby impacting net margins positively.

First BanCorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First BanCorp's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.2% today to 29.0% in 3 years time.
• Analysts expect earnings to reach $351.3 million (and earnings per share of $2.38) by about May 2028, up from $302.3 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 12.2x on those 2028 earnings, up from 10.7x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

First BanCorp Future Earnings Per Share Growth

Risks

• The potential impact of economic policies in Puerto Rico, such as new tariffs, creates uncertainty that could affect consumer confidence and business investment, potentially impacting loan growth and revenue.
  
• There was a slight decrease in total loans on a linked-quarter basis due to a large repayment, highlighting challenges in sustaining loan growth, which can impact interest income.
  
• Nonperforming assets increased, including a notable commercial real estate loan in Florida, which although currently well-collateralized, reflects underlying credit risk that could affect future net margins.
  
• Pressure on the yield of the loan portfolio, with a noted decrease in commercial loan yields, indicates potential challenges in sustaining net interest margins.
  
• The allowance for credit losses increased due to anticipated deterioration in commercial real estate prices, signaling potential worsening in asset quality, which could impact provisions and net income.

Valuation

• The analysts have a consensus price target of $23.5 for First BanCorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $351.3 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $20.01, the analyst price target of $23.5 is 14.9% 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.