Digital Expansion In Puerto Rico Will Improve Efficiency, But Credit Risks May Impact Margins

Key Takeaways

• Digital growth and self-service adoption are enhancing efficiencies and revenue via better customer service and business expansion.
  
• Strong economic conditions and new services boost loan and deposit growth, increasing revenue and shareholder value.
  
• Reduced debit card fees and credit quality issues, along with shifting deposit trends, may negatively impact revenue growth and net margins.

Catalysts

A financial holding company, provides a range of banking and financial services.

• Continued growth in digital and self-service adoption is enhancing operational efficiencies and freeing up branch bankers, potentially increasing revenue and net margins by enabling better customer service and business growth.
  
• Strong economic activity in Puerto Rico and a positive outlook for the U.S. economy suggest robust loan growth, which is expected to drive increased revenue, especially in commercial and consumer loans.
  
• The acquisition of servicing rights for a $1.7 billion Puerto Rico residential mortgage loan portfolio should generate additional servicing income, boosting earnings.
  
• The launch of new digital products and unique market offerings, such as the Elite deposit account and the associated benefits, is expected to attract more customers and increase deposits, positively impacting revenue.
  
• A strategic approach to capital allocation, including potential dividends and share buybacks, could enhance earnings per share (EPS) and shareholder value.

OFG Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OFG Bancorp's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.4% today to 24.0% in 3 years time.
• Analysts expect earnings to reach $185.8 million (and earnings per share of $4.22) by about December 2027, down from $194.4 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 13.9x on those 2027 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 1.41% 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.

OFG Bancorp Future Earnings Per Share Growth

Risks

• The implementation of the Durbin amendment has led to a reduction in debit card interchange fees, which directly impacts the company's banking and financial service revenues. This could suppress revenue growth in the future.
  
• The increase in the provision for credit losses by $5.8 million, driven by increased loan volume and updated risk assessments, suggests a potential rise in credit risk, which could affect the net margins negatively.
  
• The decrease in total banking and financial service revenues by $5.8 million from the second quarter, primarily due to reduced interchange fees and MSR valuation, may reflect challenges in sustaining non-interest revenue streams, affecting overall earnings.
  
• The noted decrease in demand deposits and migration towards savings and time deposits could imply a higher cost of funds, potentially compressing the net interest margin if the trend continues.
  
• The high net charge-off rate observed in consumer loans indicates potential credit quality issues, which, if persistent, could lead to increased provisions and lower net income.

Valuation

• The analysts have a consensus price target of $50.38 for OFG 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 2027, revenues will be $774.7 million, earnings will come to $185.8 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $42.86, the analyst's price target of $50.38 is 14.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.