BPOP Q3 2024: Loan Growth Adds $603M, But Deposit Outflows Delay 14% ROTCE Ambition
Popular’s third quarter saw robust $603 million loan growth, but unexpected deposit outflows and rising credit provisions pressured earnings and forced a reset of return targets. Management’s tone was pragmatic, emphasizing transformation progress and stable credit, yet the path to a 14% ROTCE is now a longer-term goal. Investors should watch deposit stability and margin dynamics as key levers into 2025.
Summary
- Deposit Outflows Reshape Profitability Path: Unexpected contraction in retail and public deposits alters return and margin trajectory.
- Loan Growth Remains Broad-Based: Commercial, auto, and mortgage lending drive portfolio expansion across Puerto Rico and U.S. markets.
- Transformation Efforts Continue: Modernization and digital initiatives remain central, but cost discipline and deposit mix are under scrutiny.
Business Overview
Popular Inc. (BPOP) is a leading financial services provider in Puerto Rico and the mainland United States, primarily through Banco Popular de Puerto Rico (BPPR) and Popular Bank. The company generates revenue from net interest income—spread between interest earned on loans and investments and interest paid on deposits—as well as non-interest income from fees, cards, and mortgage banking. Major business segments include commercial and consumer lending, retail and public sector deposits, and investment management, with a significant footprint in Puerto Rico’s economy.
Performance Analysis
Popular’s third quarter results reflect a mixed environment of strong lending demand but mounting funding pressures. Net income declined sequentially as higher provisions for credit losses and deposit outflows offset a modest rise in net interest income. The $603 million increase in loan balances, led by commercial, auto, and mortgage lending at BPPR, demonstrates continued local economic strength and effective origination strategy, particularly in Puerto Rico.
However, deposit balances contracted by $1.8 billion at BPPR, primarily from retail and public sources, impacting the mix of earning assets and limiting the full benefit of higher rates. The net interest margin expanded slightly to 3.24%, aided by loan repricing, but the contraction in lower-cost deposits and a shift toward higher-cost funding sources pressured profitability. Non-interest income dipped slightly, mainly due to lower mortgage banking activity. Operating expenses remained controlled, though technology and transformation investments are visible in the cost base.
- Deposit Outflows Accelerate: Both public and retail deposit balances declined, driven by tax refund spending and yield-seeking behavior, reducing average balances by 30% from pandemic highs.
- Loan Growth Broad-Based: Commercial, auto, and mortgage portfolios all expanded, with U.S. operations showing signs of renewed demand after previous declines.
- Credit Quality Stable but Provisions Up: Credit metrics remain below pre-pandemic levels, but the provision for credit losses rose as loan balances and consumer delinquencies ticked higher.
Return on tangible common equity (ROTCE) fell to 10% from 11.8% last quarter, and management revised its 2025 target down to at least 12%, citing funding mix and margin headwinds. Share repurchases continued, with 600,000 shares bought for $59 million, reflecting confidence in valuation despite near-term earnings pressure.
Executive Commentary
"While the increase in revenues was lower than we anticipated, the underlying drivers of our business continue to be favorable as demonstrated by the progression of net interest income and margin, loan growth, and stable credit trends. We are making headway in our business transformation with meaningful progress in modernizing our customer channels and improving the customer experience."
Ignacio Alvarez, CEO
"As we look forward to 2025, given a variety of drivers, including the impact of the reduction in deposit balances experienced this year, the mixed shift to higher cost deposits, along with the limited loan growth year to date in the US, we no longer expect to achieve our target of 14% RODSI by the end of Q4 2025. We now anticipate that we should be able to generate at least a 12% RODSI in the fourth quarter of 2025."
Jorge Garcia, CFO
Strategic Positioning
1. Deposit Mix and Funding Cost Management
Deposit retention and pricing have become the central challenge for BPOP’s margin and earnings trajectory. The quarter’s contraction in both public and retail deposits, driven by customer spending and migration to higher-yield alternatives, highlights the limits of traditional funding sources. Management expects further risk of $600–800 million in deposit outflows, and is focused on balancing pricing discipline with retention, especially as public deposits remain sensitive to short-term rate movements.
2. Loan Growth and Market Diversification
Loan origination remains a core strength, with robust demand in Puerto Rico across commercial, auto, and mortgage segments. The U.S. franchise, after a period of contraction, has begun to see renewed credit demand, particularly in community association and construction lending in Florida. This diversification supports overall portfolio growth, but the U.S. business still lags Puerto Rico in momentum and scale.
3. Transformation and Digital Modernization
Ongoing transformation initiatives—especially digital channel upgrades—are a strategic priority, aimed at enhancing customer experience and operational efficiency. Notably, the consumer digital banking application in Puerto Rico has seen a 30% improvement in release cycle time over two years. These projects, while elevating technology and consulting expenses, are intended to position BPOP for more scalable, personalized service delivery and deeper customer relationships.
4. Capital Allocation and Shareholder Returns
Share repurchases remain active, signaling management’s view of undervaluation and commitment to capital return. However, with ROTCE targets now moderated and capital requirements unchanged, the pace and scale of future buybacks will be closely tied to core earnings and deposit stability.
5. Asset Sensitivity and Investment Portfolio Repricing
BPOP maintains a neutral interest rate position, with recent reinvestment of maturities into two- to three-year U.S. Treasuries to hedge against falling rates. The repricing of the investment portfolio should provide incremental NII uplift through 2026, but basis risk and funding cost volatility remain key watchpoints.
Key Considerations
This quarter underscores the delicate balance between growth, funding, and profitability for BPOP as it navigates a shifting rate and liquidity environment. Management’s focus on transformation and digital channels is forward-thinking, but near-term results will hinge on stabilizing deposits and controlling cost escalation.
Key Considerations:
- Deposit Franchise Resilience: The durability of retail and public deposits will determine NIM trajectory and ability to fund loan growth at attractive spreads.
- Expense Discipline Amid Transformation: Technology and consulting spend are necessary for modernization, but cost growth must be contained to protect margins as NII growth slows.
- Credit Quality Monitoring: While credit remains solid, rising consumer delinquencies and charge-offs in auto and acquired fintech portfolios warrant close attention as liquidity normalizes.
- Capital Return Flexibility: Share buybacks are a lever for ROTCE improvement, but capital deployment must remain prudent given uncertain earnings visibility.
Risks
Deposit attrition and funding cost inflation are the most immediate risks, especially if customer behavior or competitive dynamics shift further. Credit normalization in consumer portfolios, particularly auto and acquired fintech loans, could pressure provisions if macro conditions deteriorate. The success of transformation initiatives depends on execution and customer adoption, while regulatory or economic shocks in Puerto Rico remain persistent background risks. Management’s revised ROTCE target signals a recognition of these headwinds, but also raises questions about earnings power if deposit trends worsen.
Forward Outlook
For Q4 2024, Popular guided to:
- Consolidated loan growth of approximately 1% sequentially
- Net interest income (NII) growth of 1.5% to 2% over Q3
For full-year 2024, management maintained guidance for:
- Total loan growth of approximately 4% (within 3%–6% range)
- Year-over-year NII growth of 6%–7% (revised down from 8%–10%)
- Total operating expenses of ~$1.91 billion (within $1.89–$1.95 billion range)
Management cited continued loan demand and investment repricing as NII drivers, but flagged deposit mix and cost as the key risk to margin expansion. The effective tax rate is expected at 23% for the year, and ROTCE target for Q4 2025 is now at least 12%, down from the prior 14% goal.
- Loan growth remains strongest in Puerto Rico, with U.S. markets showing early signs of recovery.
- Deposit outflows are expected to moderate, but $600–800 million remains at risk from retail balances.
Takeaways
Popular’s Q3 reveals a business at a crossroads: loan growth and digital progress are offset by funding headwinds and a slower path to target returns.
- Funding Mix in Focus: Deposit contraction and higher-cost funding sources are the primary drag on NIM and ROTCE progress, demanding vigilant management and pricing discipline.
- Transformation as Long-Term Lever: Modernization and digital upgrades are necessary for future competitiveness, but near-term returns depend on cost control and deposit stability.
- 2025 Watchpoints: Investors should monitor deposit flows, margin trends, and expense management as the company navigates a more challenging rate and liquidity landscape.
Conclusion
BPOP’s third quarter demonstrates both resilience and vulnerability: solid loan demand and stable credit are offset by funding pressure and recalibrated return targets. The pivot from a 14% to 12% ROTCE goal signals a more measured outlook, with deposit management and transformation execution as the critical levers to watch into 2025.
Industry Read-Through
Popular’s experience this quarter offers a clear read-through for regional and super-regional banks: deposit outflows and funding cost inflation are not isolated phenomena, but sector-wide realities as customers chase yield and liquidity normalizes post-pandemic. The ability to sustain loan growth while defending net interest margin will separate winners from laggards, particularly in markets where public sector deposits are material. Digital transformation and operational modernization are now table stakes, but their payoff is contingent on cost discipline and customer engagement. For banks exposed to rate-sensitive deposit bases, the coming quarters will test both pricing power and franchise loyalty.