Popular (BPOP) Q1 2024: Net Interest Margin Rises 8bps, Loan Growth Anchored in Puerto Rico
Popular’s Q1 saw net interest margin expand and retail deposit momentum in Puerto Rico offsetting flat U.S. loan demand. Management reaffirmed NII and loan growth guidance, highlighting transformation initiatives and stable credit quality as levers for 2024. Capital actions, including a potential share repurchase, remain slated for the second half, with core profitability and deposit franchise strength underpinning the outlook.
Summary
- Puerto Rico Drives Performance: Local retail deposits and loan growth offset U.S. commercial softness.
- Margin Expansion Sustained: Net interest margin increased, underpinned by higher loan yields and disciplined deposit pricing.
- Capital Deployment on Deck: Management eyes new capital return actions in H2, contingent on rate and liquidity trends.
Business Overview
Popular (BPOP) is a leading financial services provider in Puerto Rico and the mainland U.S., generating revenue primarily from net interest income (NII), the spread between loan yields and deposit costs, as well as non-interest income from fees, insurance, and card services. Its core segments include Banco Popular de Puerto Rico (BPPR), focused on retail and commercial banking in Puerto Rico, and Popular Bank, which operates in the U.S. mainland with a concentration in New York and Florida. The business model emphasizes a diversified loan book, robust deposit franchise, and ongoing digital transformation to deepen customer relationships and drive operational efficiency.
Performance Analysis
Popular delivered a resilient quarter, with net interest income rising and net interest margin (NIM) expanding by 8 basis points to 3.16%. This was primarily driven by higher average loan balances and loan repricing in a sustained higher-rate environment, partially offset by increased deposit costs, especially in the U.S. operations. Loan growth was modest, as commercial payoffs in both Puerto Rico and the U.S. weighed on end-of-period balances, but average loans still increased due to strong momentum late in Q4.
Deposit franchise strength was evident in Puerto Rico, where retail demand deposits rose $232 million, offsetting lower public deposits and U.S. deposit competition. Non-interest income remained solid, though slightly down sequentially due to seasonal insurance commissions. Credit quality was stable, with normalization trends in unsecured consumer portfolios and a flat ratio of non-performing loans (NPLs) to total loans at 1%.
- Deposit Cost Moderation: Deposit cost increases slowed, especially in Puerto Rico, supporting margin expansion.
- Credit Loss Provisioning: Provision for credit losses decreased quarter-over-quarter, reflecting early benefits from tightened underwriting in consumer lending.
- Operating Expense Discipline: Core expenses were up $3 million, with higher personnel and card processing costs partly offset by lower professional fees and business promotion spend.
Book value per share increased despite capital returns and modest unrealized losses in the investment portfolio. The CET1 ratio of 16.4% remains a strategic buffer, positioning Popular for future capital deployment.
Executive Commentary
"Our results were driven by strong net interest income and expanding net interest margin, stable credit quality, and continued customer growth. The strength of our franchise is once again reflected in the increased experience during the quarter in retail demand deposits in Puerto Rico."
Ignacio Alvarez, CEO
"Net interest margin increased by eight basis points on a GAAP basis and 12 basis points on a tax equivalent basis, driven by higher average loan balances and the repricing of loans and securities. We should continue to see NIM expansion throughout the rest of 2024."
Jorge Garcia, CFO
Strategic Positioning
1. Puerto Rico-Centric Growth Engine
Popular’s core performance is anchored in Puerto Rico, where economic momentum and a strong retail deposit base drive loan growth and margin stability. Consumer spending remains healthy, with credit and debit card sales up 2% year-over-year, and auto and mortgage portfolios expanding. Management sees ongoing opportunity to deepen relationships with over 2 million unique customers through continued transformation and omnichannel investments.
2. U.S. Operations: Selective Growth, Deposit Pressure
U.S. loan demand was soft, with commercial payoffs offsetting construction loan growth. Deposit costs rose more sharply in the U.S., especially via the online channel, reflecting competitive pressures. Management is tightening underwriting in unsecured consumer lending and remains cautious on credit expansion in riskier segments.
3. Capital and Liquidity Flexibility
Popular’s CET1 ratio of 16.4% and robust liquidity position underpin its plan to announce new capital actions—potentially including share repurchases—in the second half of 2024. The timing and scale will depend on rate trends and deposit flows, with management emphasizing a gradual approach rather than a single large step.
4. Transformation and Efficiency Initiatives
Ongoing transformation projects—over 35 in flight—target operational efficiency and digital engagement to support the 14% return on tangible common equity (ROTCE) goal by late 2025. Most efficiency gains are expected to come from top-line growth and slowing expense growth, rather than major cost cuts.
5. Credit Quality and Risk Management
Credit normalization is underway in consumer portfolios, but overall asset quality remains solid. Management proactively tightened underwriting in unsecured lending, resulting in stabilization or improvement in delinquencies. Multifamily exposure in the U.S. is limited, with no rent-controlled loans and conservative loan-to-value metrics.
Key Considerations
This quarter highlights Popular’s ability to generate core earnings growth amid mixed loan demand and deposit cost pressures, while maintaining a high capital buffer and advancing strategic transformation:
Key Considerations:
- Puerto Rico Market Resilience: Economic data, tourism, and infrastructure spending continue to support local loan and deposit growth.
- Deposit Mix and Pricing: Retail deposit strength in Puerto Rico offsets U.S. pricing pressure, but future competition could test cost discipline.
- Capital Return Path: Share repurchase and dividend decisions hinge on liquidity, deposit flows, and unrealized securities losses accreting back to book value.
- Credit Normalization: Consumer credit metrics are stabilizing after targeted underwriting changes, but ongoing vigilance is required as normalization continues.
- Transformation Execution: Success of numerous operational projects is central to achieving ROTCE targets and offsetting expense headwinds.
Risks
Deposit competition in the U.S. and potential shifts in Puerto Rico public fund balances remain key watchpoints for margin and liquidity. Credit normalization in consumer lending could accelerate if macro conditions worsen, and delayed transformation benefits or rising expenses may pressure ROTCE targets. Additionally, unrealized losses in the investment portfolio and regulatory changes could impact future capital actions and book value accretion.
Forward Outlook
For Q2 2024, Popular guided to:
- Continued NIM expansion, supported by loan repricing and stable deposit costs in Puerto Rico.
- Loan growth of 3% to 6% for full-year 2024, weighted toward Puerto Rico commercial, auto, and construction lending.
For full-year 2024, management reaffirmed guidance:
- NII growth of 9% to 13% over 2023.
- Non-interest income of $160 to $165 million per quarter.
- Operating expenses in the $1.89 to $1.95 billion range.
Management flagged that capital return actions will be announced in the second half, with scale and timing contingent on rate environment and deposit trends. Credit metrics are expected to remain stable, with net charge-offs guided to 65–85 basis points for the year.
- Puerto Rico loan and deposit momentum expected to continue.
- U.S. expansion to be selective, with a focus on risk-adjusted returns and cost management.
Takeaways
Popular’s Q1 results reinforce its position as a Puerto Rico-centric franchise with resilient earnings power and a clear path to capital deployment.
- Margin Expansion Anchored in Core Market: Puerto Rico’s economic strength and deposit franchise continue to drive NIM growth, offsetting U.S. headwinds.
- Capital Actions Set for H2: High capital levels and book value accretion position Popular to initiate share repurchases or enhanced dividends later in 2024.
- Transformation Execution Remains Critical: Progress on operational projects and digital initiatives will determine the pace of ROTCE improvement and efficiency gains in 2024 and beyond.
Conclusion
Popular’s first quarter validated its core strengths in Puerto Rico, with expanding margins and stable credit quality underpinning confidence in 2024 targets. The franchise is well positioned for disciplined capital deployment and ongoing transformation, though vigilance is warranted on deposit costs and consumer credit normalization.
Industry Read-Through
Popular’s results highlight the value of a strong local deposit franchise and diversified loan book in navigating a higher-for-longer rate environment. The slowing pace of deposit cost increases and margin expansion in Puerto Rico contrast with ongoing U.S. deposit competition, a dynamic likely to persist for other regional banks with similar market splits. Credit normalization in consumer portfolios is a sector-wide theme, but proactive underwriting adjustments and tight control on unsecured lending are proving effective in limiting losses. Capital return remains a differentiator, but timing and scale will depend on each bank’s ability to manage securities portfolio marks and deposit flows. Peer banks should note the importance of granular deposit mix management, transformation execution, and local economic tailwinds in driving sustainable profitability in 2024.