FBP - First BanCorp.: Earnings Likely To Dip Despite Loan Growth

2023-05-02 21:51:29 ET

Summary

• Loan growth will get constrained by deposit growth and the high-interest-rate environment.
• Deposits and natural disasters are the two main sources of risk.
• The December 2023 target price suggests a very small downside from the current market price. However, the dividend yield is quite high for a bank.

Earnings of First BanCorp. (FBP) will most probably dip this year as revenue growth will be unable to keep up with inflation-driven growth in operating expenses and normalization of provision expenses. I’m expecting the company to report earnings of $1.50 per share for 2023, down 6% year-over-year. Compared to my last report on the company, I’ve reduced my earnings estimate because I’ve decreased my loan growth estimate. Based on the total expected return and the riskiness, I’m adopting a hold rating on First BanCorp.

Deposit Book is the Biggest Source of Risk

First BanCorp opened the largest number of accounts in a month in March, as mentioned in the conference call . However, these new accounts weren’t able to stop the deposit book from continuing to shrink. First BanCorp’s deposits have been declining for the last seven consecutive quarters, so retaining deposits was a problem for FBP long before the cases of SVB Financial ( OTC:SIVBQ ) and First Republic Bank ( FRC ) emerged. Deposits of two other Puerto Rican banks, OFG Bancorp ( OFG ) and Popular, Inc. ( BPOP ), have also declined from a year ago period, so the issue seems widespread in the region. The management mentioned in the conference call that some of the deposit flight was attributable to customers looking for higher-yielding alternatives in the Florida market.

In the worst-case scenario of a deposit run on the bank, FBP won’t shut down because it has more than enough funding available. The company’s total unused available liquidity was 1.14 times the uninsured deposits at the end of March 2023, as mentioned in the presentation .

However, even small slippages in the deposit book can have an adverse effect on the company’s profitability. Due to the deposit trend of the last few quarters, First BanCorp has funded loan growth through borrowings as well as through reductions of securities. As borrowings carry higher rates than deposits, funding loans by borrowings instead of deposits hurts the margin. Therefore, deposit growth determines the bank’s decision to lend.

Loan growth had already slowed down to 0.2% in the first quarter of 2023, which is the lowest growth in the last five quarters. Going forward, the problems on the deposit front will likely pressurize loan growth. Additionally, the high-rate environment will dampen credit demand.

On the plus side, Puerto Rico’s labor market is still near record lows, which indicates a healthy level of business activity. Even though the unemployment rate will most probably rebound, it will likely remain below the level seen in previous years.

Overall, I’m expecting the loan portfolio to grow by 2.5% and the deposit book to grow by 1.7% in 2023. Compared to my last report on the company, I’ve reduced my loan growth estimate mostly because of the first quarter’s disappointing performance. The following table shows my balance sheet estimates.

Other Risk Sources Include Natural Disasters

Apart from the risks emanating from the deposit book (discussed above), First BanCorp’s riskiness is also attributable to its location. Puerto Rico is highly vulnerable to hurricanes, which makes the company’s earnings uncertain.

Otherwise, First BanCorp’s risk level is low. All three failed U.S. banks, First Republic Bank, Signature Bank ( OTC:SBNY ), and SVB Financial ( OTC:SIVBQ ) had exposure to California, while FBP does not. Further, First BanCorp does not operate in the risky areas of cryptocurrencies and venture capital.

Adopting a Hold Rating

First BanCorp is offering a dividend yield of 5.1% at the current quarterly dividend rate of $0.14 per share. The earnings and dividend estimates suggest a payout ratio of 37% for 2023, which is above the four-year average of 29%, but still easily sustainable. Therefore, I’m not expecting another increase in the dividend level this year.

I’m using the peer average price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First BanCorp. Peers are trading at an average P/TB ratio of 1.33 and an average P/E ratio of 7.5, as shown below.

Multiplying the average P/E multiple with the forecast earnings per share of $1.50 gives a target price of $11.3 for the end of 2023. This price target implies a 1.9% upside from the May 2 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $11.0 , which implies a 0.3% downside from the current market price. Adding the forward dividend yield gives a total expected return of 4.7%. Hence, I’m adopting a hold rating on First BanCorp. stock.

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