FBP - First BanCorp: Fairly Priced With A Flattish Earnings Outlook

2023-12-09 08:03:39 ET

Summary

• Puerto Rico’s economic outlook is now better than before; therefore, I’ve decided to revise upward my loan growth estimate.
• The margin will likely stop declining in the fourth quarter of 2023.
• The December 2024 target price suggests a small upside from the current market price. Further, FBP is offering a modest dividend yield.
• FBP’s location is the biggest source of risk.

Earnings of First BanCorp. ( FBP ) will likely remain flattish as loan growth will counter the effect of operating expense growth. I’m expecting the company to report earnings of $1.60 per share for 2023 and $1.58 per share for 2024. Compared to my last report on the company, I’ve slightly increased my earnings estimate as I’ve raised my loan growth estimate. Next year’s target price suggests a small upside from the current market price. Based on the total expected return, I’m maintaining a hold rating on First BanCorp.

Pipelines, Regional Economy Bode Well for Loan Growth

First BanCorp’s loan growth continued to remain at a satisfactory level during the third quarter. The management mentioned in the conference call , “We expect loan growth to remain in line with our mid-single-digit growth guidance as we continue to redeploy a portion of the investment portfolio cash flows into higher-yielding assets in the loan portfolio. Also, we do expect the facilities of the construction loan that were approved this year to begin to accelerate into disbursements.”

A construction project worth mentioning is a highway whose financing FBP will contribute to. As mentioned in the conference call, FBP has committed $150 million to the highway transaction, which translates to a loan growth of 1.3%.

Apart from the construction pipeline, the region’s strengthened job market also bodes well for loan growth. As shown below, the unemployment rate is near record lows. Further, the IMF expects the unemployment rate to worsen only slightly from the current level. Even after the worsening, the IMF expects the unemployment rate to remain much better compared to previous years.

Since my last report on FBP, which was issued in early May, Puerto Rico’s economy has improved tremendously. At that time, the IMF was expecting the unemployment rate to settle around 9.00% (please see the chart in my last report), while now it foresees the long-term unemployment rate to stand at 6.10%. As a result, I’ve decided to raise my loan growth estimate.

I’m now expecting the loan portfolio to have grown by 4.5% in 2023. Further, I’m expecting the loan portfolio to grow by 4.1% in 2024. The following table shows my balance sheet estimates.

In my last report, which was issued before the second quarter’s results, I estimated earnings of $1.50 per share for 2023. I’ve revised upwards my earnings estimate because I’ve increased my loan growth estimate. Moreover, the operating expenses reported so far have been below my previous expectations; therefore, I’ve reduced my non-interest expense estimate for the full year.

Risks Appear to be Moderate

Most of First BanCorp’s riskiness stems from its location. Puerto Rico is highly vulnerable to hurricanes, which makes the company’s earnings uncertain. However, as the next hurricane season is more than six months away, I’m currently not too worried.

Further, the company has a very large balance of unrealized losses on its available-for-sale securities portfolio. According to details given in the 10-Q filing , these losses amounted to $844.9 million, which is around 65% of the total equity balance. I’m expecting these losses to start reversing when interest rates start declining later next year.

Fortunately, First BanCorp’s deposit book is not risky because the company has enough available liquidity to comfortably cover all of its uninsured deposits. As of the end of September 2023, FBP had available liquidity of approximately $5.1 billion, or 1.1x of uninsured deposits, as mentioned in the earnings presentation .

Maintaining a Hold Rating

First BanCorp is offering a dividend yield of 3.5% at the current quarterly dividend rate of $0.14 per share. The earnings and dividend estimates suggest a payout ratio of 35% for 2024, which is close to the three-year average of 29%. Therefore, I’m not expecting any change in the dividend level.

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 1.75 and an average P/E ratio of 12.0, as shown below.

Multiplying the average P/E multiple with the forecast earnings per share of $1.58 gives a target price of $19.0 for the end of 2024. This price target implies a 19.7% upside from the December 8 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 $16.7 , which implies a 5.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 8.9%. Hence, I’m maintaining a hold rating on First BanCorp.

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