FBP - First BanCorp: Puerto Rico's Economy To Boost Earnings

Summary

• Loan growth will likely remain at a decent level thanks to the rapidly improving regional economy.
• The margin is moderately rate sensitive. Therefore, the rising rate environment will have a small positive impact on the margin.
• The December 2023 target price suggests a small upside from the current market price. Further, FBP is offering a good dividend yield.

The strong and rapid improvement in Puerto Rico's economy will likely drive First BanCorp's ( FBP ) loan growth and keep provisioning below normal through the end of 2023. Further, the rising rate environment will have some effect on the net interest margin, thereby boosting earnings. Overall, I'm expecting First BanCorp to report earnings of $1.62 per share for 2022 and $1.67 per share for 2023. Compared to my last report on the company, I've increased my earnings estimates for both years mostly because I've raised my margin estimates. Next year's target price suggests a small upside from the current market price. Based on the total expected return, I'm upgrading First BanCorp to a buy rating.

Puerto Rico's Rapid Economic Recovery Bodes Well for Loan Growth

First BanCorp's rate of loan growth continued to improve in the third quarter of 2022. The management mentioned in the latest conference call that it expects commercial and consumer portfolios to continue to grow while the residential portfolio declines.

I'm expecting total loan growth to remain at a decent level due to the rapid improvement of Puerto Rico's economy. As the region is susceptible to natural disasters, it is important to consider the hurricane season when looking at the regional economy. The peak of Puerto Rico's hurricane season is now behind us without leaving much damage. Due to Hurricane Fiona, electricity and water supply got disrupted. However, LUMA has announced that it had restored services to 99% of its customer base by October 14, 2022.

Post-hurricane economic data is not yet available; nevertheless, I'm sure the strong economic recovery will continue. Before the hurricane, Puerto Rico's economy was rapidly going from strength to strength. The unemployment rate dropped to record lows and economic activity surged, as shown below.

Considering these factors, I'm expecting the loan portfolio to grow by 0.75% every quarter till the end of 2023. Meanwhile, other balance sheet items will grow mostly in line with loans. However, the growth of equity book value will trail loan growth because of unrealized mark-to-market losses on the available-for-sale securities portfolio. The tangible book value per share has already fallen from $9.6 per share at the end of December 2021 to $6.4 per share at the end of September 2022. The following table shows my balance sheet estimates.

In my last report on First BanCorp, I estimated earnings of $1.58 per share for 2022 and $1.64 per share for 2023. I've slightly increased my earnings estimates for both years because I've increased my margin estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Upgrading to Buy Due to a Moderately-High Total Expected Return

Given the earnings outlook, I'm expecting the company to increase its dividend by $0.02 per share in the second quarter of 2023 to $0.14 per share. The earnings and dividend estimates suggest a payout ratio of 32% for 2023, which is close to the 2019-2021 average of 29%. Based on my dividend estimate, First BanCorp is offering a forward dividend yield of 3.6%.

I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value First BanCorp. The stock has traded at an average P/TB ratio of 1.068 in the past, as shown below.

Multiplying the average P/TB multiple with the forecast tangible book value per share of $7.8 gives a target price of $8.3 for the end of 2023. This price target implies a 44.7% downside from the October 26 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $16.0 , which implies a 6.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 10.0%.

I adopted a hold rating in my last report on First BanCorp with a target price of $15.5 per share for December 2022. Since then, the market price has declined by more than 6% resulting in a significant upside to next year's target price. As a result, I'm now upgrading First BanCorp to a buy rating.

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