FBP - First BanCorp: Stock Price Due For A Breather Earnings Likely To Continue Full Steam Ahead

• The continued strength in Puerto Rico's economy will likely keep loan growth at a decent level through the end of 2023.
• Higher interest rates will lift the net interest income but erode equity book value.
• The December 2022 target price suggests a small downside from the current market price. Further, FBP is offering a modest dividend yield.

Earnings of First BanCorp (FBP) will likely continue to surge in the remainder of 2022 and full-year 2023. Economic strength in Puerto Rico will drive loan growth, which will, in turn, play a pivotal role in earnings growth. Further, the net interest income will likely continue to benefit from rising interest rates. Overall, I'm expecting First BanCorp to report earnings of $1.58 per share in 2022, up 20% year-over-year. Compared to my last report on the company, I've slightly increased my earnings estimate as I've tweaked upwards my net interest margin estimate. For 2023, I'm expecting the company to report earnings of $1.64 per share, up 4% year-over-year. The year-end target price is quite close to the current market price. Therefore, I’m downgrading First BanCorp to a hold rating.

Strong Regional Economy Bodes Well for Loan Growth

First BanCorp's loan growth improved to 0.7% in the second quarter of 2022 from 0.5% in the first quarter of the year. Further acceleration in the loan growth rate is likely in the third quarter partly because of Puerto Rico's rapidly strengthening economy. The Economic Development Bank for Puerto Rico's economic activity index shows that the Puerto Rican economy has improved sharply so far this year.

Puerto Rico's continuously plunging unemployment rate provides further proof of economic strength.

First Bancorp also has some presence in Florida, which is another rapidly improving market. The state’s unemployment was just 2.8% in June , which is much better than the national average . Further, the state’s coincident index has recovered sharply, which bodes well for loan growth.

First BanCorp's ongoing investments in technology should also bear fruit soon. While economic factors will help increase the market size, technological advancements will help First BanCorp gain market share. As mentioned in the earnings presentation , First BanCorp plans to increase its capital projects-related expenses in the second half of 2022. As these projects have been ongoing for some time, they should not take too long to bear fruit. I'm expecting benefits to accrue in the second half of this year.

Considering these factors, I'm expecting the loan portfolio to grow by 2.7% in 2022 and 3.0% in 2023. Compared to my last report on First BanCorp, I haven't changed my loan growth estimate much.

Equity Book Value to Face Further Pressure

First BanCorp’s tangible book value per share plunged to $7.8 by the end of June 2022 from $10.07 at the end of 2021. Most of the decline was attributable to unrealized losses on the securities portfolio racked up due to rising interest rates. As the fed funds rate was increased by 75 basis points in July, and I'm expecting another 75 basis points hike in the remainder of the year, the equity book value will face further pressure in the second half of 2022. However, retained earnings will support book value per share going forward. The following table shows my balance sheet estimates.

In my last report on First BanCorp, I estimated earnings of $1.49 per share for 2022. I've increased my earnings estimate because I've revised upwards my net interest margin estimate.

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.

Downgrading to a Hold Rating

First BanCorp is offering a dividend yield of 3.0% at the current quarterly dividend rate of $0.12 per share. The earnings and dividend estimates suggest a payout ratio of 29% for 2023, which is the same as the three-year average. Therefore, I’m not expecting an increase in the dividend level. (Side note: I took a three-year average only instead of five years because FBP resumed dividends in late 2018.)

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 1.02x in the past, as shown below.

Multiplying the average P/TB multiple with the forecast tangible book value per share of $8.2 gives a target price of $8.3 for the end of 2022. This price target implies a 48.6% downside from the August 12 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 $15.5 , which implies a 4.3% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 1.5%.

In my last report, I adopted a buy rating on First BanCorp. Since then, the stock price has rallied and crossed the target price. Therefore, I'm now downgrading First BanCorp to a hold rating.

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