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 $150 million to the highway transaction, which translates to a loan growth of 1.3%.
Apart from the construction pipeline, the region’s strengthened job market also bodes well for loan growth. As shown below, the unemployment rate is near record lows. Further, the IMF expects the unemployment rate to worsen only slightly from the current level. Even after the worsening, the IMF expects the unemployment rate to remain much better compared to previous years.
Since my last report on FBP, which was issued in early May, Puerto Rico’s economy has improved tremendously. At that time, the IMF was expecting the unemployment rate to settle around 9.00% (please see the chart in my last report), while now it foresees the long-term unemployment rate to stand at 6.10%. As a result, I’ve decided to raise my loan growth estimate.
I’m now expecting the loan portfolio to have grown by 4.5% in 2023. Further, I’m expecting the loan portfolio to grow by 4.1% in 2024. The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 8,887 | 11,442 | 10,827 | 11,305 | 11,813 | 12,293 |
Growth of Net Loans | 2.1% | 28.8% | (5.4)% | 4.4% | 4.5% | 4.1% |
Other Earning Assets | 2,398 | 4,926 | 6,658 | 6,086 | 5,610 | 5,723 |
Deposits | 9,348 | 15,317 | 17,785 | 16,143 | 16,600 | 17,103 |
Borrowings and Sub-Debt | 854 | 924 | 684 | 934 | 662 | 675 |
Common equity | 2,192 | 2,239 | 2,102 | 1,326 | 1,339 | 1,520 |
Book Value Per Share ($) | 10.1 | 10.3 | 9.9 | 6.9 | 7.6 | 8.6 |
Tangible BVPS ($) | 9.9 | 9.9 | 9.6 | 6.6 | 7.3 | 8.3 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
Margin Stabilization Likely from 4Q2023
First BanCorp’s net interest margin dipped by a total of 22 basis points in the first nine months of 2023, which isn’t too bad. The reduction in the margin was largely attributable to deposit pricing pressures. In my last report, I mentioned that I was concerned about the seven-quarter streak of deposit book declines. I was worried that FBP would have to fund its loan growth through expensive borrowing, as it was finding it difficult to increase its deposits. Since then, First BanCorp has proved me wrong. Not only was the management able to curb its deposit decline, but it was also able to partially fund the loan growth by liquidating lower-yielding securities. This balance sheet repositioning helped the margin.
The management mentioned in the conference call, “We expect somewhat normalization in the margin towards the beginning of '24 based on the expectation that our interest rate increases will stabilize, thus normalizing some of the deposit pricing pressures we've had.”
I believe the management’s expectation is reasonable as the up-rate cycle seems to have already ended in the fourth quarter of 2023; therefore, the deposit pricing pressure should wane in the current quarter only.
Moreover, the management has made it clear since the issuance of my last report that it wants to fund loans through either deposits or liquidation of its securities. This puts my concerns at ease that growth in borrowings could hurt the margin going forward.
Overall, I’m expecting the margin to remain unchanged in the fourth quarter of 2023 and then rise by 10 basis points in 2024.
Expecting Flattish Earnings
I’m expecting operating expenses in 2024 to grow at a similar rate as in 2023. This is because now that the up-interest-rate cycle has apparently ended, the pace of disinflation should also slow down. Overall, I’m expecting operating expenses to have grown by 5.5% year-over-year in 2023. For 2024, I’m expecting these expenses to grow by 5.4%.
The growth in operating expenses will likely counter the effect of the anticipated increase in the loan portfolio size and the limited net interest margin expansion. Overall, I’m expecting First BanCorp to report earnings of $1.60 per share for 2023 and $1.58 per share for 2024. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 567 | 600 | 730 | 795 | 801 | 838 |
Provision for loan losses | 40 | 171 | (66) | 28 | 60 | 60 |
Non-interest income | 91 | 111 | 121 | 123 | 129 | 133 |
Non-interest expense | 378 | 424 | 489 | 443 | 467 | 492 |
Net income - Common Sh. | 164 | 100 | 277 | 305 | 284 | 280 |
EPS - Diluted ($) | 0.76 | 0.46 | 1.31 | 1.59 | 1.60 | 1.58 |
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
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.
Symbol | Selection Criteria | P/E ("fwd") | P/E ("ttm") | P/B ("ttm") | P/TB ("ttm") |
FBP | 9.92 | 9.64 | 2.12 | 2.21 | |
CVBF | Market Cap | 11.95 | 11.35 | 1.39 | 2.32 |
TCBI | Market Cap | 14.93 | 7.66 | 0.99 | 0.99 |
INDB | Market Cap | 11.31 | 10.43 | 0.93 | 1.43 |
FHB | Market Cap | 11.08 | 9.97 | 1.13 | 1.97 |
BOH | Market Cap | 15.26 | 13.29 | 2.20 | 2.26 |
BPOP | Location | 10.16 | 7.87 | 1.25 | 1.57 |
OFG | Location | 9.43 | 9.33 | 1.53 | 1.69 |
Peer Average | 12.02 | 9.99 | 1.35 | 1.75 | |
Source: Seeking Alpha |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $8.3 gives a target price of $14.5 for the end of 2024. This price target implies a 9.0% downside from the December 8 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.55x | 1.65x | 1.75x | 1.85x | 1.95x |
TBVPS - Dec 2024 ($) | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 |
Target Price ($) | 12.8 | 13.6 | 14.5 | 15.3 | 16.1 |
Market Price ($) | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 |
Upside/(Downside) | (19.4)% | (14.2)% | (9.0)% | (3.8)% | 1.5% |
Source: Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $1.58 gives a target price of $19.0 for the end of 2024. This price target implies a 19.7% upside from the December 8 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 10.0x | 11.0x | 12.0x | 13.0x | 14.0x |
EPS - 2024 ($) | 1.58 | 1.58 | 1.58 | 1.58 | 1.58 |
Target Price ($) | 15.9 | 17.4 | 19.0 | 20.6 | 22.2 |
Market Price ($) | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 |
Upside/(Downside) | (0.3)% | 9.7% | 19.7% | 29.6% | 39.6% |
Source: Author's Estimates |
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.
For further details see:
First BanCorp: Fairly Priced With A Flattish Earnings Outlook