2023-11-15 17:08:32 ET
Summary
- Popular is a sizable bank with a market capitalization of $4.71 billion.
- The bank has a lumpy operating history with fluctuations in deposits and loans, but the picture isn't necessarily bad.
- Despite appearing cheap from an earnings perspective, the stock is not the most attractive given its volatile results and recent weakness.
If investing were as simple as relying on the valuation of a company, anybody could get strong returns. But that's not how the world works. There are many working parts that go into analyzing a company. Some firms are so straightforward that it really does come down to the valuation. But when you have multiple working parts that differ in nature from one another, that picture changes. A great example of this can be seen by looking at Popular ( BPOP ), a rather sizable bank with a market capitalization of $4.71 billion. At first glance, shares of the bank look quite cheap from an earnings perspective. But earnings have been all over the map and, while shares don't look expensive relative to book value, they don't look cheap either. I wouldn't go so far as to say that the bank is unappealing. But when you look at the picture in its entirety, I would say that there are plenty of reasons why investors might want to take a more neutral stance on the enterprise.
An interesting bank to consider
According to the management team at Popular, the bank is a rather sizable financial institution that's based out of Puerto Rico. As of the end of the most recent quarter, the company had 156 branches located throughout the US territory. It has another 40 locations on the mainland, with 28 of those located in the state of New York. In addition to this, it also has another nine branches split between the US and British Virgin Islands. This is a rather large bank when you consider that it's not really that old. It was only incorporated back in 1984. But through a combination of acquisitions and strong organic growth, the bank has become the multifaceted operator that we see today.
From its branches, the institution provides a wide array of various banking activities for its customers. It accepts deposits on behalf of depositors. It then uses those funds to lend out for various purposes. For instance, it grants commercial loans, including those that are classified as commercial real estate loans and commercial and industrial loans. It originates mortgages, consumer loans such as home equity lines of credit, construction loans, and more. It also provides financing for leases, mostly for automotive dealerships and equipment leasing firms.
Author - SEC EDGAR Data
Over the years, the bank has had a rather lumpy operating history. The value of deposits, for instance, shot up from $56.87 billion in 2020 to $67.01 billion in 2021. Deposits then fell to $61.23 billion in 2022 before eventually rising to $64 billion by the end of the second quarter of this year. During these uncertain times, you want to see consistency when it comes to deposits. But alas, that has not been the case with this institution. In the third quarter of the year, for instance, deposits fell by $667 million. Though it is worth noting that its major customer happens to be the government of Puerto Rico. And most of the drop during that window of time was as a result of fluctuations in deposits for that entity. In fact, even with that drop, the value of deposits associated with the government of Puerto Rico totaled $17.75 billion as of the end of the most recent quarter.
We have seen volatility with other areas of the company as well. But some of them have shown a general trend. For instance, from 2020 through 2022, the value of loans on the company's books grew from $29.59 billion to $32.37 billion. We continue to see growth through the first three quarters of this year, with loans climbing to $34.37 billion by the end of the third quarter. I know that one area that many investors are worried about when it comes to loan exposure involves office properties. High vacancy rates translate to elevated risks. The good news for shareholders is that only about 12% of the company's commercial real estate loan portfolio, or 1.9% of all loans, are classified as office properties. So this is virtually immaterial to the company as things stand today.
Author - SEC EDGAR Data
There are other metrics that we should be looking at as well. Securities are a major source of investment for the company. These have grown from $21.69 billion in 2020 to $26.36 billion in 2022. By the end of the third quarter, they had pulled back to $25.46 billion. Overwhelmingly, these securities are in the form of US T-Bills, US Treasuries, and agency mortgage-backed securities and similar offerings. Cash has also been an interesting topic for the company. It has held as much as $17.97 billion worth of cash and cash equivalents. That was back in 2021. Today, that number is substantially lower at $6.92 billion. Likely the company feels pressured to look for yield given high interest rates and how expensive deposits are. So it seems to have taken a strategy of allocating more capital than it otherwise would in the search for yield. There is also the topic of debt. At the end of 2022, the company had $1.25 billion of debt on its books. That represented a three-year high. Today, that number is about $1 billion. That means that management has focused on paying down debt to some extent. And that's likely because of high interest rates.
Author - SEC EDGAR Data
You would think, given the volatile track record that the bank has seen, that its overall financial position has been a bit volatile as well. When focusing on the present day, you would be right. But prior to this year, things are going quite smoothly. Net interest income expanded from $1.56 billion in 2020 to $2.08 billion in 2022. Non-interest income increased from $512.3 million to $897.1 million. Both of these combined helped net profits more than double from $504.9 million to $1.10 billion. But when it comes to the current fiscal year, things are a bit different. As the chart above illustrates, net interest income and net profits are both down year over year. As you might expect, there were multiple drivers behind the recent drops that we have seen. For starters, the company saw its interest expense on deposits skyrocket from $52.6 million in the first half of last year to $436.7 million the same time this year. Higher expenses, particularly personnel costs, also hurt the company.
This does make it difficult to value the firm. If we were to use earnings from last year, for instance, the bank would be trading at a price to earnings multiple of only 4.3. That would make it one of the cheapest that we have seen using the price to earnings approach. But if we annualize results experienced so far for 2023, we would come in with a priced earnings multiple of 8.1. While still cheap, it's significantly different than the 2022 data suggests. Even though the stock is still cheap on that basis, it is less than ideal from a book value perspective. The price to book multiple is 1.06, while the price to tangible book value is 1.30.
Takeaway
As you can see, Popular is an interesting company. But at the same time, it has a lot of working parts to it that are difficult to assess. At first glance, shares look very cheap. But when you dig a bit deeper, you see that this is not exactly the case. Relative to its book value and tangible book value per share, the stock is not poorly priced. But it's nowhere near what I have seen with other banks. The volatility in things like deposits and loans is also a net negative for the company. At the end of the day, these issues lead me to rate the bank a ‘hold’.
For further details see:
Popular Might Be Popular, But It's Not Exciting