Q4 2022 Popular Inc Earnings Call
Okay.
Hello, and welcome to todays popular fourth quarter 2022 earnings call. My name is Bailey and I'll be the moderator for today's call.
Vince will be muted during the presentation portion of the call with an opportunity for questions and answers at the end maybe you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference over to our host Paul Cardillo Investor Relations Officer. Please go ahead.
Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our CFO Javier for our CFO , Carlos Vazquez, and our CRO video Suriano.
Bill will review our results for the full year and fourth quarter and then answer your questions. Other members of our management team will also be available during the Q&A session.
Before we begin I would like to remind you that on today's call. We may make forward looking statements that are based on management's current expectations and are subject to risks and uncertainties factors that could cause actual results to differ materially from these forward looking statements are set forth within todays earnings press release and are detailed in our SEC filings.
You may find today's press release, and our SEC filings on our webpage at popular Dot com.
I will now turn the call over to our CEO Ignacio Alvarez.
Morning, and thank you for joining the call.
Our results for the quarter and the full year were solid and reflect the strength of our franchise.
Our record annual net income of $1 1 billion, reflecting an increase of $168 million above our 2021 annual net income of $935 million.
The increase was largely driven by the benefit of the <unk> transaction and the partial reversal of the DTA valuation allowance.
The results also reflect higher net interest income, partially offset by higher provision expense and higher operating expenses.
The 2021 results included a provision benefit of 193.
During the summer we completed the acquisition of key customer facing channels from everything.
And also made important changes to our contractual relationship with them.
Leveraging these transactions, we have embarked on a broad based multi year technological and business process transformation.
The needs and expectations of our clients as well as the competitive landscape have evolved.
Requiring us to make important investments in our technological infrastructure and adopt more agile practices.
Our technology and business transformation will be a significant priority for the company over the next three years and beyond.
We believe that there continues to be opportunity for growth in our primary market as well as within our existing customer base and these efforts will help to capitalize upon that opportunity.
We are confident that these investments will make us a stronger more efficient and profitable company.
Throughout 2022, we continue to return capital to our shareholders. During the year, we repurchased eight 5 million shares of common stock for $631 million, which surpassed our original expectation of $500 million. We also increased our quarterly common stock dividend to <unk> 55 per share.
Presenting nearly 164 million dividends paid in 2022.
Credit quality remained strong throughout 2022.
We are pleased with how our portfolios have continued to perform.
Frequently with net charge offs, well below historical levels and a lower level of nonperforming loans.
Our capital levels are strong with year end common equity tier one ratio of 16, 4%.
Our tangible book value ended 2022 at $44 97.
31% decrease year over year, primarily due to unrealized losses on investment securities.
However, during the fourth quarter tangible book value increased by 16%.
Please turn to slide four.
Our quarterly net income excluding the partial reversal of the DTA valuation allowance.
$189 million or $7 million lower than the adjusted third quarter net income of $196 million.
Fourth quarter results were impacted by lower net interest income, which reflected higher loan income was more than offset by the higher cost of public deposits as well as a higher provision for credit losses.
Loan growth was strong and broad based during the quarter, both geographically and across most loan segment.
Total loan balances held in portfolio grew by $560 million.
Commercial loan growth in particular, it was healthy at both banks in the fourth quarter.
Our net interest margin decreased by four basis points to 328% in the quarter.
Higher deposit costs, particularly in our Puerto Rico public deposit portfolio and in popular bank impacted the margin.
This was offset in part by an improvement in asset mix due to loan growth and a reduction in the investment portfolio.
Credit quality trends remained favorable during the period nonperforming loans decreased in the quarter and net charge offs have remained well below pre pandemic levels. Please turn to slide five.
Our customer base in Puerto Rico.
Approximately 28000 during the year, reaching 198 million unique customers.
Adoption of digital channels, among our retail customers continues to be strong.
Active users on our <unk> platform exceeded $1 1 million or 56% of our customer base.
Additionally, we continue to capture 160% of our deposits through digital channels.
This trend remains significantly higher than pre pandemic levels.
And well above our island peers.
Commercial loan growth was strong commercial loan balances at <unk> in popular bank increased by $118 million and 255 million.
<unk>.
Credit card and auto loan and lease balances at <unk> increased by $53 million and $31 million respectively.
In the fourth quarter, the dollar value of credit and debit card sales of our customers increased by 11% sequentially and were 6% above the fourth quarter of 2021.
As on the mainland mortgage originations, Puerto Rico have been impacted by rising rates and limited inventory available properties.
The dollar value of mortgage originations <unk> decreased by 29% compared to the fourth quarter of last year.
Even by lower repurchase activity due to the interest rate environment, However loans to finance the purchase of homes increased only 11% during the same period.
The local economy continues to perform well during the fourth quarter and business activity has remained strong.
We remain encouraged by solid employment levels in.
In December total non farm employment in Puerto Rico increased slightly from a southern September and was 4% higher than in December of 2021.
Auto sales increased by 3% in the fourth quarter compared to the same period in 2021.
While auto sales declined by 4% in the year.
2022 was the second highest sales since 2006.
Easily surpassing pre pandemic levels evidencing continued robust demand for cars.
The industry is forecasting new car sales of 118000.
With 2023, well above pre pandemic levels.
The jurors tourism and hospitality sector continues to be a source of strength for the local economy as Puerto Rico is a popular destination for mainland residents.
Airport traffic has remained robust year to date through December total passenger traffic increased by 7% compared to 2021.
Wholesale demand has also remained strong.
Occupancy rates were up more than 500 basis points in 2022, and the average daily room rate continue to compare favorably to historical results in short we are pleased with our results for the year, particularly our robust loan growth and continued strength in credit quality.
We are mindful of the global economic uncertainty uncertainty and market volatility.
Main optimistic about the future of Puerto Rico, our primary market and our ability to manage through any potential challenges that may lie ahead.
I'll now turn the call over to Carlos for a more detailed financial results.
Thank you Ignacio good morning, before we turn to fourth quarter results, let me expand on our.
2022 full year.
Included in the appendix to this presentation and today's press release.
In 2022, we reported record annual net income of $1 $1.168 billion below our 2021 annual net income.
The increase was largely driven by the benefit of AMETEK transactions and the partial reversal of the DTA evaluation allowance somewhat offset by provision expense.
Our net interest income increased by 11% year over year to $2 17 billion due to higher rates loan growth and the change in the mix of earning assets for the year, We reported an 83 million provision for credit losses, which compares to a provision benefit of $193 million in 2021.
Noninterest income increased by $254 million year over year, primarily driven by the impact will be able to take transactions operating expenses increased 13% in 2022 to $1 75 billion with higher personnel technology professional fees and regulatory cost. Please.
Please turn to slide six.
Net income for the fourth quarter was $257 million.
This compares to $422 million in Q3, excluding.
Excluding the impact of the <unk> transactions in Q3, and the DTA reversal in Q4 net income decreased $7 million to $189 million in Q4.
Net interest income for the fourth quarter was $560 million, so ubiquitous of $20 million from Q3.
Interest income grew by $62 million from loan growth of both banks as well as higher yields on loans and investment Securities. This was more than by offset by higher interest expenses on deposits, resulting from increased deposit rates, mainly from Puerto Rico public deposits and to a lesser extent.
Noninterest.
<unk> income was $168 million, a decrease of 268 million from Q3.
The results of the third quarter included a 258 million pre tax gain on the aerotech transactions and a favorable fair value purchase price adjustment of $92 million related to the U S equipment finance business, we acquired in 2021.
These items the remaining variance in net interest income, resulting mainly from lower deposit service fees.
The fourth quarter noninterest income results fully embed the changes in overdraft policies and the reduction in equity pick up from the sale of arthritic shares the.
The results also included an $8 2 million gain on the sale of a previously written off investments.
Excluding this gain our noninterest income for the quarter would have been approximately $150 million.
For 2023, we expect noninterest income to continue around this 150 million per quarter run rate of approximately 600 billion for the year.
The provision for credit losses in the fourth quarter was $50 million compared to $40 million in the third quarter.
Total operating expenses were $462 million in the quarter, a decrease of $14 million from the prior quarter.
Q3 includes 17 million expenses related to be able to take transactions and a 9 million goodwill impairment on our U S equivalent figures business. Excluding these items expenses increased by $12 million, mostly resulting from a 10 million increase in technology expenses seasonally higher business promotion expense.
By $4 million higher other processing into essential services by $4 million, mainly due to higher network incentives received during the prior quarter and higher professional fees.
For 2023, we expect annual expenses of approximately $1 87 billion compared to our expenses a $1 75 billion during 2022.
The drivers of the $120 million increase will be first continued increase in personnel expenses drill.
Driven primarily by the previously announced increase in our minimum hourly wage from 13 to $15, which took effect on January one.
This will add approximately 15 million to expenses in 2023.
Charlie <unk>.
The market salary adjustments that were made effective on July 1st of all last year will be in effect for the full year 2023.
Also be a $2 3 million increase that traditionally has granted into some.
These two items was approximately 24 million to expenses in 2023.
These actions are necessary to keep our compensation competitive.
Second we expect that the Fdic's two basis point increase in assessments to all depositary institutions will add $14 million to expenses.
Pension and retirement healthcare expenses also increased by $19 million.
Finally, as Ignacio described in his operating opening remarks, we have undertaken a significant multi year corporate transformation initiatives.
Part of this transformation, we need to expand our digital capabilities modernize our technology platform and to implement agile and efficient business processes across the entire company.
Since completing the <unk> transactions on July one through the end of last year, we invested $24 million towards this effort primarily in professional fees and technology expenses in 2023, we anticipate transformation related expenses of $50 million.
These technological ways of working and operational investments will result in an enhanced digital experience for our clients as well as better technology more efficient processes for our employees. We expect these efforts to contribute to higher earnings and at better efficiency, resulting in a sustainable 40% RTC targets.
By the end of 2025.
To facilitate the transparency of our progress in some of these efforts we have now separated technology professional fees and transactional activities.
Items in our income statement.
Our effective tax rate for the quarter was a benefit of 24% compared to an expense of 14% in the third quarter.
Income tax benefit in Q4 was mainly due to the 68 million partial reversal of the DTA valuation allowance of the U S operation.
Excluding this impact the effective tax rate for the fourth quarter was 12% compared to 14% in the third quarter.
This partial reversal was based on our evaluation of the sustained profitability of the U S operation over the last two years as was evidenced in our stable credit metrics, while considering the remaining life of the net operating losses.
December 31, 2022, the DTA related to U S operations was $278 million net of our valuation allowance of $423 million.
For the full year 2023, we expect the effective tax rate to be in a range of 18% to 22%.
Please turn to slide seven.
Net interest income was $560 million.
Taxable equivalent basis, it was 622 million $25 million lower than in the third quarter.
Net interest margin decreased by four basis points to 328% in Q4.
On a taxable equivalent basis, NIM was 364% a decrease of seven basis points.
The decrease is driven by higher interest expense on deposits due to a significant though anticipated 159 basis point increase in the cost probably deposits due.
It was partially offset by higher loan balances and yields rose on improved mix of earning assets.
At the end of the fourth quarter, although the buses for roughly $15 2 billion a decrease of $2 2 billion from Q3.
We expect pollo the buses to be in a range of $13 billion to $15 billion during 2023.
Over the next couple of quarters the bonds to further process should increase given the cyclical nature of tax collections. However, the bonuses should decrease during the second half of 2023.
Excluding Puerto Rico public deposits deposit balances declined by $1 4 billion in the quarter, mainly from excess cash balances of corporate clients.
These declines are reflective of clients pursuing better yields on excess liquidity.
Popular continues to have a strong relationship with this client.
Our Puerto Rico commercial deposit.
<unk> remains 5 billion higher than they were in December of 2019.
We will continue to actively manage the cost of commercial deposits taking into consideration the overall client relationship and our liquidity position.
Retail that bus advances remained stable.
Our ending loan balances increased by $560 million or almost 2% compared to Q3.
Up by $2 8 billion or just under 10% year to date.
Commercial loan growth was particularly strong.
Low segments were higher in the quarter, except for construction.
We are encouraged by credit demand <unk> NPV, we will continue to take advantage of opportunities to extend credit, thereby improving the use and yield of our existing liquidity.
While we expect to see continued strong loan growth in 2023, we did not anticipate it will replicate 2020 twos exceptional growth rate.
Let's turn to slide eight.
Year to date, our retail deposit franchise, particularly in Puerto Rico has continued to track below historical data.
Deposit betas have remained low for are now tracking slightly above the prior cycle.
Combined retail and commercial deposits represent a lower proportion of total deposits compared to the last rate cycle due to the increase in public deposits.
As we discussed last quarter during their rapid shift.
Two higher interest short short term interest rates, we expect a significant increase in the cost of public deposits in the fourth quarter. The cost increased by 159 basis points. We expect the magnitude of the increase in cost of deposits to moderate in Q1 to approximately 120 basis points.
As we have described in the past to deposit pricing agreement with Puerto Rico public sector clients is market linked with a lag.
This source of funding, resulting in attractive in an attractive spreads under market rates.
Please turn to slide nine.
In 2022, we reported a decrease in fair value of the investment portfolio that we expect to be temporary.
Our investment portfolio is almost entirely comprised of Treasury and agency mortgage backed securities, which carry minimal credit risk.
The bond portfolio has an average duration of approximately two eight years.
As a physician roll down the yield curve, therefore value will converge the park and then Mark will go down to zero.
As discussed in our last webcast during their rapid increase in interest rates in 2022, as well as the uncertain outlook for interest rates.
We transferred to held to maturity $6 5 billion of U S treasuries in the 4% to six year term.
By reducing the future impact of rates on tangible book value.
At the time this action reduced ALC, our exposure to interest rates by about a third.
When transferred to HTM. These physicians had a pretax unrealized loss of $873 million.
We amortize back into capital throughout the life of the transferred positions.
As of the end of the fourth quarter the balance of the unrealized loss stood at 832 million a reduction of 42 million.
We expect a similar quarterly amortization through 2026.
The yield on transfer Securities remains the same and no losses were recognized as a result of this move.
Jennifer doesn't have a material effect on our liquidity as we continue to maintain a large available for sale portfolio in short term treasuries and cash or deferred.
The changes.
Realized gains and losses in <unk> have an impact on the corporation's annual capital ratios as well as those of our wholly owned banking subsidiaries with data do not impact regulatory capital ratios.
Please turn to slide 10.
Our return on tangible equity was 19, 2% in the quarter.
Regulatory capital levels remained strong our common equity tier one ratio increased by 35 basis points in Q4 to 16, 4%.
In December we completed our previously announced $231 million ASR.
Repurchasing approximately $3 2 million shares.
And average purchase price of $72 66.
To summarize our capital elections last year, we repurchased 631 million common stock or 825 million shares via two separate ASR and increase our quarterly dividend by <unk> <unk> per share to 55 per share.
Tangible book value at quarter end was $44 97 per share an increase of $6 28 per share from Q3 driven.
Mostly by quarterly net income of $257 million.
The favorable variance of $183 million in unrealized losses on securities available for sale.
Partially offset by dividends of $40 million declared in the quarter.
Our local capital return has not changed and our strong regulatory capital ratios over time, we expect our regulatory capital ratios to gravitate towards the levels of our mainland peers plus a spread.
I'll give you the continuous economic uncertainty, we still plan to revisit our future capital elections in the second half of 2023, once we have more clarity around the outlook for interest rates and the economy.
I'll turn the call over to you. Thank.
Thank you Carlos and good.
Morning.
Overall.
That continues to reflect stable credit quality trends.
Low levels of net charge offs and decreasing nonperforming loans.
We remain encouraged by the performance of our loan book post pandemic.
Specifically early delinquency net charge offs and nonperforming loan formation continue to trend significantly below pre pandemic levels.
We also believe that the improvement in the risk profile of the corporation's loan portfolio positions popular to operate successfully on a more difficult economic conditions.
We remain vigilant and continue to closely monitor.
In borrower performance and the macroeconomic environment.
Given potential economic headwinds rising interest rates and geopolitical uncertainties.
Turning to slide number 11.
Nonperforming assets decreased by $18 million.
$520 million this quarter.
Driven by NPL decrease of $40 million.
Coupled with our wholesale decrease of $4 million.
In Puerto Rico, Npls decreased by $8 million driven.
Driven by lower mortgage npls of $10 million and lower commercial npls by $5 million.
Part offset by higher auto npls by $7 million.
In the U S npls decreased by $6 million mainly.
Mainly due to a 9 million charge off on a previously reserved commercial borrower in the healthcare industry.
Compared to the third quarter NPL inflows.
Consumer loans decreased by $3 million.
Driven by the U S. Healthcare relationship mentioned previously that was placed in nonaccrual nonaccrual in the prior quarter.
Offset in part by higher mortgage inflows in Puerto Rico.
The other quarter.
<unk> to total loans held in portfolio.
Remained flat at one 4% compared to the previous quarter.
Turning to slide number 12.
Net charge offs amounted to $31 million.
Annualized 39 basis points of average loans held in portfolio.
Compared to $18 million.
Or 24 basis points from the prior quarter.
The results for the quarter were impacted by the 9 million charge off on the previously reserved healthcare relationship in the U S.
Excluding this item net charge off ratio was comparable to last quarter at 28 basis points.
In Puerto Rico drove remains stable, increasing by one five quarter over quarter, mainly driven by higher consumer net charge offs by $5 5 million.
Mostly due to the auto portfolio in part offset by lower mortgage net charge off by $4 million.
The corporation allowance for credit losses increased by $17 million.
Or two 5%.
$320 million.
Driven by changes in macroeconomic scenarios higher loan volumes and changes in credit quality.
The ratio of allowance for credit losses to loans held in portfolio.
Stable at $2, 25% compared to $2, 23% in the previous quarter.
As you for allowance for credit losses to Npls held in portfolio.
64% compared to under 55%.
The prior quarter.
The provision for credit losses expense of $48 million compared to $40 million in the previous quarter, reflecting the changes in the allowance for credit losses.
Activity.
Puerto Rico, the provision for credit losses was $44 million.
Compared to $29 million in the prior quarter.
The provision was $44 million compared to $11 million in the prior quarter.
Please turn to slide number 13.
As discussed in prior webcast.
We leveraged Moody's analytics for the U S and Puerto Rico economic forecast.
Notwithstanding general economic uncertainty.
Moody's baseline outlook remains for the U S economy to continue.
The recession free.
Moody's fourth quarter forecast however.
It reflects a slowdown in the economy with lower <unk>.
GDP growth for both Puerto Rico, and the U S.
The baseline scenarios assume a 2023 annualized GDP growth for Puerto Rico on the U S.
Of one, 3% and cedar, 0.7%, respectively compared to two 2%.
One 5% in the previous quarter.
The reduction is due to the expected slowdown in the economy.
Result of tight monetary policy.
The 2023 average unemployment rate remained consistent quarter.
Quarter over quarter.
Our framework for the allowance incorporates multiple economic scenarios.
In the fourth quarter, we assigned the highest probability based.
Baseline scenario.
So closely.
Pessimistic recession scenario S III.
The quarter over quarter difference.
For credit losses was driven by the macroeconomic scenarios and portfolio changes, which includes loan growth and changes in credit quality.
To summarize.
On portfolio continue to exhibit strong credit quality metrics in the fourth quarter.
Net charge offs and decreasing nonperforming loans.
We remain attentive to the evolving environment.
But remain encouraged by the <unk>.
Pandemic performance of our loan book with that I would like to turn the call over to Ignacio for his concluding remarks. Thank you.
Thank you Leon Carlos for your updates.
2020 was an outstanding year for popular in addition to record earnings we achieved strong credit quality continued customer growth close the AMETEK transactions.
Launched our transformation and successfully executed on our capital actions.
Our franchise provides a powerful.
Platform to go beyond serving our customers. It also affords us the opportunity to positively impact the lives of our colleagues and communities and create value for our shareholders. In 2020, do we reach key milestones, including participating in the Bloomberg gender equality index eating our ninth corporate Secretary report.
Also following hurricane Fiorina, we provided immediate relief to affected communities and clients and assistant impacted employees.
Looking ahead I am optimistic about the economic outlook in Puerto Rico, our primary market.
We are aware of the macroeconomic headwinds related to inflation and geopolitical risks we are confident that given the amount of stimulus support from federal funds, Puerto Rico will continue its growth path, albeit perhaps at a slower pace.
2023 marked <unk> 130, <unk> anniversary since.
Since 18, 93, we have successfully adapted and lead to changing conditions.
And we are proud of our history and the legacy that made <unk>. What it is today, a strong vibrant organization with deep rooted values.
Leveraging these strengths will continue to transform our organization to ensure success for many years to come into.
This entails meeting the rapidly changing needs of our customers.
Providing our colleagues a workplace, where they can thrive for many promoting progress and the communities we serve.
And generate sustainable value for our shareholders.
The team is energizing is energized and looking forward to another strong year, we are now ready to answer your questions.
Thank you.
We would like to ask a question. Please press star followed by one on your telephone keypad.
And for any reason you would like to turn that question. Please press star followed by two again to ask a question. Please press star followed by one.
Remind me if you are using a speaker phone. Please remember to pick up your handset before you ask your question.
Our first question today comes from the line of Tmall <unk> from Wells Fargo. Please go ahead. Your line is now open.
Hi, good morning, Thanks for the questions.
Maybe starting on expenses and the technology and business process transformation that has been laid out I guess on the back end of that how should we think about popular.
<unk> investment in kind of standing up <unk> and getting that.
Yes.
Investment kind of up to where you expect it to be or is this getting popular and more broadly on pace with a broader group or do you expect that at the back end of 'twenty five for popular to be an industry leader when it comes to tech and innovation.
Yes, I think I think this is Ignacio I think thank you for the question I think everything was the initial phase it's more than just <unk>, obviously <unk> has positioned ourselves to be able to begin to transform our technological foundation.
It's more than just taking over.
The services I would take those providing for us that wasn't essential said, but obviously our goal is to be able to compete.
With different.
Different entities that.
That are coming to the market, especially in terms of giving digital options to our clients. So yes, we aspire.
We aspire to be if not best in class at the top.
Quartile in terms of the.
The services and the products, we can offer our clients and popular has traditionally been a leader in technology and Puerto Rico.
And given what's happening now I think it's more important than ever.
We take this initiative on.
Okay, and then in terms of investing into this initiative is the expectation kind of $50 million per year through 'twenty, five or does that ramp higher as you get closer to completion.
Yes, I'm not sure we being able to nail that down at this point in time Timur.
I think the what.
What we expect will happen over time.
The expense will shift from from the press and expense which is more.
<unk> tours.
Special services and consultants and people are trying to help help us stand up and set up.
What we wanted to do and where we want to go.
We'll shift to execution.
So.
Again, we havent nailed down the number.
Looking forward to 'twenty five the composition of the expense will change.
Into execution.
<unk>.
And.
Putting in place.
The systems and the technology that we're designing and selecting right now.
Okay, Great and then maybe moving to NII and NIM it looks like the inflection point happened here in the fourth quarter, just maybe an outlook for the.
The magnitude of the remaining inflection as those public funds continue to.
To lag already happened interest rate hikes, and then more importantly kind of once that lag is complete what's the outlook for NII and NII growth from there.
Yes.
The.
The components that led to our margin coming down this quarter those pressures still still exist.
The first quarter and move forward you described them properly that the most important one being.
The increase in cost of public deposits.
We as we said last quarter, we expect NIM to reap taken upward trend in 2023.
Exactly $1 23.
<unk> will depend on the direction of the drivers do you know what the drivers are.
The rate of loan growth the rate of change in interest rates.
Advances are are the the biggest III drivers and the interaction between those three.
Exactly.
What happens in the year, but we do expect NIM to retain an upper trend in the year 2003.
Okay, then maybe one last one for me if I can just circling back on the fee income guide for around 150, a quarter I'm just wondering when does that inflect and when do we start seeing some of the positive attributes from the combination with <unk> and getting those assets back in house.
Well the biggest driver of.
The move down from our prior guidance to this 23 guidance is.
Is the change in.
The fact that we don't own the shares they were taking anymore number one number two the change in overdraft policies.
And number three the change on our practice of setting mortgages.
We're not selling anymore.
So those are the biggest drivers.
Shifting down to $1 50 per quarter, roughly obviously remember there's always some seasonality in that number so it goes up and down for different things during the year, but that is the right the right range.
We continue to initiatives on our business initiatives to try to continue to move rates up.
In different fronts, so hopefully.
As those initiatives succeed.
We can start moving freight rates.
Up.
From the $1 50.
Some of those are already.
<unk> implemented.
If everything works well, we may start to see some of that in <unk>.
<unk> three but our best guess right now is one place different quarters.
Got it thank you.
Thank you.
Question today comes from the line of Alex <unk> from Piper Sandler. Please go ahead. Your line is now open.
Hey, good morning, guys.
Good morning.
I just wanted to.
A question on the Tamar is asked a little bit differently I'm, just I'm curious when you put out a target for 2025, why 2025 is that represents sort of an inflection point or an endpoint and some of these initiatives or how can you picked that date for that year.
This is ignacio basically we think that the transformation initiatives.
It's going to be an ongoing effort, it's the way it's going to change the way we work, but obviously.
Just trying to measure our success, we wanted to take an initial three year period, where we see where we're going to be at the three year period and basically that's how we reached 25. It was kind of arbitrary but we felt three years gave us enough time to implement.
The measures that we're doing.
Given time to bear fruit.
That's how we picked it but obviously this is all going.
And obviously, we expect all these efforts to be sustainable now is sustainable so it's not like we're going to reset and stop it.
Keep growing incrementally over time.
Alright, and then.
As popular a leaner institution at that point.
Like whats going to be different.
And then obviously every bank is investing in technology meaningfully, but does it allow you to operate with a reduced branch count or sort of what like what would we see that would be different at that point.
I am not sure branch count is the thing you expect to see the most I mean that will depend on traffic. We can talk about branches separately, but I think obviously.
We're aiming to do a lot more things digitally and we're also aiming to do a lot more things self service. So for example, making our underwriting more more more.
Automatic so you don't have to have as much manual intervention.
This is across especially our businesses, but it will apply to everything we're hopefully we will do or we will do it will help us with our compliance with <unk>. We are investing also in technology, which is very manual today very people oriented so really I can't give you a specific date, but definitely over time.
We should see a lot less manual intervention in many of our processes will be the underwriting.
The compliance.
Everything so I think that's the goal the goal is to be more digital.
More and more self.
Self silvers for our clients and hopefully overtime thats good.
Fact is favorably.
Okay.
Are there any sort of chunks of the initiative that might hit at any point in time, you mentioned that a lot of the fees right now are being conducted towards the planning phase and then theres going to implementation phase, which maybe is more of a 2024 thing but are there segments that you kind of we can sort of look out over the next couple of.
Maybe even more in the near term.
To sort of get a good sense for how to track the progress.
Well I am not sure within the near term, but one of the things that we obviously are going to want to be able to report to you is what percentage of our loan applications will be digitally enhanced and obviously that we will be able to give you numbers on that we'll be tracking that and obviously that will reflect.
GNC, we've already implemented some things that are less technology oriented because again. This is more than just technology is also process improvement on.
In terms of how do we.
To make sure that our pricing strategy for products and services, including cash management or our coherent across the organization, we expect that to bear fruit pretty much immediately.
Honestly be a game changer, but that will bear fruit immediately so we will be watching very carefully that in terms of revenues that we're getting from cash management will can make important investments in that area now the technological area and cash management will take us a few years I mean, when you when you change assist them for cash management debt.
There'll be a couple of year process, but.
We're very hopeful of that.
There are benefits for us.
But again, we'll be following closely tracking that and thinking about digitally enhanced applications self service applications. So those are the things that we will be tracking.
Yes.
One other things that we.
We have a very strong belief that there is still a big opportunity for growth in Puerto Rico with by deepening the relationships, we have with our existing clients. So a lot of the effort thats going into transformation is for us to execute on the relief.
That we will be in a position to provide clients quicker and better service to offer them.
Products that fit their needs.
In a more efficient way.
And with that we increased the satisfaction of our clients and that means we have more happy clients. We have more more than pleased that can actually execute with excellence, what we're trying to do as far as client service and all those things add up to.
The positive outcomes as far as.
The contribution of all of those clients to the bank as Ignacio said these are incremental efforts. Some small things we will start operating in a few months other things will start happening next year.
So the bigger things our technology dependent.
B, so a bit back ended.
Because we have to make the investment and implement the systems to achieve or we want to achieve.
We expect that there'll be some.
Some quick wins.
So yes and.
We're currently saying I mean, what are the big initiatives is designed at what we call personalization and segmentation and therefore.
And that involves a lot of investment in our data abilities also but the idea is that we'll be able to.
For our clients products that they need faster and as you know we have by far the largest.
Client base in Puerto Rico, both retail and commercial and if we can just penetrate that market the cost of our cost of acquisition will be much below any possible competitors. So we are going to put a lot of effort to the personalization and segmentation.
And the last comment for you to get a sense of what we're talking about.
We do believe we think we have built.
Digital banking offering Puerto Rico already.
But what we're thinking is.
To be able to provide more.
Products and services to our clients through the offering and to allow us to rollout new offerings.
Faster than we can do it now so we're changing that.
The architecture of Av.
What is a market leading diesel offering so that we can be a lot more effective.
Providing more and new services quickly to our clients and we are today. So the client will never see the change in <unk>.
And back end architecture, but they will see that.
More efficient bigger offering once we've done that.
Yes.
Okay, and then with the 14% our otp, obviously theres a lot of pieces to that and I could mean, a lot of different things, but can you give us some of the assumptions on capital levels.
Or anything else to kind of help us really figure out what it actually means for profitability.
At this point in time, we we've chosen that one because it's our.
Encompass is a result of everything Alex.
You're correct there is a lot of pieces.
Compose that.
We are not in a decision to talk about the pieces specifically yet.
Right now but.
But.
We think this is the most comprehensive measure of everything we do.
We do so we've chosen to to hang our head on that one for the moment, but.
At this point in time, we haven't disclosed the component that will get us there.
Things can change and underway.
Yes.
Okay and then.
And just one final one from me before I get back in the queue. You gave us the increase in our government deposits in the first quarter of $1 20, assuming we get two more hikes, where did those peak out I mean can you just spell out for us.
I'm afraid.
They peak out you'll have to add the fed.
If it is true that they go down to 22.
Two more 25.
And that's it and then they sit tight than a quarter.
Quarter after that Youll see Gardner buses are 50 basis points more expensive.
But but.
It really is market linked so dependent deferred.
Our best guess of that.
The fed increases.
It will give us 120.
Again, roughly is it still more 25.
I will end up being about 50 basis points higher quarter after that.
And one is too.
The rates start moving the other direction.
Then we will see that we start seeing that benefit the quarter after that so.
Would love to be able to answer your question, but I can't redesign the fit very well.
But they do they do peak out.
I mean last time, they peaked at 125 basis points lower than that peaked out is that a reasonable assumption for this tightening cycle.
It is timing and we.
Ultimately the question you're asking is what's the spread that we make on the deposits.
Never answered that question purposely, we're not going to start today, but.
But.
But obviously, we do make a positive spread.
On the deposits.
Okay. Thanks for taking my questions.
Hello.
Thank you.
Remind you if you would like to ask a question. Please press star followed by one telephone keypad.
The next question today comes from the line of Kelly Motta from <unk>. Please go ahead. Your line is now open.
Hi, good morning, Thanks for the question.
I may be asking the government deposits question, a little bit differently.
I appreciate the color around margin and how you expect that to you.
I believe it start to inflect at some point this.
This year.
Does that commentary there.
Require a certain amount of roll off of the government deposits or is that irrespective of levels, just trying to get a sense of how much that may be a driver of that in <unk>.
That commentary incorporates the outlook, we expressed on the balances are growing deposits that they will remain between 13 and 15 for the year again theres not constant 13 to 15 that are probably going to be slightly higher than that in the first half of the year and then may be slightly lower than that in the second half of the year, but that has slowed.
It's incorporated in the components of that commentary.
Thank you appreciate it.
Just a point of clarification on your expense guidance that 187 billion that you gave just wanted to confirm that includes.
The innovation stuff that that youre doing in that $50 million is on top of that one point is that man.
That number includes the $50 million, yes definitely incorporated within it.
Excellent. Thank you so much.
Maybe maybe last one for me I appreciate the time is on capital.
I know you reiterated that you plan to revisit your capital plans in the second half of this year wondering if that.
Kind of your decision to do that is.
There is a certain level of TCE, where you would feel comfortable stepping back in is it is there is there any sort of parameters around that you'd be willing to share and.
That's part one and then part two of the question is.
By second half of the year do you think maybe by sometime in July .
Given the accretion back on OCI.
Is that kind of the timing we're looking at here.
Yes.
Okay.
Try to answer both questions.
There is no TCE target that would trigger us to do something or do something.
What I think if anything what we will be more important.
How do we think about this is.
Again getting.
More clear consensus of what's happening with the economy, and what's going to happen with interest rates moving forward. So I think those two components are probably more important. There is again there is no magic number of TCE that will get us there.
As Ignacio said last quarter, our best guess is that we'll get that clarity. We're looking for in the summer and Thats, where coming comes from the second half of the year.
But.
If that clarity comes in May than we were a couple of months ahead as the cloud becomes a September we may be a couple of months behind.
No specific target.
The outlook.
Theyre being consensus consensus outlook on the economy and interest rates are probably the two most important inputs into into the timing of a revisiting of the capital fund again.
Overall view of capital is unchanged.
We are only slightly adjusting the timing here.
When we execute not our intent of what we want to do.
Great I appreciate all the color I'll step back.
Thank you.
Thank you.
Our next question today comes from the line.
Cassidy from RBC. Please go ahead. Your line is now open.
Hi, Carlos.
Good morning, good morning, happy new year.
Happy new year to you too.
Carlos on the OS.
OCI or <unk> I should say.
When you look at it.
And the available for sale portfolio of about a $1 billion of unrealized losses.
Can you share with us what kind of interest rate environment would we need to see for that number to fall materially from here.
Sure.
Lower.
Yes.
I agree with that.
No.
I mean, the portfolio has about a $2 eight year duration. So that can give you some sensitivity.
Under the entire.
Piece right.
You could probably around some some calculations.
On the duration and the size of the portfolio should should give you an idea.
Roughly speaking.
Realized could move.
Yes.
Obviously the.
Simply said the portfolio is.
On the short end. So we are we are.
The biggest bang for the Buck you probably get.
Sure sure.
Sure.
And intermediate rates move lower.
I think.
Everybody is going to be happy as a 30 year comes down, but the 30 year.
And in fact on.
On our Aoc the shorter intermediate terms too.
The other thing okay.
There's a significant amount.
Bonds that mature every quarter.
So the portfolios ladder.
All the way up to six years.
We currently have.
$1 billion or so mature in any given quarter. So that also assurance duration as time passes.
Got it and even though because yes.
I'm sorry go ahead.
And those get reimbursed at current rates right.
Alright, great.
No. The reason I ask is that I noticed that the agency portion of the portfolio, which has the largest unrealized loss.
Maturity of seven and a half years and even though I know the total iff's is under three I didn't know if that meant that part of the portfolio. The longer end of the curve is something we're going to watch.
That piece that portion of the portfolio is mostly agency pass throughs.
No.
We put the weighted average life of the instruments.
The mix of 15 year, and 30 year mortgage backed securities.
That has a slightly different basis than treasuries, so that won't be a function of where intermediate rates move as well as where the mortgage back to treasury basis moves as well.
So we had some.
Some relief for that in the fourth quarter.
If those trends continue that would be of positiveness for that but again it will all be subject to where the market sees the risks.
Very good and then.
Following up on the technology commentary that you guys gave us Ignacio I think you said in your prepared remarks or actually in response to a question that popular has traditionally been a leader in technology in Puerto Rico, So somewhat surprising.
Overhaul is coming but be it as it is.
<unk> seen or are you seeing evidence that other entrants are making headway against your core customers and youre starting to lose some of these customers or what was the real.
Is that part of the reason for the big.
Spend that's coming.
No I think that.
I'd say we are traditionally.
That is true, but we feel the world is changing much faster.
We may we may have been a little bit behind where we normally would be in this kind of a curve, we havent lost customers, yet, but we're not going to wait to lose customers.
We are seeing.
There are certain areas, where you see more U S. Entrants for example credit cards.
Sure.
Where do you see more of the.
The U S issuers coming in feature and different things.
We may be a little bit behind but really we want to get ahead of this we don't we don't want to leave ourselves open to.
It will feature a digital entrants taking away our clients. So basically we think we really think.
If we offer a top notch digital experience and you combine that with our branch network.
And you combine that with the.
The diversity.
Diverse services, we offer our client that we have an unbeatable.
<unk> solution, we fall on any of those areas than we could become one and we're in a battle at that.
And so yes, we are.
We know that technology is a tough game and we may not be able to make the investments as some of the bigger.
Huge banks, but we have to stay.
And at least giving our clients.
What they expect in today's world.
Our clients in Puerto Rico, just like anywhere else, they expect a better digital experience and they expect a more personalized digital experience.
We're going to work hard to give them that.
Some more color on the <unk> comment.
Gerard.
I talked about our data to offer to our clients so as market, leading which it is.
And a nice block out the back end of the architecture of it.
We find ourselves wanting to rollout.
More things at a faster speed than our precedent architecture allows us to do so again, what we're doing is doing a lot of work in the back and the client will never even knew.
This was happening, but it will decline we will feel it because the speed at which we'll be able to offer new things on more things will go up so.
Is that kind of thing we're talking about it is improving.
Core of our of our technology.
And again, the client may not see that in their phone app, but they will see it in the generic capacity to offer them more personalized offerings more personalized services and new services faster than we can do today.
Very good and then linear you mentioned you gave us some <unk>.
Insights into the credit and credit obviously has been strong for you folks.
Your peers two questions one.
You gave us some of the assumptions I think in the Moody's outlook on real GDP growth.
What kind of unemployment rates are you factoring in I think you said they are constant but what are those numbers. Then two are there any sectors within the portfolio that you are currently.
Spending more time really focusing on just to make sure nothing.
Gets tripped up if we go into some sort of new shallow recession.
We have on a daily basis, you have on page 13 of the deck.
The assumptions for unemployment rates.
Going to the U S.
Although the baselines stronger growth on recession scenario.
I'll leave you to look at those.
What's the second part of your question I'm sorry.
No that's okay.
And just what parts of the portfolio, where you guys are really focused on to make sure that if we do go into a shallow recession youre prepared to handle it.
I will say small business lending is an area of focus we continue to be pleased how the portfolio is continuing to.
Behave.
Post pandemic producing area, where increases in interest rate inflationary pressures increasing energy prices.
Very good.
Potential higher impact than other sectors.
It is important to highlight.
One area, where we see a lot of breadth.
In the U S. In terms of office space I don't we don't have any significant exposure to the office space in Puerto Rico The U S.
Very good thank you.
Thank you.
Our next question today is a follow up from Alex <unk> from Piper Sandler. Please go ahead. Your line is now open.
Hey, I just wanted to ask for.
The loan growth that you guys are seeing what kind of yields new production is coming on in the various categories.
Yeah.
Yes.
Im sorry, I don't have that number right now we.
We can we can try to dig it out.
But I don't have the head or in my notes my apologies.
You can see that the overall yield low.
Overall.
Loan yield or both did go up 31 basis points some of it into the quarter. So obviously we are originating.
Our new our new Brit.
Vintages are unit at higher rates.
But I.
I don't have the answer to your question, we will get back right.
Okay are you able to give us a little bit more color like if you look at the commercial growth sort.
The percentage or just a rough breakdown of what might be the larger corporate customer that's based off a sofa and we saw some press releases this quarter on sort of pricing that maybe we can apply to that in Puerto Rico.
What might be more tied to prime.
Yes.
Sure.
And Leo maybe able to correctly the take up of sulfur in Puerto Rico has been.
It's pretty limited pretty slow.
So I think big picture assumptions for the moment, Alex is that whatever part of our book is floating.
It's still linked to the old floating rates again, the pickup of sulfur has been.
Seen slow so far.
Okay.
And then I just wanted to clarify your comments on the timing for capital return. It sounded like you guys go through this process every year, where you engage the fed and then a quarter later four months later you wind up.
Actually telling us what you guys are about the size of the capital return is it the <unk>.
Half of this year.
The gains the fed or do you intend to have an announcement in the second half of the year.
I think I think our plan would be.
New boat that we engaged keefe.
At some point, but the announcement I think when we talk about second half of the year would be an announcement.
Okay. So you're engaged with at some point in the next couple of months and realistically July we can still expect our capital update.
Okay.
We will.
Make the decision of what we want to do once we have clarity on the hour.
I'll look for interest rates and the economy analytics so.
That is the starting point.
So.
Our guess is that that point.
Point in time, we will come in the summer.
And then talking about the second half of the year.
So that's the starting point and from there we would.
No.
Door molding and discuss the opportunities or the alternatives with our regulator, we would have to decide how we want to execute anything we want to execute.
We want to revisit what has been our practice in the past of having very structured every January we have an announcement.
We may choose to change that moving forward.
No.
Again, the underlying thing we want to do that has not changed which is to move in the direction of our mainland peers, plus the buffer, but exactly how we execute that will be revalued.
And we May we may decide to execute it in a different path than we did in the past okay. So don't adult.
I assume it would be back to definitely announcement and thats. It for the year again, we may choose to to manage our capital return the size of the different moving forward.
When we choose to make a change obviously, we will discuss it with the market.
Okay.
Is the same process that you've gone through there is nothing changing about.
How often are the regularity that you didn't get the fed to include in this and I guess.
Question that I got from a lot of investors. After last quarter is why not go through the process as normal last year.
And then get approval, but just say, we're not going to implemented as quickly maybe we'll wait and not do an ASR, but we have it and the fed is comfortable with our capital levels and all these things that scene.
Seen any healthy from the from the surface you are describing some of the alternatives that we're considering as we revisit how we want to do this.
I always caution.
Everybody when we speak about this.
The fed does not give conditional approvals to anything.
We will only approve things when you request an approval and they will not approve things as long as things work out in the future. It this way so.
Again, we are trying to manage the fed the best way, we can I think over the last four or five years, we've been pretty effective.
In our dealing with the fed and we will try to continue that but.
Some banks manage it differently some banks have.
Clearly pivotal appliance.
Discussed with the fed instead of a yearly capital planning, which has been our practice in the past.
Again, we want to go and revisit all of those alternatives. So we frankly do so.
We'll be doing that.
Reengage.
Again.
We think what we've done in the past has been pretty successful for us as far as anything with the fed.
We are analyzing this.
Yes.
Even better.
For us and for our shareholders moving forward.
Okay. Thank you for taking my follow ups.
Youre welcome.
Thank you.
Final question today is a follow up question from Jared Cassidy from RBC. Please go ahead. Your line is now open.
Thank you actually I didn't put myself out of the QA.
Understand the instructions I'm all set thank you Carlos.
Thank you.
Okay.
That concludes today's question and answer session. So I'd like to pass the conference over to Ignacio Alvarez for any closing remarks. Please go ahead.
No.
Okay. Thank you for joining us today and for your questions. We look forward to updating you on our progress in April Thank you.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
[music].