Popular, Inc. (BPOP) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Gerard Cassidy from RBC Capital Markets. Thank you for joining us for the 2020 RBC Capital Markets Global Financial Institutions Conference. It's a virtual conference, obviously, due to the coronavirus. And with us for this fireside chat is Popular, Inc. Joining us from Popular is Carlos Vázquez. He's Executive Vice President and Chief Financial Officer. As many of you know, obviously, Popular is headquartered in Puerto Rico. The company today has, in terms of assets, approximately $52 billion in assets and it has a market cap today of about $3.4 billion. From a profitability standpoint, on a core basis, we calculate the core ROA last year coming in at 127 basis points and then the core ROE coming in at about 11.4%. Carlos, thank you so much for joining us. It's a real privilege to have you join us.

Happy to be here. Good afternoon.

What we'd like to do is, in view of what's going on in the current environment today, with treasury rates dropping unprecedentedly in our careers, just how this is impacting your businesses, the balance sheet, the income statement? Just how are you guys looking at what's going on in the way it's affecting your business?

Yes. It is a pretty unusual situation we find ourselves in. How relevant it will end up being to our business will obviously depend on the longevity, and how long this goes on and what shape the movement of interest rate takes moving forward. Bank -- as you know, Gerard, bankers look a lot smarter when rates going up than we do when rates are coming down. We're no exception to that. Over the last couple of years, as the conviction of market moving rates has been either disappearing or changing, we have been lowering our interest rate sensitivity. We normally do it through our business. So we've been doing that gradually. And actually, last week, we put out our latest 10-K as of 12/31. And in the 10-K, we published the same table. I think we all banks have to publish with regards to interest rate sensitivity. The table assumes an immediate and parallel shift in the curve. And we have the normal plus 200, plus 100, minus 100, minus 200. I think if you sort of add up everything that's happened in the last 2 or 3 weeks, we're probably not far from being at a minus 100 immediate parallel shift. So the way market rates have shifted, and what the Fed has already done, what people expect the Fed to do soon, it's probably close to that. In our case, the minus 100 basis points, the effect of that in interest income was a reduction of $35 million. That will be over the next 12 months. We obviously have to take this number with the appropriate limitations that result from the modeling. It's a simulation. It assumes a static balance sheet. It assumes management doesn't do anything over the next 12 months and everything else. But it is a reasonable indication. So the lower rates will hurt. We will have to pursue ways to balance that out in our performance. What the final number is, obviously, will end up depending on how long this goes on. If the whole coronavirus event ends up being shorter in nature, and then by the summer, we could end up with a yield curve that looks a lot more normal. If it becomes a longer-tenured event, then the effect in the economy, and therefore, in rates may be more serious. So we're watching together with everybody else. We don't have a crystal ball. But clearly, lower rates make our job as management tougher.

No doubt. And I don't know about you, Carlos, but I remember thinking with you and your peers giving us a guidance about the parallel shift down or up 100 to 200 basis points. I always thought that was farfetched, and we've never seen it. And, oh, my goodness, I mean like you just said, it's just about here.

Yes. It is. The other interesting thing that, if you look at that table in our K, most people will notice very quickly, Gerard. I presume this is a condition that is also common to other banks, is that it's very asymmetric as you go to minus 200, because at least the way we are modeling it, we are not assuming negative order rates. So if you go to minus 200, you start heading [ low ] rate. So the -- it becomes a somewhat asymmetric on the effect. Hopefully, we will not get to pass that.

No. No, I agree with you. In this environment, with the coronavirus, can you share with us some of the comments or some of the conversations you may have had with some of your commercial customers about what they may be seeing in their business and what they're planning to do if business really slows down?

Yes. Like is the case in every unique situation, like the one we're confronting now, Gerard, there's always winners and losers. So you have -- we have clients on both sides of that equation. Obviously, the areas that most people expect to be affected negatively are things like airlines and cruise ships, which we don't have any significant exposure in those segments. Hotels are expected to be affected somewhat. Our exposure there is not huge either. And we tend to concentrate in Puerto Rico in business hotels, the high-priced type of place, not the luxury beachfront hotels. So to the extent that people continue to travel, our portfolio should be somewhat isolated. One important note is that there is always an assumption that the tourism industry is a very large part of Puerto Rico economy. And we always like to remind people that it is a very important part, but not a very large part. It only represents about 7% of the economy in Puerto Rico. In nominal dollars, it's a big economic sector because the economy of Puerto Rico is pretty big. So it's $5 billion, $6 billion, $7 billion as an economic sector. But it's not a huge part of the economy. Then continuing on the sort of the negative side of the scale. You probably have restaurants that will be affected negatively if people starts -- stop going out. Oddly enough, not all restaurants will be affected the same because you may end up having fast food restaurants benefit because they have a drive-through. And if people are concerned about being in public places with a lot of people, the drive-through all of a sudden becomes a very important asset. That, by the way, is true of our branches as well. Then you have the flip side of the sector that would benefit from the present condition that which we seem to be facing, and that include supermarket. Our clients that are in supermarket business is doing great. We have a lot of clients in the food distribution business and the supply distributions business, especially suppliers that have some connection to health or cleaning purposes, stuff like that, they are doing fantastic. We have hospital clients. There are hospitals are in the health business, drugstores, clinical labs. All those clients are doing great. So we have clients on both sides. Whether the clients that will benefit from the condition will do well enough to outweigh the damage to the clients that will suffer from the condition, that we will not know for a while. But on both sides, as far as your question of what people are doing, I think we're all -- we're trying to respond the best we can. This is unprecedented. So we're also making up the rules as we go. Everybody is trying to deliver the same things. Can we separate teams, can we limit access? We're already staffing remote access so people can work from home. We are increasing the sanitation and cleaning efforts in our offices. We're restricting travel. So I don't think that I've heard client having any unique strategies. I think we're all experimenting with the same variables mostly.

Very good. And I'll get into some questions about just the recovery efforts from the hurricanes of a couple of years ago. But I have one related question for what we're going through to today in which you guys went through a couple of years ago. There's apparently been some discussion amongst the regulators with some of the larger regional banks in the U.S. about how to handle delinquent or deferred payments associated with this event and how can the regulators help the banks out by not forcing them to classify them as a TDR due to the fact that it's attributed to the coronavirus. Can you share with us, Carlos, when the hurricanes hit, I remember you deferred -- you allowed some customers to defer payments. How did that work out? And how did the accounting of that work out with regulators in terms of whether you had to classify it as a TDR or some type of nonaccrual loan?

No. The quick answer is that it worked pretty well. There are -- we've been on both ends of this situation. For example, if you move back, even farther back when the governor -- the government of Puerto Rico closed down for a few weeks some years back, we had a similar dynamic. But there, since the closure was shorter-term, the ultimate effect on credit was not material, and it wasn't a regulatory effect either. The hurricane was a lot more complex because we ended up offering broad-based moratoriums to most of our clients. That worked out relatively quite well. So it did not end up becoming a regulatory challenge as well. Of course, there's other things need to be done in coordination with the regulators to make sure we're all looking at the opportunities and the risk the same way. But I think they're pretty good at this. And whether we will need an industry-wide, broad-based regulatory approach to situation, I think will end up depending on how deep and how long the situation turns out to be. If it is 2 or 3 weeks or even 4 weeks in length, then probably the effect on credit is going to be negligible because as in the case of salaried employees, they're probably still receiving their salary so they can serve their debt. There were maybe some challenges in case of hourly employees depending on how their employees deal with the situation. But there is mechanisms to deal with it. You are correct that we had the unfortunate opportunity to have lived through it already. But this is not one of the things that keeps me up at night. So this -- we've dealt with it before. And I think that the industry will be in a good position to deal with it, and help our clients as well, which at the end of the day is what we all really want to do, make sure we assist our clients in their time of need.

It's interesting about what you said, what keeps -- it doesn't keep you up at night. What keeps you up at night these days if it's not something like the deferred payments and things like that?

No. Again, that doesn't mean I -- there's no -- the potential of more general moratoriums and things like that is simple. It isn't. I'm not trying to convey that. But it is something that we have dealt with it in multiple incident before. So we think we're in a reasonable position to deal with it again. Things that I think are a lot more interesting and challenging for us and for the industry as a whole is, for example, the fact that in the very first quarter where we instituted a very complex change in accounting under CECL, we are also having this market dislocation simultaneously. So this is something that is a lot harder to get your arms around because we're trying to implement a major accounting change at a time where the market is also going through a major dislocation. There's a lot of variables here. How banks, including us, are seeing third-party economic forecasts to feed some of the models that result from CECL. How the different entries like Moody's and other services change their forecasts if a situation becomes very important. So we have a situation now where a complex change in accounting and how we report our business could potentially be amplified by a market disruption. So that is something that is interesting. I think it's very challenging. I'm not sure we have the answer of exactly how it's going to affect the result. But that is something that to me is a lot -- it carries a lot more uncertainty than credit. And the underlying credit situation continues to be fairly benign for us in both of our markets, both in Puerto Rico and the U.S. So I'm not concerned about that. But we could still see significant reporting volatility as a result of the situation.

Knowing some of your peers have expressed that same concern regarding CECL, and it's something that is going to be very important that we all can get our arms around it when people start reporting in April. Carlos, you guys have been battle tested. I don't know if it's the 4 Horsemen of the Apocalypse or what. But you had the hurricane, the earthquake and now this virus. Share with us, if you would, how Puerto Rico has been rebuilding itself since the hurricane? Where does it stand? And if you could give us an update, that would be helpful.

Sure. Happy to. Yes, we were in our management meeting on Monday, weekly meeting, we were -- sorry, reminiscing on exactly what you mentioned, that either we are the lucky ones or the very unlucky ones that we've gotten to test all those things at once. By the way, you can add a 10-year recession just before that to -- just to complete...

That's a very good point.

Right. So we've had the luck of having to try to manage our bank for all those situations. So we're very happy that we seem to have done it reasonably successfully. Yes. I mean on the hurricanes, these are 2 -- when the hurricanes happened, there are 2 different periods that follow, Gerard. There are -- sorry, 3, I'm sorry. The initial period, when people are trying to survive and figure out how to get things done, and we're trying to figure out how to serve our clients. Our clients are trying to figure out how to continue their lives. So that's the immediate aftermath of the hurricane. There is still no electricity for months on end. So that was more firefighting than anything else. Then you go sort of the fourth quarter of 2017. Then you have the beginning and the full year of 2018 where a significant amount of assistance aid -- immediate assistance which is a specific program under FEMA comes into the island. Also, a significant amount of insurance funds coming to the island. And that level of investment sort of supported a nice economic rebound after the hurricane. So 2018 funded with those investments was very positive. Plus the fact that in 2018, we sort of had a 5-quarter year because the fourth quarter of '17 after the hurricane was sort of a dead quarter. So we sort of had 5 quarters worth of activity in 4 quarters in 2018. So that was Period 1, the fourth quarter of '17, and that's just survival. Period 2, 2018, conceptually, and that is where a lot of the immediate aid arrived, and we start dealing with the immediate reconstruction and fixing the more basic things that have to be fixed. That is Phase 2. And then we go into Phase 3, which is sort of -- has been sort of 2019 and now the beginning of 2020. And that is when the more complex, larger, more challenging projects need to be funded and need to be implemented for the reconstruction of the infrastructure, the reconstruction of housing that was severely damaged and everything else. That's third phase which is sort of -- was '19 and the beginning of '20. Has been happening a lot slower than people expected, meaning that the amount and the timing of arrival of the external assistance has been slower and later and smaller than people thought. Some of that is procedural, that the government of Puerto Rico and the U.S. agencies had not agreed on a process to actually disburse these funds. As of only a few weeks ago, I think it was 3 or 4 weeks ago, some of those procedural impediment appear to hit -- have been finally separated, in that the governor of Puerto Rico signed the agreement with HUD for the -- that defines the process for the disbursement of the different buckets of HUD's funds. The agreement was signed by the governor about 3 or 4 weeks ago. I believe it was signed by Secretary of HUD last week. So this agreement is finally in place. So some of the procedural impediment for the funds to start arriving, I think, have been lessened. The agreement between the government of Puerto Rico and HUD needs to be made public and needs to be really published in the Federal Register. That has not happened yet. It is our understanding that that agreement carries significant restrictions on how the money is used. Whether those restrictions are important or not, when it's made public, we'll be able to make a judgment. But at least we have checked the box in that the process is now agreed and in place, and that should help for the flow of funds to start being happening more and the amount of funds that arrive finally to be get larger. So we'll have to see. We're actually seeing some of that in our clients. We have clients that are involved in the reconstruction and recovery business. And we have seen that they have been granted contracts. And there is more activity in the recovery -- in the reconstruction front than there had been in the past. There's another whole bucket of assistance that comes through FEMA. And there again, we believe there has been progress in defining the process so that the funds can flow faster and easier. So that should be a plus as well. And then finally, you have -- we have the fact that the government, the Fiscal Control Board seems to have agreed with different group pockets of creditors for a restructuring of the general obligation bonds, the GOs, and also restructuring of PREPA. Those deals are in front of the board right now, and that will take some months before it settled out. But to the extent that we can get those restructuring done, it will be positive for the island, in that they would remove uncertainty for the island. So if those deals are finally executed, that will be probably a positive. And in the latter deal, the PREPA deal, there is probably the additional benefit that getting the PREPA debt restructured is probably somewhat of a gating issue for the rest of the restructuring of the electric sector to start taking -- getting a good footing. So if we get PREPA done, that means that we finally get more active in the rebuilding and redesigning and rethinking of the electric sector, and that will be an additional positive.

No. Absolutely. It's been a long tough road for many folks in Puerto Rico. But as you said, there's real progress has been made. Can you share with us also? Obviously, you had the issue with the governor awhile back. And where do we stand on elections and changes of the government?

Right. Well, we have local elections the same day of the presidential elections in the U.S. every 4 years. So we are having local elections in November of this year. There is primaries happening in the local parties. So we do not fully know who the local candidates for governor are going to be. Now that part of the equation is probably less variable because the platforms, so the different candidates are not that different in the local environment. What is probably more important for us is that the presidential elections in the U.S. is pretty important, in that while we do not know who the candidates on the Democratic Party are going to be, there is a reasonable expectation that if the Democrats were to win the White house, the previous position of a Democratic president to assist Puerto Rico might be somewhat higher than it is right now. And then if that plays out that way, we will see with time.

Very good. Moving back to more current events. With the yield curve doing what it's doing, again, rates being so low, one of -- you mentioned like how you define -- there are some customers that are certainly being negatively affected, but there are some of your commercial customers that are being favorably affected. And so in that favorable camp, the other business line that obviously is doing very well, I'm assuming for you too, is residential mortgage lending. Can you share with us what's going on with your resi mortgage business? And are you seeing the benefits of these lower rates?

Yes. Gerard. It is still early to make that call. I know there's been a lot -- the movement is faster in the mainland market, and we are seeing some of that in our U.S. bank, by the way. In the case of Puerto Rico, our mortgage business have been getting better over the last 2 or 3 quarters if you look at origination volumes. Those volumes actually were still mostly geared to home purchases as opposed to refi. So it was still mostly a home purchase business as opposed to refi. With much lower rates now, we'll see whether that changes in the natural course, which usually happen, and I think has already happened in the U.S., where a lot more people are dynamic to refi their mortgage. In the case of Puerto Rico, it tends to happen slower. The clients that we have right now in the mortgage book that will benefit from a refi are probably clients that have already had the chance to do it a couple of times along the way. And for whatever reasons, they've chosen not to. So we'll have to see. We will do our due diligence to assist clients and make them aware of the opportunities they have to refi. If a client of ours responds to refi, we obviously want to make sure they refi we have. But the market here will move slower. We are seeing some of the increased interest already in our bank in the mainland, Popular Bank.

No doubt. Like I said, it happens fast, and we're certainly seeing the industry numbers show some meaningful increases on the refi side, in particular. You've been very good over the years in -- obviously, you have an incredible amount of excess capital, and you've been returning it in share repurchases, dividend increases. But you've also been able to pick up some portfolios, the auto portfolio from Wells Fargo a couple of years ago, and then more recently, the credit card portfolio. Can you share with us just any other opportunities that you see out there?

Yes. I mean we're always looking to buy assets that fit our credit box. As you know, asset acquisition is regulatorily a lot more expedient than doing M&A. So that's a good opportunity. The credit card portfolio we purchased in Puerto Rico of the JetBlue co-branded card from Santander was a nice acquisition. The more important part of that deal though is actually not the portfolio, but the fact that we also acquired the right to issue the JetBlue co-branded credit card in Puerto Rico. Now JetBlue is the dominant carrier in the island right now. A co-branded JetBlue credit card, we think, is going to be very successful with client. So that is part of our ongoing effort to continue to revamp and improve our credit card offering that, as you know, is a big business for us. We still have a credit card portfolio of over $1 billion, which is somewhat unusual for bank our size. But it's a great business. So we keep looking at acquisition opportunities, both in Puerto Rico and in the mainland. We're always looking at portfolios. Finding portfolios at the right price that fit our credit box sometimes can be a little bit challenging because we try not to expand the credit box through portfolio acquisitions. But we always keep looking in -- as you said, historically, if you look back in the last 5 or 6 years, every year, we find something that fits the box. Hopefully, we can continue to do that, because it's an important part of us deploying our capital, and that's the best way to deploy the capital with good yielding assets, obviously.

Yes. No doubt. And as you pointed out, they're not the easiest things to find. And speaking of deploying capital, you've -- for the last couple of years have obviously increased your repurchasing of your shares and increased the dividend. Can you give us an update, please, on just where are you with the ASR? If I recall, that was announced in end of January, early February. And I think if I recall correctly, it was a $500 million buyback. And just where do we stand there?

Yes. That is correct. And it's worth spending us a minute on it. We announced an approval for a buyback of $500 million this year. We did announce an ASR for $500 million this year. There's been a little bit of confusion because of how the ASR works. Now the way it works is that, upon signing of the contract, we get delivered 80% of the shares at the price of the date that we signed the contract. And a lot of people have assumed that, that means that the price at which we repurchase those shares is that price, and that is incorrect. The price at which we repurchased the totality of the shares in the contract for $500 million of our buyback gets set at the end of the contract, which will happen late this year. And that is the weighted average price of the stock on a daily basis for the life of the contract. So we did get delivered 7.1 million shares on day 1, which is the beginning of the contract, and that happened at the growing -- going price at that time. But the ultimate price at which we will buy the totality of the shares, again, it's the average daily price of the stock for the life of the contract minus the discount. That how the ASR works. So just I appreciate the question because it's important to clarify that a number of people have gotten confused with the fact that we've got 80% of shares delivered upfront and assume that, that was the fixed price. So I am excited to say that as our stock price has gone down, we will benefit from that. I would prefer not to, to be frank with you. But yes, it will be reflected in the ending price of the execution of the ASR.

Very good, Carlos. I can't believe it, but we ran through our time already. Really, and again, privileged and lucky to have you participate in our virtual conference. And hopefully, next year, we'll have you back and we'll do a in-person conference. So thank you very much.

Look forward to it. Thank you, Gerard.

You're welcome.