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

I mean I think in terms of Puerto Rico, I mean, we're happy with the deposit mix. I mean we -- you have to look at our book in -- and we look at it in 2 different ways. We have our public funds, right? -- that are important sources of income for us, and it's an important -- a very important set of clients. It is more expensive deposit for us. but we do like a deposit relationship. They do provide a significant contribution to our profitability. And you have the nonpublic funds. And those nonpublic funds, as you've alluded, our very transactional base, low-cost deposits, and there really are the strength of the franchise. So we are a necessarily as focused on the deposit mix in Puerto Rico as we are in continuing to maintain and grow that deposit. We've done a lot of things to be able to make sure that we grow and retain those balances. In terms of profitability, I think we have still opportunities. First, we have some tailwinds in our investment portfolio still, particularly in the rate environment that we're in. We continue to reprice kind of our latter investment strategy, both in terms of the legacy investment portfolio that's maturing every quarter as well as the more recent vintages that we purchased that in today's environment, provide a little bit of a potential lift there in their yield. So that's certainly a tailwind. We continue to see commercial and general loan demand in our markets. So that's an opportunity. And then we still have opportunities in creating efficiencies in Puerto Rico. We -- our current expense base for this year included a reduction of about $50 million in expenses. -- that we are right on target for those. For next year, we expect that to increase to about $70 million cumulative. So -- and our teams are pretty focused. And those are not big restructuring or heavily labor reduction efforts. These are just having a commitment to excellence to really pay attention on how we procure how we manage our our technology, how we manage data, just little things that add up. And that's permeated across the organization. And so -- and then certainly, when we look at our U.S. business, the trends there continue to demonstrate improved profitability, and we just recently had a switch in our leadership in the U.S. Our new U.S. market director is used to run our Florida business, and now he's running the U.S. business, and he's very much focused on improving the deposit strength in the U.S., as you know, that's been an area of challenge for us in the U.S. This is a deposit franchise. The teams are ultra focused on that as well. We are managing changing our our compensation structure to make sure that we're providing more focus on deposit gathering and low cost of asset gathering. And all these things will help continue to drive profitability. -- then, of course, we need to manage our capital and be able to optimize our capital levels, we're certainly resulting in a better ROTCE as we reduce that denominator.

I know you're a CEO now, but you were CFO, so I feel like I can ask this question, too. This time last year, we were talking about the potential for rate cuts. Now we're talking about the potential for rate hikes. How is the balance sheet dynamics change over that year? And how are you positioned for that and with the lens of the margin backdrop?

Yes. So the reality is our balance sheet is fairly neutral. If you look over the last few quarters, we tend to switch between slightly asset slightly liability sensitive depending on the level of public funds. So this last quarter, the second quarter, we tended to be slightly liability sensitive because of the increase in public funds. So we've tried to manage our portfolio. We haven't extended to make sure that we feel comfortable with our rate position. Right now, the fairly neutral on gives us some some comfort that our profitability is not really driven in some scenario that may or may not occur.

Great. Popular has invested significantly in digital capabilities, branch modernization cash management tools and customer-facing technology. What have you learned from those investments so far and where are you seeing the most tangible productivity benefits?

All right. I've learned there's no new technology to have cheaper than the old obsolete technology. That's 1 thing. It is a heavy investment, but it creates a lot more resilience. Obviously, the functionality of our new investments and the experience for our clients and for our employees, it's significantly better. I'm very excited about the efforts that we have done with the deployment of our commercial treasury and cash management product. We're coming towards the end of finally rolling out to all of our clients in Puerto Rico. And we see the tangible difference than that. We -- in at the end of the first quarter, we started launching some corporate credit card products that we saw a lot of uptick in the second quarter and saw the benefits in our noninterest income in the second quarter. We continue to expect to see some of that going forward. So the investment, it takes time. It's patience, but it's brings in talent. It keeps people engaged. It creates a lot of buzz for our clients, and we will continue to do that to differentiate ourselves. Again, we don't -- we want to be able to add value in those relationships and not focus so much on just 1 item of price with our client relationship.

As part of that, I guess, AI continues to evolve rapidly. Where do you see the most promising applications inside the bank today? And how do you think AI could improve customer engagement, productivity or profitability over time?

Yes. So -- we are in the early stages of our efforts with AI. We started by creating a governance and an infrastructure that cadre some guardrails around the AI deployment and -- and then we combine that with top-down initiatives and bottom-up initiatives. The top downs are center-led and these are focused on 5 work streams, 1 of it is software development, 1 is BSA cyber security, claims management and fraud. All those have strong value cases that we're focused. They're in different stages, I would say that where we are prioritizing right now is in cybersecurity and software development. And then the bottoms-up approach are more kind of gorilla warfare the team's been able to bring to the management team opportunities, whether that's leveraging broad-based tools like copilot, agents or other embedded solutions like in Salesforce or SAP within the context of the governance, right? And we're trying to be very strict in monitoring and making sure that we don't have any unauthorized use of tools that are not part of our stack. For us, the integrity of data and the cybersecurity is critical. In terms of the benefits, it's too early. I mean, of course, when you look at the opportunities and the improvement in productivity. That's clear, where they're -- when and how those translate to lower cost or efficiencies would probably take a little bit more time given kind of where we're at. We certainly watch what competitors and some of the larger banks are doing and announcing as opportunities. We've got to make sure that also you have a base of control. I mean this token economy of all these AIs, I want to make sure that we don't get a situation where all of a sudden now, they realize that we're spending more than we're actually saving -- but the early stages, we do see that there's kind of a human in the middle of concept that some of the efficiencies that we're creating, for example, software development create a funnel somewhere else. So as we're using AI, for example, to move some legacy systems to new coding in a new platform for like maybe something all going to like a sales force, AI can help us in that software development very quickly. But at the end, you still need a human in the middle. You still need quality control and review. So you create the funnel somewhere else on the screen. So we haven't necessarily seen the speed to market yet, but sure we'll get better at it and start seeing some benefits.

I guess 1 of the most important developments in the second quarter was the introduction of a long-term ROTCE target of 14% to 17%. Walk us through the key building blocks behind that framework, if you can. And what gives you confidence that those returns are sustainable through a full cycle?

Yes. So when we look -- I mean first when we look at '14 to '17, we live in an unfortunate in this quarterly reporting, right? So that's important that any given quarter, I mean $5 million of net income gets analyzed, so that's about 30 basis points in ROC. There is some natural drift in those results for what would normally not be a big number. But in terms of what gives us confidence, we look at the efforts and the sustainability of those efforts in deposits in expense control and the diversity of our fee income. And it gives us opportunities to use different levers. So as we see growth in income on credit cards, for example, that gives us the flexibility or the the ability to then maybe shift our deposit structure a little bit and maybe reduce fees on deposits to make that an opportunity to increase the positive balance, right, give us that confidence that we can replace some of that income. And you see all that momentum at the same time that we've been intentful with managing capital and that denominator is a clear opportunity to improve on the ROTCE target, right? So it is a lever that is available to us. So -- and to give you a sense about $100 million in lower capital CET1 is it translates to about 20 basis points improvement at ROTCE. So when you have all those levers available to you, then you start getting some confidence in the momentum and the focus of the team and that sense of urgency, this concept of being an active participant in making these opportunities happen and these results happen, and that gives us confidence to go out and put that target. And frankly, as I said earlier, it helps us in manage that messaging internally and keep people focused. What we found is that sometimes people were focused on a budget. And you'd have conversation with people who are, hey, you know why? -- why do you keep pushing for this campaign or efficiency effort, we've already hit the budget. It's like we haven't hit the profitability. Let's go and let's keep going. So being able to have that mindset makes a big difference in a large organization.

I guess you're already operating near the upper end of that range today as you think about the next several years, where are the biggest opportunities to continue to improve returns -- sustain.

I think we talked about that earlier. It's just -- the focus on deposits the investment portfolio repricing still provides a tailwind for us, the improvement and focus and profitability in the U.S. operations contribute to that and capital management.

Great. On credit, consumer credit performance remains favorable. Mortgage quality remains strong and maybe headline credit metrics continue to improve. What areas of the portfolio are you monitoring most closely today?

Yes. I mean I think the second quarter was a really strong quarter. We -- there is nothing in our portfolio that's flashing any warning life at this point. Certainly, with a high cost environment with where oil prices are gasoline prices in Puerto Rico, that translates to everything in daily life in Puerto Rico. So we'll continue to monitor that. I think the area we talk about where we would see that potentially impacting first with being a small business. We've been focused on that. We don't see any -- nothing coming out in that group yet. We hope that the stability continues, the resiliency continues in Puerto Rico, but we're not naive. We want to make sure that we are prepared. We have a strong capital base. We have strong reserves. We have very trunking. We have efforts in our collections efforts that are geared towards being prepared for anything to get worse. But -- so far, there is nothing that's worrying us. The diversity of investment coming into Puerto Rico, the diversity of employment. We don't foresee any significant changes in that. But we do see life everyday life in Portugal getting more expensive. So how do we help our clients prioritize that debt repayment in their quality of life and all that, that will be very important. But -- so far, we don't see any changes in the trend of Puerto Rico.

Great. Let me see if there's any questions in the audience, Charlie?

[indiscernible]

Yes. So we do look at this on a quarterly basis. And as you can imagine Charlie, we when you're looking at the DTAs, you're looking at what we call positive and negative evidence towards being able to generate those NOLs use those NOLs. And because you are forecasting into the future. That makes it very difficult. But they -- it is something that we consider and we balance certainly the continuity and the sustainability of those results gives us -- would give us confidence to be able to readjust the DTAs. It's normally how it work. If you look back, I think the last time we made adjustments in the DTA was in 2024, if I remember correctly, '23 or '24. So it's really about looking at all the positive and negative evidence and the level of comfort that you have in the sustainability of it. But we do look at it every quarter. But what you described is essentially if you have a high level of confidence that you're going to be able to generate an amount of profit above and beyond what we already have reserved against the DTAs, then we would then release the resources. Remember, I mean, when we're looking at this, it's not at a point in time, right? So we are forecasting and some of the results that we're at, we have visibility into that in the assessment of those -- the realization of those NOLs. So not just a moment in time.

Great. I guess looking at capital, roughly 16% CET1 you continue to operate with 1 of the strongest capital positions in the peer group with the new $1 billion authorization, the dividend increase. How are you thinking about the optimal long-term capital structure?

Yes. We certainly want it to come down. And we've been more intentful in our messaging and our actions to be able to bring that capital down. We just increased our dividends $0.90, it's declared this quarter. And we continue to do our buybacks. We said in the second quarter call that we expected the buybacks for the rest of the year to be in the $300 million to $400 million range. When you add that to what we've already purchased in the first half and the dividends we're getting fairly close to 100% return for the prior year's net income. So we want to reduce capital. We want to do it in a steady and patient way. We have a a conservative management team and its conservative Board that have long memories. And we appreciate the flexibility of having capital levels if things get either require a level or provide opportunities that you can act in a turmoil, right? So we get it. We understand. I'd love to be able to say this is our target, and so we're going to get to -- we're not there yet to announce anything like that beyond the fact that we want to make it lower. We want to look more like our peers, but always with a buffer for the level of geographic concentration that we have in Puerto Rico. We hardly believe that, that's necessary. We do still have levers. When we look at CET1, we are higher than peers. But when you look at our additional Tier 1 capital, we are lower than our peers. So we have to fund that essentially that Tier 1 with common -- that's 1 area that we continue to explore. We see opportunities where we could have a preferred issuance that would replace common stock. Unfortunately, the market where rates are, it's just not something that we're willing to do at these levels. And we're not at the level of precision. It's a good to have, not a must have at this point given our level of return -- capital return to our shareholders right now and where we're at on our capital stack.

How does M&A play into the discussion around capital? You've talked about your U.S. presence in the past? And how should we think about?

Yes. I mean, listen, we we're not naive. We're not going to say we're not going to do [indiscernible] or we're not open to M&A, right? We -- there's always opportunities out there and sometimes we look -- but the reality is that our M&A for us needs to attend to a handful of things, and that creates a really high bar, right? First and foremost, it has to improve our deposit franchise in the U.S. So any potential target would have to provide for low-cost deposits. Number two, it has to be a commercial led organization. We like niche businesses that can be profitable and it's not just exclusively focused on CRE -- we like the geographies that we're in. So we want to be near those geographies. We're adjacent. So talking South Florida, Central Florida or New York Metro area, adjacent areas, right? We don't want to jump out. I'm sure there's plenty of good banks in Iowa and Montana that we're not going to pursue. It has to be a good cultural fit and culture for us is not only the culture of the employees of the organization, but also the culture of the clients. want to make sure that, that target would be comfortable we've been owned by a bank from Puerto Rico, right? We want to make sure that we're not trying to challenge of integrating a client base. And then the last thing is size when we look at acquisition target, you have to find a sweet for too small acquisition doesn't do anything. It's not worth it. And we -- when we look at a target, we see Popular Bank $14 billion, $15 billion bank buying a bank, not Popular Inc., $75 billion institution buying a bank. So the size of it. And when you put all those things together, there just aren't a lot of options out there that are attractive at this point. And -- so we will continue to prioritize our capital distribution through loan growth, organic loan growth and through dividends and buybacks for our shareholders.

Great. Well, thanks with that, we'll end it. But thank you very much for joining us.

Thank you. Thanks, Jared.