First BanCorp: Puerto Rico Economy to Boost Profits (NYSE:FBP)

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The strong and rapid improvement in Puerto Rico’s economy will likely boost First BanCorp (New York Stock Exchange: FBP) loan growth and keeping provisions below normal through the end of 2023. Also, the rate-hiking environment will have some effect on the bottom line. interest margin, which increases profits. Overall, I expect First BanCorp to report earnings of $1.62 per share for 2022 and $1.67 per share for 2023. Compared to my latest report About the company, I raised my earnings estimates for both years primarily because I raised my margin estimates. Next year’s target price suggests a small advantage over the current market price. Based on expected total return, I upgrade First BanCorp to a buy rating.

Puerto Rico’s rapid economic recovery bodes well for credit growth

First BanCorp’s loan growth rate continued to improve in the third quarter of 2022. Management mentioned in the last conference call that it expects the commercial and consumer portfolios to continue to grow while the residential portfolio declines.

I expect total loan growth to remain decent due to Puerto Rico’s rapidly improving economy. As the region is susceptible to natural disasters, it is important to take hurricane season into account when analyzing the regional economy. The peak of Puerto Rico’s hurricane season is behind us without leaving much damage. Due to Hurricane Fiona, the water and electricity supply was interrupted. Nevertheless, LUMA has announced that it had restored services to 99% of its customer base by October 14, 2022.

Post-hurricane economic data is not yet available; however, I am confident that the strong economic recovery will continue. Before the hurricane, Puerto Rico’s economy was going from strength to strength rapidly. The unemployment rate fell to record lows and economic activity increased, as shown below.

Frame
Data by YGraphics
The Puerto Rico Economic Activity Index

The Economic Development Bank for Puerto Rico

Taking these factors into account, I expect the loan portfolio to grow by 0.75% each quarter until the end of 2023. Meanwhile, other balance sheet items will grow mainly in line with loans. However, equity book value growth will continue to lag loan growth due to unrealized market value losses on the available-for-sale securities portfolio. Tangible book value per share has already fallen from $9.6 per share at the end of December 2021 to $6.4 per share at the end of September 2022. The table below shows my balance sheet estimates.

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fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Financial situation
net loans 8,705 8,887 11,442 10,827 11,136 11,474
Net Portfolio Growth 0.6% 2.1% 28.8% (5.4)% 2.9% 3.0%
Other earning assets 2,140 2,398 4,926 6,658 6,164 6,288
Deposits 8,995 9,348 15,317 17,785 16,694 17,030
Loans and sub-debt 1,074 854 924 684 386 393
common equity 2,009 2,192 2,239 2,102 1,316 1,528
Book value per share ($) 9.3 10.1 10.3 9.9 7.0 8.1
Tangible BVPS ($) 9.3 9.9 9.9 9.6 6.7 7.8

Source: SEC Filings, Author Estimates

(In millions of USD unless otherwise specified)

Margin estimate revised upwards

Thanks to the rising rate environment, First BanCorp’s margin has expanded 70 basis points year to date. This performance is as good as in previous years when the margin was considerably rate sensitive, as shown below.

Net Interest Margin History

SEC Filings, Federal Reserve Bank of St. Louis

However, in theory the margin is not as sensitive as in practice. According to management’s rate sensitivity model results presented in the second quarter 10-Q filing, a 200 basis point increase in interest rate can increase net interest income by only 3.11%. for twelve months.

I expect the fed funds rate to rise another 150 basis points through mid-2023. Taking these factors into account, I expect the spread to grow 20 basis points in the last quarter of 2022 and 10 basis points in 2023. Compared to my last First BanCorp report, I have increased my estimated margin for 2022 and 2023 due to the results of the third quarter.

Supply is likely to remain below normal

As loan additions increased, ECL provisions also increased during the third quarter on a sequential basis. However, provisioning was still well below the average of the years before the pandemic. Going forward, supplies are likely to remain below normal due to Puerto Rico’s rapidly improving economy. Macroeconomic data from Puerto Rico shows that bankruptcies have plummeted significantly in the region, as shown below.

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Bankruptcies in Puerto Rico

The Economic Development Bank for Puerto Rico

Additionally, management mentioned in the conference call that the impact of the hurricane on First BanCorp’s client base has been minimal. Taking these factors into account, I expect net provisioning expense to represent about 0.52% of total loans (annualized) each quarter through the end of 2023. By comparison, net provisioning expense has averaged 0.74% of total loans in the last five years.

2022 earnings estimate revised upward to $1.62

Anticipated loan growth and margin expansion will boost earnings through the end of 2023. Meanwhile, below-average provisions for expected credit losses will provide further support to the bottom line. Overall, I expect First BanCorp to report earnings of $1.62 per share for 2022, up 23% year over year. By 2023, I expect earnings to grow 3% to $1.67 per share. The table below shows the estimates from my income statement.

fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Statement of income
Net Interest Income 525 567 600 730 805 894
Provision for loan losses 59 40 171 (66) 27 60
Non-financial income 82 91 111 121 123 131
interest-free spending 358 378 424 489 451 496
Net Income – Sh. 199 164 100 277 305 314
EPS – Diluted ($) 0.92 0.76 0.46 1.31 1.62 1.67

Source: SEC Filings, Earnings Releases, Author Estimates

(In millions of USD unless otherwise specified)

In my last report on First BanCorp, I estimated earnings of $1.58 per share for 2022 and $1.64 per share for 2023. I slightly increased my earnings estimates for both years because I increased my margin estimates.

Actual earnings may differ materially from estimates due to risks and uncertainties related to inflation and, consequently, the timing and magnitude of interest rate increases. In addition, a stronger or longer than anticipated recession may increase provisions for expected credit losses beyond my estimates.

Upgrade to buy due to moderately high expected total return

Given the earnings outlook, I expect the company to increase its dividend by $0.02 per share in the second quarter of 2023 to $0.14 per share. Earnings and dividend estimates suggest a 32% payout rate for 2023, which is close to the 2019-2021 average of 29%. Based on my dividend estimate, First BanCorp offers a 3.6% forward dividend yield.

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I am using the historical price-to-book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First BanCorp. The stock has traded at an average P/TB ratio of 1,068 in the past, as shown below.

Frame
Data by YGraphics

Multiplying the average P/TB multiple with the projected tangible book value per share of $7.8 yields a target price of $8.3 by the end of 2023. This target price implies a 44.7% drop from at the closing price of October 26. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.87x 0.97x 1.07x 1.17x 1.27x
TBVPS – Dec 2023 ($) 7.8 7.8 7.8 7.8 7.8
Target price ($) 6.8 7.5 8.3 9.1 9.9
Market Price ($) 15.1 15.1 15.1 15.1 15.1
up/(down) (55.1)% (49.9)% (44.7)% (39.6)% (34.4)%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 14.21x in the past, as shown below.

Frame
Data by YGraphics

Multiplying the average P/E multiple with the forecasted earnings per share of $1.67 yields a target price of $23.7 for the end of 2023. This target price implies a 57.5% upside from the price closing on October 26. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 12.2x 13.2x 14.2x 15.2x 16.2x
EPS – 2023 ($) 1.67 1.67 1.67 1.67 1.67
Target price ($) 20.4 22.0 23.7 25.4 27.0
Market Price ($) 15.1 15.1 15.1 15.1 15.1
up/(down) 35.3% 46.4% 57.5% 68.6% 79.7%
Source: Author’s estimates

By equally weighting the target prices of the two valuation methods, a $16.0 price target, which implies a rise of 6.4% compared to the current market price. Adding the term dividend yield gives a total expected return of 10.0%.

I adopted a hold rating in my last report on First BanCorp with a price target of $15.5 per share for December 2022. Since then, the market price has declined by more than 6%, resulting in a significant increase next year’s target price. As a result, I am now upgrading First BanCorp to a purchase rating.

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