Popular Inc (BPOP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Popular Inc. earnings conference call. My name is Stacey and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. As a reminder this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, to Mr. Enrique Martel, Communications. Please proceed.

Good morning. Thank you for joining us for today's call. Chairman and CEO, Richard Carrion; our CFO, Jorge Junquera; and our CRO, Lidio Soriano, will review our first-quarter results and then answer your questions. We'll be joined in the Q&A session by other members of our management team.

Before we start I would like to remind you that in 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 today's earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. You may find today's press release and our SEC filings on our web page, which you may visit by going to www.popular.com.

I will now turn the call over to Mr. Richard Carrion.

Good morning and thank you for joining the call. Please turn to the second slide.

For the first quarter, we reported net income of $48 million compared with a profit of $3 million in fourth quarter of 2011 and $10 million in Q1 of 2011. The results met our expectations and were driven by a lower provision expense. Most credit trends during the first quarter were encouraging. We had lower charge-offs, lower NPLs and lower commercial NPL inflows. We are reaping the benefits from the numerous actions we have taken since 2009 to de-risk our balance sheet, which are being helped by improving economic conditions in Puerto Rico. We are in a better position today than we were at this point last year, and we expect our institution to continue to get stronger.

Revenue generation was again solid in the first quarter with continued strong production from our Puerto Rico mortgage business, stable fee income and our continuing efforts to reduce deposit costs. The yield on the covered loan portfolio remains strong at 7%. The substantial decrease in our funding costs has helped maintain our margin above 4%, well above our peer average.

The cost of deposits in Puerto Rico where we hold a considerable share of the market fell to 87 basis points. That's a 48 basis point drop from the year-ago quarter. Even with this considerable drop we've been maintaining key customer relationships. To ensure we maximize the value of our covered portfolio, as well as our special loan portfolios, we created a new division specifically dedicated to commercial loan administration. Headed by our former corporate Comptroller, Ileana Gonzalez, the Commercial Credit Administration Group includes the special loan division, the Commercial Credit Operations division, and the Loss Sharing Agreement Administration Group.

We are confident this reorganization will help streamline decision-making in those three critical areas, reinforce our credit administration and allow the lending side of our commercial group to concentrate on generating business.

During the quarter, we also revised our loan loss allowance methodology by extending the look-back period used to better calibrate recent loss trends and by further segmenting our commercial and construction portfolios into more categories. The longer period provides more observation points and the greater segmentation allows us to better refine loss estimates in the commercial portfolio.

Lidio will address this in greater detail later in the call, but the key here is that the reverse methodology along with the reorganization of the commercial group are part of our continual efforts to improve our risk management processes.

Critical to our business is the state of the economy in Puerto Rico, and our perception is that it is gradually improving. There have been year-over-year increases in the number of non-farm jobs in Puerto Rico for the first time in several years. And cement sales, which are approximate a proxy for real investment and infrastructure spending, are rising.

Auto sales and hotel occupancy are also trending positively. Our view is that this contraction in Puerto Rico's economy seems to be over and we are transitioning from recession to stability. While this is a positive development we do not expect to see a sharp recovery. Puerto Rico still has some headwinds to deal with, including a relatively high level of public-sector debt and energy needs which are highly dependent on oil. Nonetheless, we're in a better position now than at this time last year.

Please turn to slide three for an overview of the income statement. The most notable number on this slide is the decrease in the loan loss provision. Key point is that credit costs for the company are declining as expected, benefiting from improved credit trends in both Puerto Rico and the US.

Another item I'd like to point out is that revenue generation remained solid. Excluding the FDIC indemnity expense, which is impacted materially by changes in the covered loan provision, total revenue remained at a solid level in Q1, relatively flat versus the previous quarter. We expect to continue to generate stable and solid levels of revenue in 2012.

As a result of our sustained profitability we continued to generate capital internally. We ended the first quarter with a book value of $3.81 per share. And after removing all intangibles and the un-accreted TARP discount, a tangible book value of $2.68 per share.

Let me now turn the call over to Jorge.

Thank you, Richard. Good morning. I would like to go over the main variations in our first-quarter results as compared with the fourth quarter.

First, net interest income declined by $7 million. This decline was driven primarily by a $14 million reduction in interest from FDIC covered loan portfolio, which was partially offset by a decline in deposit and borrowing costs amounting to $4 million and $2 million, respectively. Our high-end stable margin is one of our strengths and we expect it to remain over 4%.

Non-interest income declined by $25 million versus the previous period, due primarily to a decline of $33 million in the FDIC indemnity asset. The reduction in the indemnity income was basically associated with the 80% offsetting effect from the decline in the covered loan provision.

As we have previously mentioned we have a negative amortization related to our indemnity assets. This is the result of lower expected losses in our FDIC covered portfolio relative to our original estimates at the time of acquisition. This negative amortization is offset by an increase in the accretable yield, which is amortized over the expected life of the loans, which is longer.

In other income, including the aforementioned FDIC-related items, the $7 million increase was led by a rise of $6 million in higher deposit and other fees and by favorable variances in the mark of our mortgage servicing rights.

Also benefiting noninterest income during the quarter was the income related to several minority investments we have. This includes EVERTEC, Grupo, (technical difficulty) in the Dominican Republic and PRLP 2011 holdings, the latter being the entity which owns the construction and commercial loans we sold last year and in which we hold a 24.9% participation.

As Richard mentioned, our provision expense declined in quarter one. Of the $79 million total reduction, $41 million was related to non-covered loans, which was split fairly evenly between Puerto Rico and our US business.

The drop was led by lower commercial loan charge-offs in Puerto Rico and in the US, offset partially by increased mortgage loan charge-offs in Puerto Rico, which remain at very manageable levels. Also, part of the decline in the provision expense came as a result of the revised methodology, which accounted for $25 million of the total decrease. The remaining $38 million of the drop was due to lower estimated losses in the covered loan portfolio.

Expenses in the quarter declined $15 million versus the previous one. Some of you may recall that in the fourth quarter, included a one (technical difficulty) [$6] million related to the voluntary retirement window. The window met our expectations and we are carefully reviewing our operations to assure that as we transition to a leaner company we do not compromise effectiveness, controls, and the quality of service. Full-time employees were 8,074 as of the end of March compared with 8,329 as of the end of the year.

OREO expenses rose $4 million in the quarter, while there were declines of $6.4 million in business promotion expenses which tend to be higher at the end of the year, and $1.9 million in professional fees. In all, we are pleased with the performance of the quarter, which was in line with our plan.

Please turn to slide 5 for an overview of capital. As you can see in this slide, Popular has very strong levels of capital, which exceed well-capitalized regulatory requirements by approximately $[1.9] billion. We have enhanced our capital management processes to better adapt it to the evolving regulatory environment.

The supervision of capital by the regulators has become a much more dynamic process by moving away from utilizing primarily static historical ratios to adopting dynamic forward-looking processes. Now, banks have to stress test the impact of adverse economic scenarios on credit losses, revenues and asset values during the planning period and assure that enough capital is maintained to comply with all regulatory requirements post-stress.

We are well-positioned to comply with the enhanced capital requirements of this new regulatory environment. The planning process we have already implemented indicates that even on a post-stress basis we would still exceed all regulatory capital requirements.

Following the publication of the 2012 Sicar results several banks announced that their plans for TARP repayments were approved. Regarding the TARP capital we have an outstanding our position is unchanged. We want to repay as soon as we can under conditions that make sense to our shareholders.

We do not have a specific repayment plan yet in place but we think that the business strengths, improving credit metrics, strong revenue generation, and rising capital, puts us in a better position for a repayment of the TARP capital we have outstanding under terms that are reasonable. Of course in repayment of TARP we'll be subject to regulatory approval.

Now, I would like to turn the call over to Lidio, who will discuss credit trends.

Thank you, Jorge. While we begin with a detailed view of our credit indicators let me make three general comments related to the corporation's loan portfolio.

First, all of our portfolios in Puerto Rico show improved credit quality. The first quarter marked the second consecutive quarter with decreasing next charge-offs, which fell to $74 million, the lowest level since 2008. NPLs in Puerto Rico also dropped for the second consecutive quarter, driven mostly by lower NPLs in the corporation's commercial portfolio.

Mortgage NCOs increased by $7 million. This increase was not caused by a deterioration in the inherent credit quality of this portfolio, but was principally due to the implementation of a revised charge-off policy in Puerto Rico.

During the first quarter of 2012, the Corporation revised its charge-off policy for the residential mortgage loan portfolio by including historical losses on recent OREO sales to determine the net realizable value and asset charge-off once a loan becomes 180 days past due. Previously this was done once the loan was foreclosed.

While this accelerates the timing of the charge-off, it should result in lower OREO expenses upon disposition of foreclosed properties. We remain very comfortable with the risk profile of this portfolio and expect losses to remain at 1%.

Secondly, we continue to enjoy the benefit of our de-risking strategies in the US. For the first quarter of the year, NPLs amounted to $338 million, an improvement of $28 million over the prior quarter. This marks the ninth consecutive quarterly decrease in NPLs for the US business.

NCOs for the first quarter in the US amounted to $34 million, an improvement of $13 million compared to the prior quarter. The first quarter marked the fifth consecutive quarterly decrease in charge-offs reaching the lowest level since the first quarter of 2008.

Thirdly, during the first quarter of 2012 the Corporation revised the estimation process for evaluating the adequacy of its allowance for loan losses for the corporation commercial and construction loan portfolios to better reflect current market conditions. I will provide details later in the presentation.

Let's turn to slide 6 to highlight some of the key quality metrics for the Corporation's noncovered loan portfolio. Total loans remained relatively unchanged with a slight loss in Puerto Rico offset by a decrease in the US. In Puerto Rico the growth mostly came from the mortgage loans.

NPLs decreased by $56 million during the first quarter, mainly driven by a $32 million decrease in the US construction portfolio and a $26 million decline in the Puerto Rico commercial and mortgage portfolios. This was partly offset by slight increases in Puerto Rico construction and US commercial.

The decrease in NCOs was driven by improvements in both Puerto Rico and the US. The allowance to NPL coverage ratio remained relatively flat, driven by the decrease in NPLs, coupled with the effect of the revised allowance methodology. I will provide more details in the later part of the presentation.

Please turn to slide number 7 for further insights into the commercial construction and mortgage portfolios.

In the top half of the slide, we illustrate the commercial and construction NPL inflow since Q1 of 2010. For both Puerto Rico and the US, total inflows reached the lowest levels in the last three years. In Puerto Rico, commercial and construction NPL inflows are down $12 million and $134 million compared with the fourth quarter and third quarter of last year, respectively, marking the second consecutive quarter of improvements. We are optimistic that the trend will continue.

In the US, commercial and construction NPL inflows are down substantially, falling 52% from the fourth quarter of last year.

In the bottom half of the slide we provide information regarding the Corporation's Puerto Rico mortgage portfolio. Since the fourth quarter of 2009, the Puerto Rico mortgage NPL ratio has increased from 9.9% to 13.3%. The mortgage NPLs are primarily driven by repurchases from our mortgage recourse portfolio. In 2011 we repurchased $270 million from our recourse portfolio, approximately $50 million in the first quarter of 2012. We expect the repurchase to decrease during 2012 due to improved credit quality.

The graph at the bottom half of the slide illustrates the credit quality trends in our total mortgage exposure. This graph combines the corporation's Puerto Rico and mortgage loans with a recourse portfolio. Two important observations are derived from the graph.

First, consistent with stopping the practice of selling with recourse in 2009 the light blue bar shows a decreasing balance of our recourse portfolio. Total mortgage exposure 90+ days past due delinquency ratio has decreased since the third quarter of 2010. The key take-away here is that our total mortgage exposure shows steady credit performance during the last 2.5 years.

Please turn to slide 8 to discuss recent revisions to allowance estimation process and the related coverage ratio. Our allowance for loan losses methodology is divided into two components, a general reserve and specific reserves.

The specific reserve stems from the individual analysis of loans being impaired. The general reserve is based on historical net loss rates adjusted for recent net charge offs and environmental factors.

The base net loss rates are based on the moving average of annualized net charge off compared over a three-year historical loss period for commercial and construction loan portfolio and an 18-month period for consumer and mortgage loan portfolios. Net charge-offs trend factors are applied to adjust the base loss rates based on the recent loss trends for the last six months.

Environmental factors account for core market conditions that are likely to cause estimated (inaudible) loss to defer from historical loss experience.

During the first quarter of 2012 we made the following two changes. We established a more granular segmentations of loans in the commercial and construction portfolio to make loan segments more homogenous. Some of the changes included segregating [late app] loan segments and changing the primary segmentation from a line of business to a product type segmentation.

We also revised the look back assumption for recent loss trends by increasing it from six to 12 months for commercial and construction portfolios. This change is designed to better calibrate the impact of (technical difficulty) loans stressed on inherent loss estimates.

As part of the process, the corporation also reassessed environmental factors applied to the commercial loan portfolio in Puerto Rico. The net effect of these enhancements amounted to a [$20.3] million reduction in the Corporation allowing for loan losses. Most of the effect was in the US. The allowance coverage ratio remained basically flat quarter to quarter.

Please turn to slide number 9 to discuss our coverage ratio. To understand our coverage ratio it is important to highlight that more than 50% of our NPLs are subject to specific analysis. Based on this fact that most of our impaired loans are collateral dependent we require updated operations or current evaluations to ascertain proper reserves and charge-offs. Our policy is to charge off any portion of our impaired collateral dependent loan in excess of the fair value of the collateral.

For commercial and construction loans we have charged off approximately 30% of the unpaid principal balance. The coverage and adjusted coverage ratio for loans that are individually analyzed are 3% and 33%, respectively, as you can see in the left box. In the right box, you see that excluding NPLs that are individually analyzed we have approximately $833 million of NPLs with a remaining reserve of $638 million -- $631 million -- I'm sorry. For a coverage ratio of 76%, the adjusted NPL coverage ratio is 104%.

Let me finalize by summarizing and reiterating our key trends in our credit portfolio. Puerto Rico showed improved credit quality, with NPLs decreasing for the second consecutive quarter and NCOs at the best levels since 2008. In the US we continue to enjoy the benefits of our de-risking strategies with NPLs decreasing for the ninth consecutive quarter and NCOs improving for the fifth consecutive quarter. And with that, I'll turn it over to Richard for his concluding remarks.

Thank you. Thank you, Lidio. The results of our first quarter came in according to plan, and we continued making progress on various fronts.

Credit metrics of our loan portfolio continued improving. Revenue generation was once again strong and our already strong capital base continues to rise.

The economic environment in Puerto Rico seems to be stabilizing, and while we're not expecting significant economic growth in the near future, the macro environment is definitely better today than last year.

We have a clear plan for the rest of 2012 -- continue to work on improving the risk profile of our loan portfolio; acquire moderate risk assets with good returns; continue our efficiency initiatives; and further improve our US community banking business. We feel confident about our prospects for the year and we are reaffirming our target range of $185 million to $200 million in net income for 2012. Thank you once again for joining us and let us now open the call for questions.

(Operator Instructions). Joe Gladue, B. Riley & Co.

Good morning. I guess I wanted to start off with a question about I guess for Lidio on the adjustment in the charge-off policy in residential mortgages.

Just wondering, is that going to -- did that result in sort of a bump up in first-quarter charge-offs as that would've affected loans that were already nonperforming? And again, just wondering if we'll see a decrease as that change only impacts inflows going forward; just am I looking at that correctly?

Yes; I mean it didn't have an impact during the first quarter. The impact was $5 million out of the $7 million of increase in net charge-offs for the mortgage business was related to the implementation of the new charge-off policy. That policy should have an effect through the first year of implementation as we evaluate all of our loans as they come due for the anniversary and evaluation from a net charge-off perspective. And going forward then, that should normalize to slightly lower levels than what you're seeing today.

Okay. And just one bookkeeping item. Can you give us what accruing TDR's were at quarter end?

I don't have that number with me. We'll provide that with the Q's, certainly, but I don't have the number with me. Sorry, Joe.

Okay. I'll shift over and I guess ask about the PRLP. Just wondering if you could -- saw some improvements there. Just wondering if you could tell us, is that something we -- that's sort of periodic that gets reevaluated?

Yes, they reevaluate based -- as you know we have 24.9. So we use the equity method to account for that. We have a minority interest there. I think we're running it three months behind. So, I think they have some good wins in the firsts few months of the process and they revalued it positively. I think it's a good sign and we're optimistic about it, but of course, this is every three months you've got to reevaluate, so --. But so far it seems to be working according to plan and I think that's a good sign.

All right. I'll ask one more and then step back. Just a question on the I guess noninterest bearing deposits. It looks like there was a sizable decline in the quarter. Just wondering what was going on there.

Okay. Joe, it's -- the decline in noninterest bearing has to do, it's more cyclical. Toward the end of every year, we have some particularly some government accounts. We are the trustee of a lot of the bond issues for the Puerto Rico government and they either come due or they certainly pay interest on January 1 and July 1. So they tend to pile up deposits one or two days before interest payments, but that money goes away so it was just you know that it tends to build up a little bit toward the end of the year and then it drops. There hasn't been any material reductions in demand deposits. In fact they're running slightly higher than what we're expecting. So, there is no negative surprises there. It's just more cyclical.

Ken Zerbe, Morgan Stanley.

Great, thanks. You guys reaffirmed your guidance, right, the $185 million to $200 million, but you also benefited this quarter from the $25 million of reserving methodology change. Why didn't you consider increasing your guidance this quarter?

Well you, know, we think things are coming according to plan. Obviously, the provision will behave according to what credit conditions are. And so far, they seem to be unfolding as we expected. But that was in our -- that was in our plan. And, we are reaffirming the guidance at this level. And we think we're going to make it.

Okay. That probably explains it because we didn't know you were doing the methodology change. Is there any other items such as I guess that would result in gains that are included in your guidance that we don't know about?

No, I think we also mentioned this small tweak in the mortgage thing and that made for more charge-offs. But nothing of -- that is remarkable.

Okay. The other question I just had was on expenses. I guess we were looking for a more substantial decline this quarter, given you had the unusual pension charges last quarter, but obviously, they stayed elevated. How should we be thinking about expenses going forward?

Well, I think there's a little -- there is still a little noise in there. Remember, the employees were still on the payroll until February 1. We've had some attempts coming as we begin to stabilize the process and there are a couple of accruals that are sort of frontloaded in the beginning of the year in terms of expenses. Plus we also had some severance for some additional employees during the quarter. So, there is a bit of noise there. I don't know, Jorge, do you want to --?

No. I think that's precisely -- no doubt that we are already beginning to see the benefits of the window. We're very satisfied with the window that was implemented. And we're beginning to -- already begun to see reductions in salaries and pension costs. But as Richard mentioned, there were some other items that unfortunately mitigated the benefits that we were already seeing. And also there was a lawsuit in the mainland that we settled, also bringing up expenses slightly higher. But it has to do more with this hiring of, on a temporary basis, of some of the people that retired.

We should begin to more generally see the benefits of the reduced level of our operating expenses in the second but more likely in the third and fourth quarter. Also when we get the full benefit of further branch consolidations that are taking place. But we still believe that as we committed last year that we were going to get that $25 million annual reduction from our quarter-three expense levels, we still feel confident that we're going to be able to achieve it toward the end of the year.

Okay, that helps. And then just one final question. On deposits costs do you guys still feel good that you have 15, 20 basis points further lending cost reduction going forward? Is there still room to lower deposits?

Yes. We still feel confident. It gets more difficult as we go along, but you also have to get smarter. But yes, we still feel confident that that can be achieved throughout the year.

Great. Thank you.

Michael Sarcone, Sandler O'Neill.

I just had one question. Or just more -- can you give us an update on the US franchise?

Well, Carlos is here. I will tell you things are unfolding according to plan in general with one exception. We are finding asset generation on the commercial side is particularly soft. But, aside from that, everything is moving according to plan. Carlos, do you want to add something here?

Yes, the credit side continues to develop as we had hoped, and Lidio mentioned earlier, with nonperformings and losses continuing to drop. And the other thing that you may hear something about in the next few weeks is that we will be completing our rebranding with the New York region during the summer. We have already successfully done that in the other three regions. We'll do that over the summer as well.

Okay. Thanks, guys.

Derek Hewett, KBW.

You guys transferred another $141 million roughly from non-accretable to the accretable yield. At some point should we expect to see an accelerating accretable yield?

Well, not necessarily an accelerating accretable yield. It would be -- the benefit will be there but it will be as the amortization of the indemnity asset becomes -- extinguishes. And that's what -- then we will continue with a clear benefit of the higher accretable yield from latest recastings.

Okay. So in terms of the amount that's going to flow through interest income, what you're saying is that's going to be relatively flat, but you will -- in the outer years we'll see the benefit as the amortization from the indemnity rolls off. Is that kind of how to look at it?

That's right. And looking -- and both of them, as they diminish, because this is an extinguishing asset on both sides, so the amount of accretable yield and also the amortization of the indemnity asset will be going down gradually.

Okay, great. Thank you very much.

(Operator Instructions). Jose Carmona, Caribbean Business.

Good morning, gentlemen. I've got a couple of questions. First, I would like your comments on Moody's recent news on placing Popular for a possible review on their outlook on the credit rating.

And also, if you plan to meet with them to review your first-quarter results and the latest information regarding the economic outlook of the island -- as you know this morning, the GDB yesterday revised upward their economic forecasts for growth for 2012. Can you comment on that?

Sure. We will obviously be meeting with them and go over the first quarter with them and with all the other rating agencies as we do regularly.

Regarding the announcement that they made, I think it was related to the fact that they are revising the Commonwealth debt. And as a result they said they would put all the Puerto Rico banks also on their watchlist as is normal. So I think it's going to happen and we'll talk to them and see where they come out there.

Okay. The second question has to do with the Bloomberg story that came out yesterday. This is nothing new. It's been reported previously regarding some loans given to some more directors. Can you comment on that?

Sure. I'll be glad to. I think the key thing we have to separate is first of all, all these loans at the time they were made were made with the approval of the Board of Directors. I was certainly not involved in that approval. And they were made under the same conditions as -- same market conditions existing at the time of approval.

As you know in the past few years, things have not worked out exactly as we expected in Puerto Rico. And the loans the same as many other loans in the construction portfolio, when we transferred them to held-for-sale we took a hit on that. We expect that these loans at this current level will get paid off.

Ok. Thank you, gentlemen.

Joe Gladue, B. Riley & Co.

Hi, again. I'd like to touch base on the recourse loans. You guys stopped selling loans with recourse some time ago. And I guess I'd just like some color. I imagine most of the recourse provisions had a timeframe on them that they expired after a certain amount of seasoning. And just wondering if you can give us an idea of -- is there a good portion of those loans that were sold with recourse that will sort of pass their range for recourse or were there time frames on that?

Most of these recourse were lifetime recourse, so there isn't an expiration. But I think the key message from our recourse portfolio is that we feel comfortable the delinquencies are down. And when you take it together with our mortgage exposure, our mortgage on balance sheet exposure, the strength and the quality of those -- both portfolios taken together is actually trending better over the last year or so.

Okay. All right. And just wondering if you could maybe touch on just loan demand overall, particularly, I guess in Puerto Rico; are you seeing any -- what trends are you seeing in loan demand?

You know, on the commercial side, both in the states and in Puerto Rico, it's still soft. We are seeing better consumer demand and mortgage business continues strongly in Puerto Rico. But the commercial side, particularly small and middle commercial, remains soft, Joe.

Okay. Thank you.

(Operator Instructions). And with no more questions in the queue, we thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.