Thursday, December 8, 2022

Puerto Rico Banks Deliver strong earnings, beating most banks

By on November 9, 2022

Puerto Rico Banks Transformed their operational model

The Puerto Rico Bank peer group has transformed its operational model to adjust to periods of macroeconomic uncertainty with its robust CET1 ratio, profitable business model, and strong asset quality. The results for the third quarter are the best evidence yet of the best-in-class model the Puerto Rico banking sector has adopted. The enhancement or adoption of the “Fortress Balance Sheet” model has created strong lines of defense with conservative loan loss reserves. The strong Tier 1 Capital ratio and the meticulous risk management process have strengthened the Puerto Rico bank holding companies to be better able to absorb macroeconomic shocks.

From October 20 to October 26, the Puerto Rico bank holding companies delivered their respective third-quarter 2022 earnings; we dedicate this issue to examining each Bank’s performance.

As we revise loan growth, deposits, Tier 1 Capital, and other relevant metrics worth highlighting, we discover that there is much more than meets the eye.

The three Bank holding companies, which are all part of the Birling Capital Puerto Rico Stock Index, have continued to outperform most of the U.S. Bank holding companies, and their collective earnings are pretty impressive. We reviewed each Bank holding company’s third-quarter results and stock performance from 1/01/22 to 10/28/22 and compared them to the Dow Jones, S&P 500, Nasdaq, Birling Puerto Rico Stock Index, and the Birling U.S. Bank Index.

The returns of these five indices ranked by performance are as follows:

1. Firstbank Corp.(FBP): Reported 3Q22 earnings that saw revenues rise to $237.6 million, up 9.63%, and Net Income of $74.6 million, down 0.12%.

The Bank’s stock closed the week of October 28 at $14.52, up 0.71%, with a stock price objective of $17.80. Firstbank has a YTD return of 13.50%, beating the Dow, S&P, Nasdaq, Birling U.S. Bank Index, and the Birling P.R. Stock Index. Capital ratios for common equity tier 1 capital, tier 1 capital, and leverage ratios were 19.38%, 16.66%, and 10.36%.

  • Birling Puerto Rico Stock Index -4.01%.
  • Dow Jones Industrial Average -9.57%
  • Birling U.S. Bank Index -16.74%
  • S&P 500 -18.15%
  • Nasdaq Composite -29.04%

The Three Puerto Rico Banks Reported earnings that beat expectations. 

The Bank’s stock closed the week of October 28 at $14.52, up 0.71%, with a stock price objective of $17.80. Firstbank has a YTD return of 13.50%, beating the Dow, S&P, Nasdaq, Birling U.S. Bank Index, and the Birling P.R. Stock Index. Capital ratios for common equity tier 1 capital, tier 1 capital, and leverage ratios were 19.38%, 16.66%, and 10.36%.

Key Stats for FBP:

  • Total Assets of $18.4 billion, down $1.1 billion
  • Total Deposits of $17.2 billion, down $797 million
  • Total Loans of $11.3 billion, up $81.3 million

2. OFG Bancorp. (OFG): Reported 3Q22 revenues of $156.8, up 16.4%, and Net Income of $62.5, up 5.12%. The stock closed for the week of October 28 at $28.00, up 2.19%, with a stock price objective of $34.50. The Bank has a YTD return of 5.42%, beating the Dow, S&P, Nasdaq, Birling U.S. Bank Index, and the Birling P.R. Stock IndexCapital ratios for common equity tier 1 capital, tier 1 capital, and leverage ratios were 13.34%, 13.34%, and 14.59%.

Key Stats for Oriental:

  • Total Assets of $10.05 billion, down $189.5 mm
  • Total Deposits of $8.855 billion, down $174.4 mm
  • Total Loans of $6,591 billion, up $5.81 mm

3. Popular, Inc. (BPOP): Reported 3Q22 earnings that surpassed expectations with revenues of $1.01 billion, up 34.5%, and Net Income of $422.4 million, up 99.81%.

The stock closed the week of October 28 at $70.65, down -2.39%, with a stock price objective of $93.83. The Bank has a YTD return of -13.88%, beating the S&P, Nasdaq, and Birling U.S. Bank Index, lagging the Dow Jones & Birling P.R. Stock Index.

Key Stats for Banco Popular:

  • Total Assets of $70,729 billion, down $772,256mm
  • Total Deposits of $64,819 billion, down $508,337 mm
  • Total Loans $30,820 billion, up $1,130 billion

Collectively the Puerto Rico Banks’ stock results for the 2022 third quarter are outstanding:

  • Total Assets $ 99.179 billion, down $3.321 billion
  • Total Deposits $90.869, down $1.258 billion
  • Total Revenues $1,395.40 billion, up $450.40 million
  • Total Net Income $559.50 million, up $233.07 mm.
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The Birling Puerto Rico Stock Index beats all indexes with a year-to-date return of -4.01% beating the Dow Jones, S&P 500, Nasdaq Composite, and the Birling U.S. Bank Index, which consists of the U.S. biggest banks. 

Suppose you have not taken a recent look at the local Puerto Rico bank stocks. In that case, we think they are worth considering and may be a crucial part of your asset mix as part of a well-diversified portfolio of stocks, bonds, and other securities that are part of your long-term financial goals.

The Week in Markets: U.S. GDP Rises to 2.60%, The Core PCE rose 0.5% and Consumer Sentiment rises.

The U.S. stock markets ended the week with solid gains, following the rise in GDP to 2.60%, and Apple’s outstanding earnings results provided a superlative lift to the markets. Apple (AAPL), which closed yesterday at $144.81, has risen today by $10.94 or 7.56%, to close at $155.74

In economic news, the Fed’s preferred inflation metric, the Core Personal Consumption Expenditures Index, rose 0.5%, meeting consensus estimates and below the 0.6% of the previous month. Lastly, the U.S. Index of Consumer Sentiment rose to 59.90 increasing 2.21%.

As the U.S. GDP rose to 2.6-% ahead of most consensus estimates of 2.3% GDP, and below the metric we use, the GDPNow last assessment, of 3.1%. The positive GDP number is a welcomed indicator and the GDPNow was updated for the Fourth Quarter 2022 forecasting 3.1% growth.

The main drivers of the GDP growth were as follows:

  •  Private inventory investment, 
  •  Acceleration in nonresidential fixed investment,
  •  Increased federal government spending 

These drivers offset the significant decrease in residential investment, further declines in consumer spending, and decreasing imports.

Notable metrics to ponder for the third quarter:

  • Current‑dollar GDP rose 6.7% or $414.8 billion.
  • Price index for gross domestic purchases rose 4.6%.
  • Disposable personal income increased by 6% or $268.3 billion. 
  • Personal Savings Rate is 3.3% or $626.1 billion.

It was not a good corporate earnings week for the tech sector, which delivered dismal results. Companies like Amazon, Microsoft, Meta, and Google tanked the tech sector further down when their earnings did not meet expectations; however, at Apple, the story was quite different; let’s see their results.

Apple (AAPL): reported its 4Q22 earnings that surpassed expectations with revenues of $90.1 billion, up 8%, and Net Income of $20.71 billion, up 0.82%. The Stock closed at $155.74, up 7.56%, and has a stock price objective of $181.18.

Wall Street Weekly Summary for the week ending October 28:

  • Dow Jones Industrial Average closed at 32,861.80, up 1,779.24 points or 5.72%.
  • S&P 500 closed at 3,901.06, up 148.31 points or 3.95%.
  • Nasdaq Composite closed at 11,102.45, up 242.73 points or 2.24%.
  • Birling Capital Puerto Rico Stock index closed at 2,763.54, up 47.26 points or 0.76%.
  • The U.S. Treasury 10-year note closed at 4.02%.
  • The U.S. Treasury 2-year note closed at 4.41%.
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The Final Word: It is time to change investment strategies from inflation defense to growth mode.

As we have seen so far, the corporate earnings season appears to be much weaker than expectations, and some are even saying these results may sway the Fed to alter its aggressive interest rate campaign. While we find this occurrence unlikely, the reality is that there is a strong link between interest rates and valuations. On the one hand, inflation does not appear to be headed significantly lower, and it remains pretty high. We need to see inflation readings of at least three significant decreases to call it beaten. 

However, as we are headed in the right direction, we find it appropriate to begin shifting our gears from inflation defense to growth mode.  As the markets shift into growth mode, we will begin to see lower yields in bonds and rising performance from most stocks, and considering the lower prices, we are seeing it creates a compelling opportunity for growth. As soon as investors sense that inflation has been tamed, the pessimism will subside, and the corporate earnings misses will become buying opportunities for many; the key is taking the early train for growth and profits.