Everybody, for joining us for our final BPOP. Popular, as many of you know, is based in Puerto Rico, of course. It's the 24th largest U.S. commercial bank, with about 70 has a market cap of around $6 billion, and impressively has a Common Equity Tier 1 ratio of just over 16%. Very pleased, Vázquez, today. He joined Popular back in 1997, and as some of you may know, he has announced his retirement. He, at the end of this month, and I'm very privileged to share the podium with him on, I think, your last investor conference.
This is my last investor conference.
Yeah, last investor conference. So we're very privileged to have you here, so thank you so much, Carlos. We wish you tons of fun in, in retirement, at the end of the month. Keeping track of every day?
Absolutely. Keeping track every day, yes. It is time.
Yep. And his replacement, Jorge García, is with Paul Cardillo, who heads up investor relations. If you want to introduce yourself to Jorge, you're obviously welcome to do that. Maybe to start. Banks are products of their economy. You certainly know that as well, Carlos. And can you share with us what's the progress that the Puerto Rican government is making toward exit and talk about PREPA and the restructuring and how that all plays into what's going on in Puerto Rico?
Yeah, that's a very timely question because, today in the afternoon was the beginning of the court hearings.
Yes.
For the PREPA restructuring, most of the people that know all those hearings will take a couple of weeks. I think there's a general expectation that after hearing all the parts, the PREPA plan as proposed, and if that happens, it's a sort of an important point, because PREPA is the last remaining material piece that was pending restructuring in Puerto Rico. So once we get PREPA done, you can check the box and sort of the whole chapter, the seven-year chapter, will be behind us. So I think that will be very positive for the island. It will be positive for the continued investment in the, to give you one example, PREPA, if you're setting up a new private generation plant in Puerto Rico, your off-take contract, to the extent that PREPA was a bankrupt company, those off-take contracts were very difficult to finance.
Once PREPA is out of that bankruptcy, then financing of some of these generation projects that are all private now. So, having PREPA done is important from the legal point of view. It's important operational. Electric sector renewal. And it's important cyclically to get the whole phase of the bankruptcy. There will be continuous court challenges for many things, and those will take years to resolve. But basically, conceptually, the restructuring.
As you mentioned, it's been a 7-year kind of process timeline. And so psychologically, I have to believe it's going to be like a new era, you know, for Puerto Rico. Do you think that could bring more investment dollars into Puerto Rico once this is finally resolved?
I think that's happening already.
Okay.
because I think the evolution of the restructuring and how the pieces have continued to get resolved and increase the probability that the remaining pieces will be resolved. So I think it as is, if it's going to happen in some reasonable form. And a lot of the investment that was maybe because of the uncertainty in the government situation, I think we passed that bridge already some time ago. But you know, checking the box will still be important.
Yep. The items you and I have talked about over the years is that the outmigration from the island to the mainland has slowed, which it is. I think it's going to because I'm assuming from our conversations, most of the folks leaving was job opportunities in the mainland, not because they didn't like, obviously, where they grew up. What do you think could bring more folks back to Puerto Rico, the ones that may have left?
I'm not sure, not necessarily a reasonable target.
Okay.
Because we have the same demographics that you have in the mainland. You know, the whole population is getting old. Our long-term trends are very difficult to change. So, I think most people would probably be pretty happy if we can keep the population steady. That's roughly been what has happened for the last couple of years. You're right that, you know, we lost roughly 10% of the population over. And most people left because there was no job creation program. So they needed a job, and they needed to go. For the last net job creation in Puerto Rico, we have a more nominal number of people working today in Puerto Rico than we've had since 2007.
Yeah.
2007 people now is 3.2 million people. So the job creation has been significant and very real. With that job creation, you've seen population. Unfortunately, the economists can't do their own famous equations, correlating job creation with population.
Right.
Because the last time that happened in Puerto Rico was. So whatever the equations were then, they just don't work anymore.
Right.
We probably need two or three more years under our belt before the new equation can be put together that makes sense and has reliability.
Yep.
But as long as there are jobs, people will stay. And we've been very lucky for the last two plus. Hopefully, we continue that trend for a while, and that will keep population steady.
Yep. I remember in our conversations, you often referenced like a 10-year recession that you worked at the bank. This growth that you're seeing now, as you just referenced, can you highlight some of the areas? Because many folks, especially in the Metro New York area, destination point, obviously, for vacation.
Sure.
I know tourism is important.
Right.
But there are some other sectors that are maybe even more important, like manufacturing. Maybe you could give us some economic growth.
Yeah, I mean, tourism. Northeast is very important for our tourism, and please keep coming. You're welcome. It's fantastic.
Yeah. Okay.
There is a perception that it's a much bigger number because in most of the Caribbean, it's a much larger number.
Sure.
and it's only 7%, not because short-term is a pretty big sector, but because the rest of the economy is pretty big.
Yeah.
The largest sector in the economy continues to be manufacturing.
Yep.
There's a perception that after.
Yes.
In the early 2000s, all manufacturing left Puerto Rico, and that's just not true. We're still very strong. The kind of thing that happened is that pharmaceuticals from prescription drugs to generics.
Yes.
We have a very strong medical equipment manufacturing sector. To give you a hint, there are wearing contact lenses.
Right.
It's a pretty good chance those were manufactured in Puerto Rico.
Okay.
If any of you have a pacemaker, I hope not, but pretty good chance that was manufactured in Puerto Rico. If you have used an IV bag anytime in the last few years, there's a pretty good chance those were manufactured in Puerto Rico. A few months after the hurricane, there was a very serious shortage of IV bags in the United States.
Yes.
Everybody's trying to figure out because a very large part of the supply of IV bags for the whole country is manufactured in Puerto Rico.
Oh, interesting.
Manufacturing continues to be the heart of the economy. It's about half of the size of the economy. You have services and insurance and banking and medical services start being the next few segments.
Yeah. Here, and I know there's also been other, you know, the earthquake that you had as well, the pandemic. The federal spending or the monies that have come, how much is remaining? If you had to estimate about what it was going to be, where are we on that timeline in terms of incremental spending coming?
It's hard to hitch the exact numbers because there's hundreds of programs that are involved in this.
Right. Right.
Best guess, still around $50 billion of that allocated. The rate at which that money is being spent continues to increase.
Yes.
So most people are guessing that in 2023, the amount of it's probably in the $3 billion range.
Yep.
It was somewhat lower than that the prior year. Hopefully, it'll be somewhat higher than that this year. But there's also spent.
Right.
So that if it was 3% last year, it's not going to be 6% this year. It's unlikely, because we have a big part of this investment is in construction.
Right.
Infrastructure construction, housing construction. We have a hard time getting construction. Our construction workers have grown by about 50% in the last few years, but it's still half of what it was at its peak in the early 2000s. So, in construction workers and trades, tradespeople, that's ongoing. There's always some involvement of illegal immigration that. It's probably helpful. There's been a lot of efforts to facilitate legal immigration for construction, but those haven't gone very. But there is a limit of how much of the money can be spent, and it's just the capacity of the economy to actually put it to work.
Be wearing a hard hat soon and down.
only if it's a vacation hard hat.
There you go. Before we talk, some specifics on. Think the monetary policy of the Fed going from, obviously, tightening to eventually easing, what, what kind of impact do you think that. Banking system, but more specifically Popular?
Well, I mean, the Fed, tightening monetary policy for all banks is the deposits are going down.
Yeah.
For the whole system.
Right.
To the extent that deposits are not going back down in the top five banks, that means the rest of us are losing more deposits.
Right.
With deposits going down in the system, we'll have to be very attentive.
Yes.
On liquidity issues. You compound that with regulatory pressure, from the banking agencies on liquidity requirements and a number of things. So that's something that we have to be very careful about. The other risk is the one that everybody was terrified of 12 months ago is that the Fed might overdo it and we end up with a recession. Now, it seems like the consensus has moved away from that risk.
Yeah.
You know, my colleagues were just telling me earlier today that the other thing that is important now is that we do have elections. So if the Fed does not move by the summer, while they are not supposed to be influenced by politics, there's a good chance.
I agree.
A few months of sitting things out could change the outcome.
Yeah.
We have to be attentive to that.
Yep. No, I agree with you wholeheartedly about loan growth. You had some real nice loan growth over the past two years. You're looking, I think you got it for maybe 3%-6% 2024. Can you share with us what's driving it and what how you succeeded in 2023, but what's also then driving.
Actually fun to talk about loan growth, but because for many, for many years when we were talking about loan growth, what we were able to say is that we hoped a little bit in the States. That was, what we used to say for many, many years. So talking about loan growth is, is a nice change.
Yes.
It's been two years of very strong loan growth, about $3 billion in 2022 and about $3 billion in 2023. The growth was throughout. So most of our portfolios in the States also grew. But, you know, you combine that with strong growth in Puerto Rico, of course, it makes a big difference. So almost all. And commercial. But the big driver in dollar terms is commercial.
Sure.
So that was a big contributor to the growth in Puerto Rico as it started getting stronger, as we saw more investment coming into the island. You know, a lot of significant and large loans that we made over the last couple of years. People purchasing property, purchasing warehouses, purchasing a health insurance company, and the new owners come and they want to have a local relationship in Puerto Rico. Part of the investment. If they want to borrow a significant amount, we, of course, have more lending capacity than anybody else in the market. So it's been strongly driven by other reasons. If you do $3 billion over our loan book for the last two years, there's been slightly more than 9% growth in both of those two years.
One of the reasons we are guiding to things that contributed to that strong growth in the last two years was very unusual large commercial transactions.
Yes.
The best-known one, specific transactions, is the financing that was attached to the public-private partnership of the highways that happened in December.
Yeah.
That was a very large transaction. Dollars, and we participated as a joint lead with a foreign bank, and our ticket in that financing was $300 million. Don't do $300 million loans frequently.
Right.
Okay? And if you look at last year, there's a couple of other significant large commercial deals. The prior year, we are not necessarily seeing those big transactions continuing. So that is part of why we're, we are.
Right.
We are still seeing strong growth or expecting strong growth. And when you think about it, generically, banking assets will grow at the rate of the growth of the economy, right? The economy in Puerto Rico is expected to grow about 1.5%, maybe touch even our 3%-6% is a significant pickup above the normalized rate of growth of banking assets. So ultimately, we're saying that we hope to. Important.
Yeah. Speaking of market share, obviously, you have a dominant share in Puerto Rico. And when you look at the mix of your business, Rico versus the homeland, how do you manage? I mean, you have such a different presence in Puerto Rico versus here in the mainland. So how do you guys? You are the go-to bank in Puerto Rico.
Right.
Not to say you're not the go-to bank in certain parts of the Metro New York and Florida markets, but obviously, you don't have the. There's different approaches.
We are running different businesses.
Yeah.
In Puerto Rico, we are the bank that everybody looks up to.
Sure.
Other big banks.
Yes.
It is difficult, because we are very skilled at being the biggest.
Yes.
A bit less so. So, but you have to pursue different strategies. Your pricing is different. Your capacity to attack different segments is different. And this sounds like a little bit of a funny comparison, but in Puerto Rico, we look more like a mini JP Morgan or a mini B of A bank.
Yes.
We offer every segment for every product, every market, through every channel, all the time, wherever you are, whenever you want. Regional competitors in the States to have as big a consumer business as we do.
Right.
or as broad a consumer business as we do. So we are a little bit unique in that sense. But, you know, makes running the bank a lot more fun, so.
There you go. In the vein of you and I can't teach old dogs. You guys had a new one. You gave annual guidance in the fourth quarter.
How about that?
On Net Interest Income.
Yes.
So I guess they can teach us new tricks.
On a few things. Yes.
There you go. It's about a 9%-13% increase is what you guys are suggesting. As interest rates, how are you positioned, you know, to make sure to ensure that you get close to that kind of success?
Well, if you look at our NII sensitivity, flat.
Yes.
We're not really significantly exposing either direction to changes in interest rates. So what is going to drive is a number of things. Number one, the backbook versus frontbook of our investment portfolio.
Sure.
We roughly have $1 billion quarter.
Yes.
The maturing piece has a yield in a, sorry, like 1.6%, 1.7%, something in that ballpark.
Yes.
That has been. That's a nice pickup yield there. We also have the loan growth we expect.
Right.
Which is also investing, moving to into higher yielding assets. And one part that is missed frequently, but it's still very important. Even if our loans are flat, we have something between 20%-25% of the loan book maturing every year.
Right.
So our bankers are very busy even when the loan book is flat. Much more busy when it's flat, that is maturing and renewing is hopefully maturing and renewing to higher rates as well. So it'll be driven by all of that. The other important effect will be deposit cost. The cost part of it is mostly in the States where we have a more volatile portion of our deposits, in the U.S., because our international is probably more a matter of mix. Because if we have more public deposits are more expensive and less, retail and commercial deposits are less expensive, the absolute cost could go against that.
Yep.
But those are the components. Again, we think if things go the way we yeah, that is a good range and that will probably be a good outcome for the bank.
Got it. What are your views on deposit beta? They were different than in the 2016 to 2018 time period. So when you think about maybe what your terminal deposit beta might be. Peaks or ends. But then on the other side, can you share with us what happens if rates start to come down, how your deposit pricing will be?
We have sort of two, two pieces of the puzzle here. The bank in the States and the bank in Puerto Rico.
Sure.
Sorry, three pieces and the public deposits.
Right.
Popular. One quarter of the land, roughly. So that is, it, it's pretty easy. The retail and commercial deposits in Puerto Rico, you are correct, the beta has been higher than it was. A fraction of the beta that you see for most banks in the States. So deposit pricing in Puerto Rico has continued to be very positive.
Right.
Beta in Puerto Rico has come up than it has anywhere else. On the flip side of that, it's probably what we'll probably see. Went up slower and they did not go as high, they will also come down slower on the back end of rates coming down.
Sure.
In the U.S., it should be more. Market moves with one exception. That exception is going back to your question of the Fed tightening.
Yes.
So if there's less liquidity, aggressive competing for deposits in the U.S. market, then in the U.S. market, we might see betas on the downside also move slower than historic.
Yep.
We'll have to see.
The homeland market of liquidity issues that is already showing up in some deposit pricing. Have we seen any, or have you guys?
The market responsive to attractive rate offerings.
Yes.
with ample liquidity. If you do that for. Seen an issue of supply yet.
Okay.
We'll have to keep watching if the Fed continues to reduce money supply.
Sure.
So eventually there could be.
One of the hallmarks of Popular has been its strength and its Common Equity Tier 1 ratio. Many investors think that you've got excess capital. Maybe the regulators never.
There is no such bucket in the regulator's mind.
No. The two things about the regulators is they love as much capital. There's never too little.
Exactly.
And whenever banks, the regulators or disagreements, the regulators are undefeated. So that's the other thing we got to remember.
That's true.
So, I know you guys don't give us but do you think you have excess capital or how do you kind of think about the CET1 ratio?
Well, the way we've talked about for a while now and the statement we make is that over time, yeah, we would expect our capital levels, our capital ratios down in the direction of our mainland peers plus a spread.
Right.
It's always going to be a spread.
Agreed.
The spread is based on a couple of things. Number one, that's the way the Fed thinks. And number two, we actually agree with the Fed on this loan, which is unusual. But we do have geographic concentration.
Yes.
Number one. The second part of that consideration. We're not important for the U.S. financial system. You know, we are very important for the Puerto Rico financial system.
Yes.
So we are like a mini SIFI. Therefore, some capital strength is. Over time, we will gravitate to our mainland peers plus a spread. The spread is dynamic. It changes depending on what people are worried about. But the big challenge now. Average capital of our mainland peers is anymore because we don't know what the rules that will apply.
Sure.
We don't know how our mainland peers will react. So we don't even know what to target yet. Where we are, there's some room for us to move that. Exactly how much room we'll define it over time. We don't expect the step. Regulators are allergic to step functions down in capital, not up, yeah, but down. They are allergic to it. It won't be a step function. But hopefully over time. Path down. We've been trying for the last five years plus since we restarted our capital return program. And it gets lost sometime in observers that we. Third of our stock since we started that program. But, you know, we'll be cautious and we'll try to be respectful of capital. See, capital, you can always get it when you don't need it.
Yeah.
So.
Oh, yes.
We'll be careful.
That's true. Maybe in talking about share repurchases, what, what is your thought process of reinstating, you know, the stock repurchases?
It's really three things. We want more clarity, number one, on what's going to happen with the economy.
Sure.
We want more clarity on regulation.
Yes.
That's not gotten better.
Yeah.
But hopefully. Pending is liquidity regulations. We don't have anything concrete on that, and that's pretty important. The last piece, which is related to the first, is what's going to happen with rates. Things are the three big considerations we have on how we think of capital. Hopefully, we can get to a position where we can feel more comfortable trying to define something to move forward.
Speaking about the capital return still, to shareholders, you recently raised the quarterly dividend to $0.62, and payout ratio, based upon some estimates for the upcoming year. What is, do you guys have a targeted payout ratio that you're comfortable with?
You know, historically, something around 30% is the area where they feel comfortable. We tend to think about that guidance when we are thinking about dividends. That means is that we will continue to make more money in the future so the dividend actually will go up.
Yeah.
We'll still be in that ballpark of around 30% probably. You know, probably.
Over the years, been active in buying assets or loans, also acquisitions of depositories. Any thoughts on what could be in either area?
Yeah, you know, we'll prefer to buy assets because the regulatory burden is a lot lower.
Yep.
We haven't, in the recent years, come along.
Right.
Our CEO has been pretty clear that M&A is not top shelf for us right now. It's not a top priority. So again, that doesn't mean, and frankly, from my point of view, I'm not sure the numbers work nowadays anyway.
Right.
So, even if it were a priority, I'm not sure a lot would happen. Our transformation and, and doing a number of things we're doing internally, that's higher priority at this point in time. If a particular interesting book of assets were to show our underwriting criteria and our interest and the right sector, we'll always look at that. We do have the capital. We do have the liquidity to do it. And again, the fact that we haven't done it doesn't mean that we haven't been looking.
Yep. Getting back to outlook, gave a 14% ROTCE target for the end of 2025. Maybe can you share with us some of the points to that? I mean, obviously business growth, profitability improvement. Is it also maybe lower tangible common equity to get that up as well?
Yeah, well, there is. That calculation assumes that there is some activity on the capital return.
Yep.
There is an assumption in there. We have not made that assumption public. Use capital return in that number. The number is mostly driven by higher revenues.
Yeah.
So it is not driven by an expense reduction program. We do expect our expenses to grow less quickly in the future. But it's mostly driven by the revenue growth comes from us serving more clients and doing more things with the clients we have and the new clients that we might get.
Just the final question here as time is up. After 30 years of being in the banking business and retiring at the end of the month, what have been some of the most memorable highlights that you've seen over your biggest changes? And then lastly, the third part of the question is, what do you think investors underappreciate in analyzing bank stocks?
30+ years of doing this, actually 42 if you go all the way back to my beginnings at J.P. Morgan. Probably the most interesting thing, how much has changed, but how little has changed if you really look through it.
Yep.
At the end of the day, strength matters.
Yeah.
Strong matters. Strong capital matters.
Yeah.
Second, flexibility and agility is important. You need to have a management team that can move on because of unexpected events and react quickly and react smartly. Fortunately, practicing that, as you know, I mean, we have a management team that's gone through a 10-year recession, a bankrupt government, a 100-year storm, a 100-year earthquake, and a global pandemic performing quite well. So, we learned agility and flexibility the hard way. The third thing is you need a moat.
Mm-hmm.
Technology-based, remote maybe, branch-based, remote maybe, product-based, remote maybe, client-based at what segment of clients you select to serve. But that is very, very important. And the last thing is, it sounds old-fashioned, but you've lived this. The things that matter don't change that much. And at the end of the day, deposits rule in banking.
Yes.
If you have a strong deposit base, you'll probably will do well in the long run.
There you go. That's great insights. Please join me in a round of applause thanking Carlos and wishing him well.
Thank you.