Popular, Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Popular, Inc. is a financial holding company that provides various retail, commercial, and digital banking services primarily in Puerto Rico, the U.S. and British Virgin Islands.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Popular, Inc., often known as “Popular,” is a diversified financial services company with a rich history. While it primarily operates in Puerto Rico, the US Virgin Islands, and the United States, the core of its business is deeply rooted in serving the Puerto Rican community.

Revenue Streams

Popular’s revenue comes primarily from three core areas:

  1. Retail Banking: This includes personal checking and savings accounts, mortgages, auto loans, credit cards, and other retail-focused financial products.
  2. Commercial Banking: This encompasses services like commercial real estate lending, business loans, leasing, and other corporate banking solutions.
  3. Investment Management: The company offers a variety of investment advisory and management services to both individuals and institutions.

The banking industry is currently experiencing the following trends:

  • Digital Transformation: The rise of digital banking has compelled banks to increase investment in technological infrastructure, leading to heightened competition and a shifting customer preference toward online platforms.
  • Interest Rate Sensitivity: Banks’ profitability is heavily influenced by interest rate changes, affecting their net interest income and lending margins.
  • Regulatory Scrutiny: Banks face increased regulatory demands that can affect their operations, risk management, and capital requirements.
  • Consolidation: Larger financial institutions are increasing acquisitions, making the environment very competitive and difficult for small to medium sized banks.

Margins & Profitability

Popular’s margins are sensitive to interest rate changes. The recent rate hikes by the Federal Reserve has enabled it to expand its net interest income significantly.

  • Net Interest Margin: This fluctuates based on the difference between interest earned from lending activities and interest paid on deposits. Currently the Net Interest Margin is relatively low due to the current yield curve.
  • Cost-to-Income Ratio: This has seen consistent improvement over the last few years, which management attributes to cost savings through automation and operating efficiency.

Competitive Landscape

Popular operates in a competitive market, both in Puerto Rico and the U.S. mainland, with major US based banks like JP Morgan Chase, Citigroup and Bank of America. Popular also competes against other Puerto Rico based banks like OFG Bancorp (OFG), and First Bancorp (FBP).

  • Puerto Rico: It enjoys a leading position within Puerto Rico, benefiting from strong name recognition and customer loyalty and cultural ties.
  • U.S. Mainland: They compete with larger U.S. banks and other local financial institutions. The ability to offer better prices in certain niche markets as well as the Spanish-speaking market is an advantage.
  • Digital Banking: It faces competition from fintech companies as well as online-first banking platforms and apps.

Popular differentiates itself through:

  • Strong Local Presence in Puerto Rico: Long-standing history and strong customer relations with the Hispanic population in Puerto Rico and the US.
  • Focus on Digital Transformation: Emphasis on mobile and digital banking solutions. The company sees this as a significant opportunity for growth.
  • Community-Oriented Approach: A focus on serving the needs of its community with tailored products and services.

Risks That Could Harm the Moat and Resilience

While Popular’s strong position in the Puerto Rican community and its digital advancements are considerable assets, some risks could erode the competitive advantages.

  1. Economic conditions of Puerto Rico: Although Puerto Rico has made significant improvements in the economy, it is still fragile. Any further economic turndown in Puerto Rico will significantly affect Popular, given its large concentration in the region.
  2. Interest Rate Sensitivity: A change in the interest rate regime could result in a squeeze of profit margins if loans cannot be repriced as quickly as liabilities.
  3. Increased Competition: Competition from both traditional and non-traditional players, as well as fintech and digital first banks could put pressure on margins.
  4. Regulatory Changes: Changes in federal or Puerto Rican regulations could affect operations, increasing compliance costs, or reducing potential revenue.
  5. Credit Risk: A downturn in the Puerto Rican economy would also likely increase defaults on loans.
  6. Acquisition Risk: It has tried acquisitions in the past and they have failed, diluting shareholder value.

Financial Analysis

Popular’s financials have shown strong growth.

Income Statement Analysis

  • Revenue Growth: Popular’s revenues have shown moderate, but consistent growth, over the past few years.
  • Net Interest Income: With the FED increasing interest rates, Popular has seen a solid increase in net interest income.
  • Non-Interest Income: This includes fee income from loans and services, and is a highly volatile segment.
  • Expense Management: Popular has focused on cutting costs through automation and increased efficiency. They have invested capital into software and artificial intelligence.

Balance Sheet Health

Overall, Popular’s balance sheet seems to be in good health.

  • Capital Adequacy: The company has strong capital ratios, which provide ample cushion against potential loan losses and provide flexibility for growth.
  • Asset Quality: Although the non performing loan levels have seen a slight increase in the past two years, they are still at a manageable level.
  • Debt: Debt is low relative to assets, ensuring good financial health.

Recent Controversies/Concerns

In the latest earnings calls and financial reports, the management has emphasized their dedication to technological advancement and cost-cutting measures. However, concerns about competition in the long-term, and the overall Puerto Rican economy, remain.

Understandability

I am giving BPOP a 3/5 in terms of understandability, because:

  • The banking business can be tricky, since the companies are very diversified and offer lots of products, however, the financial metrics for banks are easier to understand than those of other sectors.
  • Popular’s business model is relatively easy to grasp, however, diving deeper into the different types of financials and the effect of interest rates and the macro economical environment of Puerto Rico increases the complexity and the difficulty to fully understand their business.

Final Thoughts

Popular is a strong player in its market, but its reliance on the Puerto Rican economy makes it a little riskier. It has adapted with changing consumer trends and the adoption of technology. The management has a clear and defined strategy to grow the business by focusing on profitability while reducing costs. Overall, I would still be cautious given the risks that it faces.