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First BanCorp: Stock Price Due for a Breather (NYSE:FBP)

Ocean view of the town of San Juan

Cavan Pictures

First BanCorp’s earnings (NYSE:FBP) may continue to increase for the remainder of 2022 and the full-year 2023. Economic strength in Puerto Rico is driving credit growth, which plays a key role in earnings growth. Next, the net interest Income continues to benefit from rising interest rates. Overall, I expect First Bancorp to report earnings of $1.58 per share in 2022, up 20% year-over-year. Compared to my last report on the company, I have slightly increased my earnings estimate as I have tweaked my net interest margin estimate upwards. For 2023, I expect the company to report earnings of $1.64 per share, up 4% year-over-year. The year-end target price is quite close to the current market price. Therefore, I am downgrading First Bancorp to Hold rating.

A strong regional economy bodes well for loan growth

First Bancorp’s loan growth improved to 0.7% in the second quarter of 2022 from 0.5% in the first quarter of the year. A further acceleration in the rate of credit growth in the third quarter is likely in part due to the rapid strengthening of Puerto Rico’s economy. The Economic Development Bank of Puerto Rico’s Economic Activity Index shows that the Puerto Rican economy has improved sharply so far this year.

Puerto Rico Economic Activity Index

Economic Development Bank for Puerto Rico

Puerto Rico’s steadily declining unemployment rate provides further evidence of economic strength.

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Puerto Rico unemployment rate data via YCharts

First Bancorp also has some presence in Florida, another fast-improving market. State unemployment was just 2.8% in June, well above the national average. Moreover, the state’s coincidence index has recovered sharply, which bodes well for credit growth.

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Philly Fed Florida Coincident Index data via YCharts

First Bancorp’s ongoing investments in technology will soon pay off. Economic factors help increase market size, technological advancements help First Bancorp gain market share. As mentioned in the earnings presentation, First Bancorp plans to increase spending related to its capital projects in the second half of 2022. Since these projects have been going on for a while, they shouldn’t take long to bear fruit. I am expecting to get the benefits in the second half of this year.

Considering these factors, I expect loan portfolio growth of 2.7% in 2022 and 3.0% in 2023. Compared to my last report on First BanCorp, I haven’t changed my loan growth estimate much.

Equity book value to face further pressure

First Bancorp’s tangible book value per share fell from $10.07 at the end of June 2022 to $7.8 at the end of 2021. Much of the decline was attributed to unrealized losses in the securities portfolio due to rising interest rates. Given that the Fed funds rate was raised by 75 basis points in July and I expect another 75 basis point increase for the rest of the year, equity book value will face further pressure in the second half of 2022. However, retained earnings will continue to support book value per share. The table below shows my balance sheet estimates.

FY18 FY19 FY20 FY21 FY22E FY23E
Financial status
Net borrowings 8,705 8,887 11,442 10,827 11,120 11,457
Growth in net loans 0.6% 2.1% 28.8% (5.4)% 2.7% 3.0%
Other earning assets 2,140 2,398 4,926 6,658 6,631 6,765
Deposits 8,995 9,348 15,317 17,785 17,398 17,749
Loan and sub-loan 1,074 854 924 684 590 601
Common Equity 2,009 2,192 2,239 2,102 1,662 1,889
Book value per share ($) 9.3 10.1 10.3 9.9 8.5 9.7
Tangible BVPS ($) 9.3 9.9 9.9 9.6 8.2 9.3

Source: SEC filings, authors’ estimates

(in USD million unless otherwise specified)

Revising margin estimates upwards

First Bancorp’s net interest margin expanded nearly 40 basis points in the first half of 2022, more than I had previously expected. This expansion is higher than suggested by the management interest rate simulation model. According to simulation model results provided in a recent 10-Q filing, a 200 basis point increase in interest rates could increase net interest income by just 3.11% over twelve months.

Due to the good first half performance, I have decided to revise my margin estimate for 2022 upwards. I expect the margin to grow by 26 basis points in the second half of 2022 and another 10 basis points thereafter. First quarter of 2023. The rise in 2023 is due to the lagged effect of monetary tightening in 2022. I do not expect the rate hike cycle to continue beyond 2022.

Improvement in asset quality to keep provisioning below historical averages

First Bancorp has rapidly improved the asset quality of its portfolio over the past 12 months. As mentioned in the earnings release, non-performing loans declined from 1.60% of total loans at the end of June 2021 to 0.88% of total loans at the end of June 2022. The company released its reserves at the same intervals but at a lower rate. As a result, coverage has improved.

Allowances stood at 2.25% of total loans, while non-performing loans accounted for 0.88% of total loans at the end of June 2022. Because of the greater coverage, I believe First Bancorp will not need to increase its provisioning amid higher interest rates and the possibility of a recession. In my view, provisioning will continue at the second quarter level till the end of 2023. Overall, I expect provisioning costs to be 0.36% of total loans (annualized) in the second half of 2022 and full-year 2023. In comparison, net provisioning costs have averaged 0.74% of total loans over the past five years.

Earnings are expected to grow by 20%

Expected loan additions and margin expansion will boost earnings in the remainder of 2022 and 2023. On the other hand, higher provisioning costs, net of reversals, constrain earnings growth. Further, operating expenses will increase in the next year as management plans to increase expenses related to its capital projects. Management explained in the conference call that it expects higher professional fees and technology costs on ongoing projects. Furthermore, management expects vacancy levels to normalize, which will lift salary costs. Overall, management expects the efficiency rate to increase towards the 50% mark from 47.7% in the second quarter of 2022.

Overall, I expect First Bancorp to report earnings of $1.58 per share in 2022, up 20% year-over-year. For 2023, I expect the company to report earnings of $1.64 per share, up 4% year-over-year. The table below shows my income statement estimates.

FY18 FY19 FY20 FY21 FY22E FY23E
Income statement
Net interest income 525 567 600 730 797 871
Provision for loan losses 59 40 171 (66) 16 40
Interest free income 82 91 111 121 126 138
Non-interest expense 358 378 424 489 448 490
Net Income – Ordinary Percentage 199 164 100 277 308 321
EPS – Diluted ($) 0.92 0.76 0.46 1.31 1.58 1.64

Source: SEC filings, earnings releases, authors’ estimates

(in USD million unless otherwise specified)

In my last report on First BanCorp, I estimated earnings of $1.49 per share in 2022. I have revised my net interest margin estimate upwards so I have increased my earnings estimate.

Actual earnings may differ materially from estimates due to risks and uncertainties related to inflation and, as a result, the timing and magnitude of interest rate increases. Furthermore, the expected recession may increase the expected loan losses beyond my estimates.

Downgrading to Hold rating

First Bancorp offers a dividend yield of 3.0% with a current quarterly dividend rate of $0.12 per share. Earnings and dividend estimates point to a payout ratio of 29% for 2023, about the same as the three-year average. So, I don’t expect any increase in dividend level. (Side note: Since FBP resumed dividends in late 2018 I only took a three-year average instead of a five-year one.)

I use historical price-to-book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First Bancorp. The stock has previously traded at an average P/TB ratio of 1.02x as shown below.

chart
Clear book value data for FBP price via YCharts

Multiplying the average P/TB multiple with the forecast tangible book value of $8.2 per share yields a target price of $8.3 for the end of 2022. This price target implies a loss of 48.6% from the August 12 closing price. The table below shows the sensitivity of the target price to the P/TB ratio.

P/TB multiple 0.82x 0.92x 1.02x 1.12x 1.22x
TBVPS – December 2022 ($) 8.2 8.2 8.2 8.2 8.2
Target Price ($) 6.7 7.5 8.3 9.1 10.0
Market Price ($) 16.2 16.2 16.2 16.2 16.2
upside down (58.7)% (53.6)% (48.6)% (43.5)% (38.4)%
Source: Author’s estimates

The stock has previously traded at an average P/E ratio of around 14.4x as shown below.

chart
FBP PE ratio data by YCharts

Multiplying the average P/E multiple with forecast earnings per share of $1.58 gives a target price of $22.6 for the end of 2022. This price target indicates a 39.9% upside from the August 12 closing price. The table below shows the sensitivity of the target price to the P/E ratio.

P/E multiple 12.4x 13.4x 14.4x 15.4x 16.4x
EPS – 2022 ($) 1.58 1.58 1.58 1.58 1.58
Target Price ($) 19.5 21.1 22.6 24.2 25.8
Market Price ($) 16.2 16.2 16.2 16.2 16.2
upside down 20.4% 30.1% 39.9% 49.6% 59.3%
Source: Author’s estimates

Equally weighting the target prices from the two valuation methods gives convergence The target price is $15.5, which represents a loss of 4.3% from the current market price. Adding the forward dividend yield gives a total expected return of negative 1.5%.

In my last report, I adopted a Buy rating on First BanCorp. Since then, the stock price has rallied and crossed the target price. Therefore, I am now downgrading First Bancorp to a Hold rating.

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