First BanCorp stock price due for pause (NYSE:FBP)

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Earnings of First BanCorp (New York Stock Exchange: FBP) will likely continue to increase through the remainder of 2022 and into 2023. Puerto Rico’s economic strength will drive loan growth, which, in turn, will play a pivotal role in earnings growth. Also, the net interest revenues will likely continue 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 estimate of earnings as I have changed my estimate of net interest margin 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. Accordingly, I am downgrading First BanCorp to a holding rating.

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. Further acceleration in the rate of loan growth is likely in the third quarter, in part due to the rapidly strengthening Puerto Rico’s economy. The Economic Development Bank The Puerto Rico Economic Activity Index shows that the Puerto Rican economy has improved significantly so far this year.

Puerto Rico Economic Activity Index

Economic Development Bank of Puerto Rico

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

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Unemployment rate in Puerto Rico given by Y-Charts

First Bancorp also has some presence in Florida, which is another rapidly improving market. State unemployment was fair 2.8% in Junewhich is much better than national average. In addition, the government’s coincident index has rebounded strongly, which bodes well for loan growth.

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Philly Fed Florida Coincident Index given by Y-Charts

First BanCorp’s continued investments in technology should also pay off soon. While economic factors will help increase the market size, advancements in technology will help First BanCorp gain market share. As mentioned in the presentation of the results, First BanCorp expects to increase spending on capital projects in the second half of 2022. As these projects have been in the works for some time, they should bear fruit soon. I expect the benefits to accrue in the second half of this year.

Given these factors, I expect the loan book to grow 2.7% in 2022 and 3.0% in 2023. Compared to my last report on First BanCorp, I don’t have much changed my estimate of loan growth.

Book value of equity to face new pressures

First BanCorp’s tangible book value per share plunged to $7.8 at the end of June 2022 from $10.07 at the end of 2021. Most of the decline was attributable to unrealized losses on the securities portfolio accumulated as a result of rising interest rates. As the fed funds rate was hiked 75 basis points in July and I expect another 75 basis point hike for the remainder of the year, the book value of equity will come under further pressure in second half of 2022. However, retained earnings will support book value per share going forward. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 8,705 8,887 11,442 10,827 11,120 11,457
Net loan growth 0.6% 2.1% 28.8% (5.4)% 2.7% 3.0%
Other productive 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
Loans and sub-debts 1,074 854 924 684 590 601
Common Equity 2009 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, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Upward revision of the margin estimate

First BanCorp’s net interest margin increased by about 40 basis points in the first half of 2022, which is more than I previously expected. This expansion is also greater than implied by management’s interest rate simulation model. According to the results of the simulation model presented in the latest 10-Q filing, a 200 basis point rise in interest rates can only increase net interest income by 3.11% year-over-year.

Due to the strong first half performance, I have decided to revise my margin estimate for 2022 upwards. I now expect the margin to increase by 26 basis points in the second half of 2022 and then by 10 additional basis points in the first quarter of 2023. The rise in 2023 will be due to a lagged effect of monetary tightening in 2022. I do not expect the rate hike cycle to continue beyond 2022.

Improved asset quality to keep provisioning below historical average

First BanCorp has rapidly improved the quality of the assets in its portfolio over the past 12 months. Unexpired loans fell to 0.88% of total loans at the end of June 2022 from 1.60% of total loans at the end of June 2021, as reported in the earnings release. The company also released its reserves during the same interval, but at a lower rate. As a result, coverage has improved.

Provisions were 2.25% of total loans, while unaccrued loans were 0.88% of total loans at the end of June 2022. Due to high coverage, I believe First BanCorp will not need to increase provisioning in an environment of higher interest rates and the possibility of a recession. In my view, provisioning will likely continue at the second quarter level through the end of 2023. Overall, I expect provisioning to be approximately 0.36% of total loans (annualized ) in the second half of 2022 and throughout the year. 2023. By comparison, the net provision charge has averaged 0.74% of total loans over the past five years.

Expect revenue to increase by 20%

Planned loan additions and margin expansion will drive earnings for the remainder of 2022 and 2023. On the other hand, a higher provision charge, net of reversals, will limit earnings growth. Additionally, operating expenses will increase in the coming year as management plans to increase spending on capital projects. Management explained on the conference call that it expects to incur higher professional fees and technology costs on ongoing projects. Additionally, management expects vacancy levels to normalize, which will increase payroll costs. Overall, management expects the efficiency rate to increase towards the 50% mark, up from 47.7% in the second quarter of 2022.

Overall, I expect First BanCorp to report earnings of $1.58 per share for 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 following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 525 567 600 730 797 871
Allowance for loan losses 59 40 171 (66) 16 40
Non-interest income 82 91 111 121 126 138
Non-interest charges 358 378 424 489 448 490
Net income – Common Sh. 199 164 100 277 308 321
BPA – Diluted ($) 0.92 0.76 0.46 1.31 1.58 1.64

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

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

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Downgrade to a sustain note

First BanCorp offers a dividend yield of 3.0% at the current quarterly dividend rate of $0.12 per share. Earnings and dividend estimates suggest a payout ratio of 29% for 2023, which is the same as the three-year average. Therefore, I do not expect an increase in the level of dividends. (Note: I took a three-year average only instead of five years because FBP resumed dividends at the end of 2018.)

I use historical price/book tangible (“P/TB”) and price/earnings (“P/E”) multiples to value First BanCorp. The stock has traded at an average P/TB ratio of 1.02x in the past, as shown below.

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FBP price to tangible book value given by Y-Charts

Multiplying the average P/TB multiple by the expected tangible book value per share of $8.2 yields a price target of $8.3 for the end of 2022. This price target implies a decline of 48.6% compared to the closing price on August 12. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.82x 0.92x 1.02x 1.12x 1.22x
TBVPS – Dec 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
Up/(down) (58.7)% (53.6)% (48.6)% (43.5)% (38.4)%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 14.4x in the past, as shown below.

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PE to PBF ratio given by Y-Charts

Multiplying the average P/E multiple by the expected earnings per share of $1.58 yields a price target of $22.6 for the end of 2022. This price target implies a 39.9% upside from at the closing price on August 12. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 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
Up/(down) 20.4% 30.1% 39.9% 49.6% 59.3%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a $15.5 target price, implying a 4.3% decline from the current market price. Adding the forward dividend yield gives an expected total return of minus 1.5%.

In my last report, I adopted a buy rating on First BanCorp. Since then, the stock price has rallied and exceeded the target price. Accordingly, I am now downgrading First BanCorp to a holding rating.

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