Entering text into the input field will update the search result below

Popular Inc.: Margin Likely To Drag Earnings

Mar. 10, 2020 4:31 PM ETPopular, Inc. (BPOP)1 Comment
Sheen Bay Research profile picture
Sheen Bay Research


  • Earnings are expected to decline this year because net interest margin is quite sensitive to interest rates. The 50bps Fed rate cut will squeeze margins, and hence drag earnings.
  • Investments in personnel and technology and business promotion are expected to further pressurize earnings.
  • For an investment horizon of nine months or more, BPOP appears attractive due to a double-digit price upside and 4% dividend yield.
  • For the next three to four months outlook is less bright due to COVID-19.

Earnings of Popular, Inc. (NASDAQ:BPOP) are expected to take a hit from the Fed funds rate cut earlier this month. BPOP's balance sheet is positioned in a way that makes its net interest margin highly sensitive to interest rate movement. As a result, the recent 50bps rate cut is expected to squeeze margin, and consequently drag earnings this year. Earnings are also expected to be negatively affected by an increase in expenses related to business promotion and investments in people and technology. The December 2020 target price suggests a significant potential for capital appreciation. However, for the near term of three to four months, the outlook is less bright due to the panic related to COVID-19. Consequently, only high-risk tolerant investors with an investment horizon of more than nine months should currently consider investing in BPOP. For the near-term of three to four months, a neutral rating on the stock is appropriate.

Earnings to Suffer from High Sensitivity of Margin to Interest Rates

In the third and fourth quarters of 2019, BPOP's net interest margin, NIM, took a hit from last year's Fed rate cuts which shows the high sensitivity of NIM to interest rates. As the funding and earning asset mixes have not changed much over the past six months, NIM is likely to be as sensitive to rate cuts in the first of 2020 as it was in the second half of 2019. Consequently, I'm expecting BPOP's NIM to get compressed in the first and second quarters of this year. In the second half of the year I'm expecting NIM to stabilize because I'm not expecting any further rate cuts. However, there is a risk that COVID-19 may encourage further Fed rate cuts if the outbreak gets much worse. For now, the World Health Organization has refrained from labeling the COVID-19 outbreak as a pandemic in the

This article was written by

Sheen Bay Research profile picture
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.