First BanCorp: Revising The Earnings Estimate Upwards Thanks To Better Provisioning Outlook

May 26, 2022 3:20 PM ETFirst BanCorp. (FBP)
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Summary

  • The existing loan pipelines and strength in the Puerto Rican economy signal an acceleration in loan growth.
  • There are good chances of further reserve releases partly because of the continued strengthening of the regional economy.
  • The year-end target price suggests a small upside from the current market price. Further, FBP is offering a decent dividend yield.

Oceanside view of the town San Juan

Cavan Images/iStock via Getty Images

Earnings of First BanCorp (NYSE:FBP) will continue to grow this year mostly because of the anticipated bottoming out of the loan portfolio size. Additionally, the moderately rate-sensitive topline will benefit from the rising interest-rate environment. Further, the provisioning for expected loan losses, net of reserve releases, will remain much below historical levels thanks to the significant improvement in the Puerto Rican economy. Overall, I'm expecting First BanCorp to report earnings of $1.49 per share in 2022, up 14% year-over-year. Compared to my last report on the company, I have tweaked upwards my earnings estimate mostly because I've reduced the net provision expense estimate. The year-end target price suggests a small upside from the current market price. Based on a total expected return, I'm maintaining a buy rating on First BanCorp.

Acceleration in Loan Growth Rate Highly Likely

The prolonged declining trend for loans that started in the fourth quarter of 2020 finally turned around in the first quarter of 2022. The portfolio grew by $3 million in the last quarter, or 2.0% annualized. The management is positive about loan growth in the remainder of the year and expects the pace of this growth to continue to accelerate. As mentioned in the latest conference call, the management expects the loan growth to come from a combination of different projects, initiatives, and acquisitions. The management's confidence is also partly attributable to the loan pipelines. The management mentioned in the conference call that it currently has better commercial and construction pipelines compared to the same period last year.

In my opinion, Puerto Rico's continued economic recovery will play a pivotal role in loan growth in the year ahead. The region's economy hasn't been this good in decades. The unemployment rate is at a multi-decade low, while bankruptcies in the economy are near multi-decade lows, as shown in the charts below.

Chart
Data by YCharts
Puerto Rico Bankruptcies

Economic Development Bank for Puerto Rico

Further, the economic activity index indicates strong economic growth throughout this fiscal year, which again bodes well for loan growth.

Economic Development Bank Economic Activity Index Puerto Rico

Economic Development Bank for Puerto Rico

Considering these factors, I'm expecting the loan portfolio to increase by 2.8% by the end of 2022 from the end of 2021. Meanwhile, I'm expecting the deposit book to trail the loan portfolio's performance because the management mentioned in the conference call that it expects some government deposits to run off. The following table shows my balance sheet estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Financial Position
Net Loans 8,652 8,705 8,887 11,442 10,827 11,127
Growth of Net Loans (0.9)% 0.6% 2.1% 28.8% (5.4)% 2.8%
Other Earning Assets 2,095 2,140 2,398 4,926 6,658 6,724
Deposits 9,023 8,995 9,348 15,317 17,785 17,684
Borrowings and Sub-Debt 1,224 1,074 854 924 684 593
Common equity 1,833 2,009 2,192 2,239 2,102 1,936
Book Value Per Share ($) 8.5 9.3 10.1 10.3 9.9 9.7
Tangible BVPS ($) 8.5 9.3 9.9 9.9 9.6 9.4

Source: SEC Filings, Author's Estimates

(In USD million unless otherwise specified)

Earnings to Receive Further Support from Topline's Moderate Rate-Sensitivity

The management's interest-rate sensitivity analysis given in the 10-Q filing shows that the net interest income is moderately sensitive to rate changes. According to the results of the analysis, a 200-basis points increase in interest rates can boost the net interest income by 3.0% over twelve months. This analysis assumes a static balance sheet and an interest rate ramp. Therefore, the actual impact of a 200-basis points rate hike will most probably be higher than 3.0%.

I'm expecting the Fed to increase the federal funds rate by 100 basis points in the remainder of this year to close the year at 2.0% (the upper limit of the target federal funds rate). Considering the management's guidance and my outlook on interest rates, I'm expecting the net interest margin to increase by 200 basis points in the last nine months of 2022 from 3.81% in the first quarter of the year.

Revising Downwards the Provision Expense Estimate

First Bancorp surprised me in the first quarter of 2022 by posting a net provision reversal for the fifth straight quarter. Further provision reversals are likely in the second quarter of the year as the allowance appears excessive relative to the portfolio's credit risk. Allowances were 229.3% of total loans at the end of March 2022, up from 178.5% at the end of March 2021, according to details given in the first quarter's earnings release. Moreover, the improving Puerto Rican economy will also provide further room for reserve releases.

On the other hand, the anticipated loan growth discussed above will require provisioning for expected loan losses. Overall, I'm expecting the provision expense, net of reserve releases, to be much below normal this year. I'm expecting the net provision expense to make up around 0.01% of total loans in 2022, as opposed to an average of 0.74% in the last five years.

In my last report on First BanCorp, I estimated a net provision expense of $20 million for 2022. I have now slashed the provision expense estimate to $1 million because of the positive surprise in the first quarter of the year and the rapidly improving economic outlook.

Expecting Earnings of $1.49 per Share

The anticipated loan growth and margin expansion will fuel the increase in earnings this year. Further, below-normal provision expense will support earnings compared to previous years. Overall, I'm expecting First BanCorp to report earnings of $1.49 per share in 2022, up 14% year-over-year. The following table shows my income statement estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Income Statement
Net interest income 492 525 567 600 730 765
Provision for loan losses 144 59 40 171 (66) 1
Non-interest income 62 82 91 111 121 127
Non-interest expense 348 358 378 424 489 440
Net income - Common Sh. 64 199 164 100 277 298
EPS - Diluted ($) 0.30 0.92 0.76 0.46 1.31 1.49

Source: SEC Filings, Earnings Releases, Author's Estimates

(In USD million unless otherwise specified)

In my last report on First BanCorp, I estimated earnings of $1.30 per share for 2022. I have increased my earnings estimate mostly because I've cut the net provision expense estimate, as discussed above.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Puerto Rico also has elevated risk of natural disasters.

Decent Total Expected Return Justifies a Buy Rating

First BanCorp is offering a dividend yield of 3.2% at the current quarterly dividend rate of $0.12 per share. The earnings and dividend estimates suggest a payout ratio of 31% for 2022, which is close to the last three-year average of 29%. Therefore, the dividend payout appears secure.

I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value First BanCorp. The stock has traded at an average P/TB ratio of 0.97 in the past, as shown below.

Chart
Data by YCharts

Multiplying the average P/TB multiple with the forecast tangible book value per share of $9.4 gives a target price of $9.1 for the end of 2022. This price target implies a 36.1% downside from the May 25 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple 0.77x 0.87x 0.97x 1.07x 1.17x
TBVPS - Dec 2022 ($) 9.4 9.4 9.4 9.4 9.4
Target Price ($) 7.2 8.2 9.1 10.0 11.0
Market Price ($) 14.3 14.3 14.3 14.3 14.3
Upside/(Downside) (49.2)% (42.7)% (36.1)% (29.5)% (22.9)%
Source: Author's Estimates

The stock has traded at an average P/E ratio of around 14.5x in the past, as shown below.

Chart
Data by YCharts

Multiplying the average P/E multiple with the forecast earnings per share of $1.49 gives a target price of $21.6 for the end of 2022. This price target implies a 51.7% upside from the May 25 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 12.5x 13.5x 14.5x 15.5x 16.5x
EPS - 2022 ($) 1.49 1.49 1.49 1.49 1.49
Target Price ($) 18.6 20.1 21.6 23.1 24.6
Market Price ($) 14.3 14.3 14.3 14.3 14.3
Upside/(Downside) 30.7% 41.2% 51.7% 62.1% 72.6%
Source: Author's Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $15.4, which implies a 7.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 11.0%. Hence, I'm maintaining a buy rating on First BanCorp.

This article was written by

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2.72K Followers
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Additional disclosure: 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.

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