Popular, Inc. (BPOP)

Q2 2012 Earnings Conference Call

July 18, 2012 10:30 ET


Enrique Martell – Corporate Communications

Richard Carrión – Chairman and Chief Executive Officer

Jorge Junquera – Chief Financial Officer

Lidio Soriano – Chief Risk Officer


Joe Gladue – B. Riley

Robert Greene – Sterne Agee

Ken Zerbe – Morgan Stanley

Michael Sarcone – Sandler O'Neill

Derek Hewett – KBW



Good day, ladies and gentlemen, and welcome to the Q2 2012 Popular Inc. Earnings Conference Call. My name is (Clara) and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Enrique Martell, Corporate Communications. Please proceed sir.

Enrique Martell

Good morning. Thank you for joining us on today’s call. Chairman and CEO, Richard Carrión; our CFO, Jorge Junquera; and our CRO, Lidio Soriano will review our second quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, I would like to remind you that in today’s call, we may make forward-looking statements that are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release and are detailed in our SEC filings, our financial quarterly release, and supplements. You may find today’s press release and our SEC filings on our webpage, which you may visit by going to popular.com.

I will now turn the call over to Mr. Richard Carrión.

Richard Carrión

Good morning and thank you all for joining the call. Please turn to the second slide. For the second quarter, we reported net income of $66 million, compared with the profit of $48 million in first quarter, our sixth consecutive profitable quarter.

We remain on track in executing our strategy by improving credit, building our asset portfolios to maintain our strong revenues, optimizing operating expenses, and continuing improvements on our U.S. operations. Our revenue generating capacity was clearly displayed in the second quarter with a net interest margin of 4.33% that stands well above our peer average and gross revenues amounting to $435 million.

A major takeaway from the results of the second quarter is that credit metrics continued to improve. Excluding bulk sales, the quarterly decline of $120 million in non-performing loans is our largest quarterly decrease in this credit cycle, while charge-offs reached their lowest level since 2008. The decrease in NPLs was experienced across the board in both Puerto Rico and the U.S. mainland and NPLs inflows fell to their lowest level in four years. We continued to add high quality portfolios to our asset base by completing purchases of $273 million in U.S. mortgages and $225 million in Puerto Rico consumer loans. The pipeline of foreign portfolio opportunities remains active.

We continued to generate internal capital and boost liquidity. Higher cash flows from our covered portfolio are expected to boost our original net revenue assumptions for the entire life of their portfolio while in the second quarter we received the cash dividend of $131 million from EVERTEC, of which we own approximately 4.09%.

Our tangible common equity and Tier 1 common ratios are strong at 9.09% and 12.29% respectively. The economic situation in our markets have stabilized as evidenced by recent economic indicators and our credit trends, but we are still seeing weak loan demand both in Puerto Rico and the U.S. mainland. Combination of this weak loan demand, higher cost related to collection efforts, and the current negative accretion of the covered portfolio, which I will cover later are the three main challenges that we face as we move ahead.

Please turn to slide 3 for greater detail on the quarter’s main takeaways. The improvement in our credit metrics is quite evident. NPL commercial and construction inflows fell 63% from their peak to their lowest level in four years. The net charge ratio fell to 1.85% in Puerto Rico and to 2.15% in the U.S. Opportunistic portfolio acquisitions and another quarter of solid loan production by our Puerto Rico mortgage business, which originated $397 million in the quarter helped maintain our non-covered loan volume at $21 billion with a yield of 6%.

We continue exploring every opportunity to further reduce our cost base by streamlining our origination processes, lowering branch network expenses, and tackling inefficiencies in areas we have identified. However, our focus on accelerating the resolution on NPLs has increased costs associated with these benefits, legal fees, appraisals, collections, valuation adjustments among others. Meaningful reductions in these expenses will only be achieved through sustained improvements in NPL levels.

Credit quality improvements have already provided palpable results at our U.S. operations, where the current run rate for the provision it’s 40% lower than last year’s. Although earnings on U.S. mainland are still not at an acceptable level, the U.S. operations are contributing to our overall profitability.

Consolidated personnel costs decreased by $5 million in the quarter. We also paid off $350 million in expensive repos rebuilt that were scheduled to mature in 2014 and carried an average cost of 4.36%. The prepayment expense of $25 million will be recovered over the two year period by replacing the borrowings at substantially lower current market risks.

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