Viatris Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 12 speakers on the call.

Operator

Everyone, and welcome to today's conference call titled Popular Inc. Q2 2023 Earnings Call. My name is Ellen, and I'll be coordinating the call for today. I will now hand over to Paul Cardillo, Investor Relations Officer to begin. Paul, please go ahead whenever you're ready.

Speaker 1

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez our CFO, Carlos Vasquez and our CRO, Lidio Soriano. They will review our results for the Q2 and then answer your questions. Other members of our management team will also be available during the Q and A session. Before we begin, I would like to remind you that on today's call, we may make forward looking statements that are based on management's current expectations and are subject to risks and uncertainties.

Speaker 1

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. You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Speaker 2

Good morning, and thank you for joining the call. The 2nd quarter was another strong one in which we achieved net income of $159,000,000 lower than the Q1 results of $159,000,000 Net interest income and non interest income remained strong. The decrease in net income was driven by higher operating expenses, offset in part by a lower provision for credit losses. We grew loan balances by $693,000,000 during the quarter. Banco Popular generated loan growth across all segments, Well, Popular Bank achieved growth in commercial and construction loans, offset in part by runoff in the mortgage and consumer portfolios.

Speaker 2

Year to date, loan balances have grown by more than approximately 953,000,000 Our net interest margin decreased by 8 basis points to 3.14 percent in the quarter, primarily driven primarily as a result of a 29 basis This was partially offset by higher loan balances and the repricing of adjustable rate loans in a higher interest rate environment As well as higher balance of money market investments driven by our strong deposit growth. Non interest income continued to improve. Excluding the $7,000,000 insurance claim reimbursement recorded in the Q1, fee income was $5,000,000 higher. Revenues related to customer transaction activity were particularly strong and we also began to see some early results from our various transformation initiatives. Operating expenses increased by $20,000,000 as we continue to strategically invest in our people In areas such as regulatory compliance and technology and projects related to our transformation.

Speaker 2

Credit quality trends remain positive. NPLs once again decreased in the period and net charge offs remain well below pre pandemic levels. We maintain robust liquidity anchored by our deposit franchise and our high levels of cash reserves and unpledged securities. Overall, deposits were up $3,100,000,000 in the quarter and liquidity sources increased by 1,900,000,000 We have a well diversified deposit franchise in Puerto Rico with an average balance of less than $10,000 per retail account. Our total consolidated borrowings remained flat during the quarter.

Speaker 2

Regulatory capital levels remained strong. Our common equity Tier 1 ratio in the 2nd quarter was 16.9%. Additionally, tangible book value per share Ending the quarter at $51.37 an increase of $1.22 per share. Earlier this month, we announced that August 14, we will redeem at par all outstanding $300,000,000 aggregate principal amount Of our senior notes that mature in September of 2023. Please turn to Slide 4.

Speaker 2

Our customer base in Puerto Rico grew by approximately 9,500 during the quarter, reaching nearly 2,000,000 unique customers. Adoption of digital channels among our retail customers remains strong. Active users on our Mibanco platform exceeded 1,100,000 or 56% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channels. This trend remains significantly higher than prepagnemic levels demonstrating our customers' adoption of this technology.

Speaker 2

In the Q2, consumer spending remained healthy with combined credit and debit card sales of 3% compared to the Q2 of 2022. Our auto and lease originations increased by 29% compared to the Q1 As demand for cars has continued to be strong in Puerto Rico. Mortgage production in Puerto Rico appears to have stabilized in the 2nd quarter. The dollar volume of mortgage originations at Vancapolar increased by 20% compared to the Q2 of last year, driven primarily by home purchase activity. The Puerto Rico economy performed well during the Q2.

Speaker 2

Business activity is solid and remains in good shape as reflected in the continued positive trends in total employment and other economic data. The tourism and hospitality sector continues to be a source of strength for the local economy. Year to date San Juan's airport Has seen record levels of passenger traffic. Hotel demand has also been very strong. Year to date occupancy, Average daily rates and RevPAR are all at the highest level seen in nearly a decade.

Speaker 2

There are still approximately $45,000,000,000 of Hurricane disaster recovery funds yet to be dispersed. We expect that these funds will support economic activity in many sectors in the coming years. In fact, we are beginning to see these funds being dispersed into local construction projects. As this infrastructure investment in the economy expands, We are well positioned to serve the needs of our customers and benefit from such activity. In short, we are pleased with our results for the quarter, Particularly our strong loan growth in both Puerto Rico and in the U.

Speaker 2

S. As well as the continued strength of our deposit base, Liquidity and credit quality. We're encouraged by the resiliency of the U. S. Economy and strong economic activity in Puerto Rico.

Speaker 2

We remain optimistic about the future of Puerto Rico, our primary market, and our ability to manage and serve the needs of our growing customer base. I'll now turn the call over to Carlos for more details on our financial results.

Speaker 3

Thank you, Ignacio. Please turn to Slide 5. We reported net income of $151,000,000 compared to $159,000,000 in Q1. Net interest income was $532,000,000 in line with Q1. On a taxable equivalent basis, Net interest income was $558,000,000 down $12,000,000 from Q1 due to a higher disallowed interest expense The calculation of taxes in Puerto Rico.

Speaker 3

Non interest income was $160,000,000 a $2,000,000 decrease from Q1, Which included a $7,000,000 insurance claim reimbursement. Excluding the Q1 reimbursement during the quarter, Non interest income increased by $5,000,000 driven by customer activity. Service charges and deposit accounts increased by $3,000,000 mainly due to higher cash management fees on commercial customer accounts. Additionally, other service fees increased by $4,000,000 Primarily driven by higher credit and debit card fees due to higher volume of customer transactions. Going forward, We expect non interest income to be approximately $155,000,000 to $160,000,000 per quarter.

Speaker 3

The increase from our prior $150,000,000 quarterly guidance is partly due to 2 transformation related initiatives that have yielded early results. First, we have enhanced the pricing segmentation in our commercial cash management business in Puerto Rico. And second, last year we introduced a commercial credit card product for Puerto Rico SME Businesses. Both initiatives have contributed additional fee income. The provision of our credit losses was $37,000,000 compared to $48,000,000 in the Q1.

Speaker 3

Total operating expenses were $640,000,000 in Q2, An increase of $20,000,000 from the prior quarter. This increase was primarily driven by higher professional fees by $17,000,000 Related to regulatory compliance and cybersecurity initiatives as well as technology and software expenses that increased by 4,000,000 During Q2, we incurred $7,000,000 of transformation related expenses compared to $6,000,000 last quarter. We continue to anticipate transformation related expenses of approximately $50,000,000 in 2023 as these efforts are expected to accelerate in the second half of the year. Other large expense variances were higher business promotion expense by $6,000,000 mostly related to credit card customer loyalty programs, Higher processing and transactional services expenses by $4,000,000 due to retail credit and debit card replacement costs. And finally, Lower personnel costs by $7,000,000 primarily related to lower equity based compensation expenses.

Speaker 3

Personnel costs historically exhibit a seasonal decrease The second quarter then typically increase for the remainder of the year, in part due to the impact of annual merit increases, which are effective On July 1. Our quarterly expense trajectory has historically ramped up as the year progresses. We anticipate that 2023 will be consistent with our experience and continue to expect expenses for the year of approximately 1,870,000,000 We will strive to come in below this expected level of expenses. Our effective tax rate for the quarter was 22%. For the full year 2023, we now expect an effective tax rate to be between 22% 25%.

Speaker 3

This range is somewhat tighter than the 21% to 26% range provided during our last webcast. Please turn to Slide 6. Net interest income was $532,000,000 On a taxable equivalent basis, It was $558,000,000 $12,000,000 lower than in the Q1. Net interest margin decreased by 8 basis points To 3.14 percent in Q2. On a tactical equivalent basis, NIM was 3.29 percent, A decrease of 17 basis points versus Q1.

Speaker 3

The decrease is driven by higher interest expense on deposits Due to the increase in balance of cost of Polysectors deposits as well as growth in high cost deposit accounts at Popular Bank. This was partially offset by higher loan yields and balances across all major lending categories. At the end of the second quarter, Poly sector deposits were roughly $18,500,000,000 an increase of $3,000,000,000 compared to Q1. The increase in Q2 was consistent with historical trends And as such, by the end of 2023, we still expect deposits public deposits to be in the range of $14,000,000,000 to 16,000,000,000 It is important to reiterate that by law in Puerto Rico, public deposits must be 100% collateralized. While changes in the level of these deposits May impact profitability, they do not have a significant impact on our liquidity.

Speaker 3

Excluding Puerto Rico public deposits, customer deposit balances were essentially unchanged In the quarter, we did however see some mix shift as non interest bearing deposits decreased by $624,000,000 in the quarter. This was offset by increases in time and saving deposits at popular bank gathered through its direct online channel. In Q2, we continue to see commercial and high net worth clients pursuing better yields on excess liquidity by moving these funds outside the banking sector. However, we have been able to capture a good portion of these in our broker dealer. We saw inflows from deposit customers Approximately $350,000,000 in Q2.

Speaker 3

Our ending loan balances increased by $693,000,000 compared to Q1, Given my growth in all loan segments at BBPR, I bank commercial and construction loans at PB. This growth is net of a transfer to held for sale of a $46,000,000 private label credit card portfolio. That portfolio was sold at par value in early Q3. We are encouraged by the demand for credit at BBPR and PV. We will continue to take advantage of prudent opportunities to extend credit and improve the use and yield of our existing liquidity.

Speaker 3

Our interest rate sensitivity continues to be relatively neutral. As this year progresses, we expect the margin to resume an upward trajectory. The timing will depend on our loan and deposit growth and mix, investment portfolio strategy and the pace of repricing of public And incrementally, retail and commercial deposits. Deposit betas in the current timing cycle are now above the prior cycle. We have seen a total cumulative deposit beta of 31% to date in this cycle.

Speaker 3

In BPPR, Total deposit costs increased by 34 basis points compared to an increase of 35 basis points in Q1 Led by public sector deposits. Exclude the public sector balances, deposit costs in BBPR increased by 14 basis points. In PV, deposit costs increased by 55 basis points versus 67 basis points in Q1, led by retail deposits gathered primarily through our online channel. In Puerto Rico, our combined retail and commercial deposit betas Cycle to date continue to be less than 10%. Given the increase in short term interest rates, We expect a continued increase in the cost of public sector deposits.

Speaker 3

The deposit pricing agreement with the Puerto Rico public sector is market linked with a lag. This source of funding results in an attractive spread on the market rates. In the Q2, the cost of Polytech deposits increased by 39 basis points compared to our April estimate of 60 basis points. The different rests in balance fluctuations And the mechanics of the interest expense calculation. We expect the cost of public deposits to increase by approximately 50 basis points in Q3.

Speaker 3

Please turn to Slide 8. Our investment portfolio is almost entirely comprised of treasury and agency mortgage backed Securities which carry minimal credit risk. Including our cash position, this portfolio has an average duration of approximately 2.3 years. As of the end of the Q2, the balance of the unrealized loss in our HTM portfolio stood at 746,000,000 A reduction of $43,000,000 from Q1. We expect this loss will be amortized back into capital throughout the remaining life of that portfolio at a rate of approximately 5% per quarter through 2026.

Speaker 3

Please turn to Slide 9. Our return on tangible equity was 10.6% in the quarter. Regulatory capital levels remained strong. Our common equity Tier 1 ratio in Q2 of 16.9 percent increased by 14 basis points From Q1. Tangible book value per share at quarterend was $51.37 an increase of $1.22 per share.

Speaker 3

Given the continued uncertainty on the outlook for rates, the economy and the potential regulatory response to events in the banking sector, We do not expect to engage in a share repurchase during the remainder of 2023. We do plan, however, to consider a dividend increase later this year. We'll review future capital actions as market conditions evolve. Our long term outlook on capital return has not changed Andcore is now our strong regulatory capital ratios. Over time, we expect our regulatory capital ratios to gravitate towards the level of our maintenance peers With that, I turn the call over to Lidio.

Speaker 4

Thank you, Carlos, and good morning. Overall, Popular continue to exhibit strong credit quality trends with low levels of net charge off and decreasing nonperforming loans. We believe that the improvements over the last few years in the risk profile of the corporation's loans portfolio positions Popular And the macroeconomic environment, given inflationary pressures and geopolitical risk. Before discussing the credit metrics for the quarter, I would like to address the risk profile of 3 loan segments: office CRE, credit cards and auto and lease financing portfolio. We have also included additional information for this segment in the appendix to today's presentations.

Speaker 4

The office segment is receiving a lot of attention in the current environment due to the shift to remote work and higher interest rates. Popular consolidated office CRE exposure is limited, representing only 1.8% For $600,000,000 of our total loan portfolio and is mainly comprised of low to mid rise properties Located in suburban areas and is well diversified across tenant type with an average loan size of 2,000,000 We have no exposure to large office tenant CRE in the mainland urban city centers. The portfolio has a favorable credit risk profile with low levels of NPLs and classified loans. In terms of our credit card and auto and lease portfolios, the credit risk profile of these portfolios is anchored On the strength of the job market and economic activities in Puerto Rico, coupled with the credit quality of our originations over the last few years. In terms of credit cards, 30 plus delinquency is at 2.8% compared to an average of 3.7% In the 2011, 2019 pre pandemic period and year to date net charge offs are at 2.4% compared to an average of 3.7% in the pre pandemic period.

Speaker 4

In terms of auto loans, 30 plus delinquency is at 3.7% Compared to an average of 6.2% in the 2011, 2019 period and year to date net charge offs Are at 60 basis points compared to an average of 1.9% in the pre pandemic period. For lease financing, 30 plus delinquency is at 1.3% compared to an average of 2.1% in the 2011, 2019 period And year to date net charge offs are at 20 basis points compared to an average of 70 basis points in the pre pandemic period. Turning to Slide number 10. Nonperforming assets decreased by $32,000,000 to $472,000,000 this quarter, Driven by an NPL decrease in Puerto Rico of $27,000,000 due to lower mortgage NPLs by $30,000,000 offset in part I hired construction NPLs due to a single $9,000,000 relationship. Oreo balances also decreased by 6,000,000 NPL inflows decreased by $10,000,000 quarter over quarter, driven by lower commercial NPLs in Puerto Rico by $13,000,000 And lower mortgage NPLs in Puerto Rico by $7,000,000 offset in part by the previously mentioned construction NPL relationship.

Speaker 4

Includes in the U. S. Remained flat quarter over quarter. At the end of the quarter, the ratio of NPLs to total loans held in portfolio Decreased to 1.2% from 1.3% in the previous quarter. Turning to Slide number 11.

Speaker 4

Net charge off amounted to $24,000,000 were annualized to a 9 basis point of average loans held in portfolio compared to 33,000,000 41 basis points in the prior quarter. The quarter over quarter improvement was driven by a 10,500,000 Line of credit charge off in the prior quarter. Please turn to Slide number 12. At June 30, 2023, The ACL increased by $11,000,000 to $700,000,000 driven by portfolio changes Due to higher specific reserve, higher volume and change in the phyto mix of customer portfolios. Changes in the macroeconomic scenario caused the ACL to increase by $8,000,000 which were offset in part by the change in the mix in the probability weight Macroeconomic Scenarios by $6,000,000 During the Q2, we lowered the probability weights assigned to a pessimistic scenario And increase the probability of weight assigned to the baseline scenario.

Speaker 4

Changes to qualitative reserve reduced the AECL by 5,000,000 The provision for credit losses was $37,000,000 compared to $48,000,000 in the prior quarter. In Puerto Rico, the provision was $28,000,000 Compared to $45,000,000 in the prior quarter, while the provision for the U. S. Was $7,000,000 compared to 2,000,000 The corporation ratio of ACLs to long term portfolio remained flat at 2.1%, While the ratio of ACL to NPL stood at 182% compared to 167% in the previous quarter. To summarize, Our loan portfolio continued to exhibit strong credit quality trends in the 2nd quarter with low net charge off and decreasing nonperforming loans.

Speaker 4

We remain attentive to the evolving environment, but remain encouraged by the post pandemic performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Speaker 2

Thank you, Lidio and Carlos, for your updates. Our results for the first half of twenty twenty three were strong, driven by solid earnings, robust loan growth, positive credit quality And continued customer growth. Our diversified business model, robust levels of capital, and most importantly, the talent and dedication of our people Position us well to support and meet the evolving needs of our growing customer base. We're optimistic about the opportunities that lie ahead. Economic trends in Puerto Rico continue to be positive.

Speaker 2

A considerable amount of recovery funds yet to be dispersed are expected to support increased economic activity in the coming years. We made progress in our transformation initiatives during the quarter, Which over time will drive more customer connectivity, operational efficiencies and greater potential for profitable growth And sustained return on capital. In June, we released our annual corporate sustainability report. We continue to focus on providing opportunity for progress, Protecting the environment and promoting leadership. We are mindful of the responsibility we have to Puerto Rico as the leading banking institution and to all the communities that we proudly serve.

Speaker 2

We are now ready to answer your questions.

Operator

Thank you. As we head into the Q and A session, I would like to remind everyone that if you would wish to register a question, please press star followed by 1 on your telephone keypad. When preparing to ask your question, please ensure that your device is unmuted locally. We'll take our first question from Timur Braziler from Wells Fargo. Timur, your line is now open.

Operator

Please go ahead.

Speaker 5

Hi, good morning. Maybe Starting on the loan growth, that's remained quite strong now for many consecutive quarters. I'm just wondering, As you look ahead, is this kind of where we're at for the foreseeable future or just given the Remaining idiosyncratic tailwinds for the island, does loan growth actually accelerate some of these construction projects you referenced come online?

Speaker 2

Well, Timo, this is Ignacio. As I said in the past, it's always hard to project and forecast loan growth in Puerto Rico, it's coming It's very lumpy, especially the larger loans that drive some of the growth. But what I can say is that we continue to have Good pipelines, good demand from our customers. We're not seeing that decrease. So again, I don't want to put a percentage level on it, but we have strong loan demand both in Puerto Rico and the U.

Speaker 2

S. So I wouldn't put a number on We certainly don't see it decelerating at this point.

Speaker 5

Okay. And then as far as appetite for Mainland Credit, The growth in construction, I'm assuming that's contractual loans funding up and then just maybe speak more broadly about appetite and growing the Mainland portfolio In the face of what's expected to be an uncertain credit environment at the back end of the year?

Speaker 2

Yes. Leno can add more But I want to point out that we've always been a construction lender especially in the New York metro area, but we are not very involved in the office sector. So we're mostly most of our construction is around multifamily. So I think we're continuing to be Prudent and lending to existing clients, but I don't see us Pulling back from our traditional markets that we serve, again, we're not in the office sector. I don't know, Lydia, if you want to add anything.

Speaker 3

That's perfect.

Speaker 5

Okay. And then maybe switching to the funding of this loan growth, just given the seasonal trends in Public funds and those coming down in the back end of the year coupled with the loan to deposit ratio that still has plenty of room to move higher. Is there a wantingness to fund upcoming loan growth through incremental deposits or Are you okay borrowing at this level in funding the new growth?

Speaker 3

Hi, Taylor, Carlos. At this point in time, we do have a very strong liquidity position. So everything else being equal, our first port of call would be our cash To fund loan growth, we are very lucky that The yields on our loan book are quite attractive. So they're even more attractive than the yields we can achieve in some of our investment portfolio. So that will be first call.

Speaker 3

At this point in time, I don't envision us having Significant borrowings to fund on growth.

Speaker 5

Okay, that's helpful. And then Last for me, just on the expenses, any color you can provide on the profit sharing component, Pretty big quarter relative to Street expectations. And I know Street is kind of the proxy that you have used in the past Determining whether or not we're going to have profit sharing contribution, but your comments on hoping to come in better than that 187, I'm just wondering what the outlook is for profit sharing in relation to that comment?

Speaker 3

At this point in time, there is no consideration of profit sharing in our numbers.

Speaker 5

Okay, got it. Thank you. I'll step back.

Operator

Thank you. Our next question comes from Brody Preston from UBS. Brody, your line is now open. Please proceed with your question.

Speaker 6

Hey, good morning everyone. I wanted to just ask On the FTE adjustment, I guess I was a little bit perplexed This quarter, the FTE adjustment keeps moving a bit lower, but the tax rate It was kind of flattish and it looked like you kind of narrowed the guidance range a little bit. I guess can you maybe Explain again the dynamics between what's happening with the FTE adjustment and the tax rate at this point?

Speaker 7

Hi, this is Jorge Garcia. Good morning. It is a complicated question. I don't blame you. The first thing I would say is that this allowance of our interest expense, which is really what drives that FTE adjustment, It's increasing given that the cost of deposits are increasing.

Speaker 7

So that's the first impact that you're seeing. Essentially, your Tax free income is becoming less. Your other question is why isn't why aren't we seeing Change necessarily in our effective tax rate. And that has to do with GAAP accounting, where you try to anticipate changes in that effective tax rate throughout the year and you make adjustments for that on a quarter by quarter basis, so you normalize it.

Speaker 6

Okay. Okay. Maybe just shifting to deposit costs. I think You provided the betas, the cumulative betas for the interest bearing portions cycle to date for the retail, commercial and public Deposits, I know the public is going to be 100% with a lag, but just on the commercial and retail side, just Wanted to

Speaker 2

get your thoughts if you

Speaker 6

have any on where you thought those betas would end the year by the Q4 of this year?

Speaker 3

Yes. Well, it depends on in part on what the Fed does today and what the Fed does the rest of the year, Frankly, I think the trends are Trends that can be expected to continue, meaning that our betas in Puerto Rico will continue to be lower in our retail and commercial businesses, commercial slightly higher, Retail a lot lower than the mixed market betas and then we'll have a beta that's Slightly higher or closer to market averages in our bank in the U. S. So I think those trends will probably continue. To the extent that the Fed is done this afternoon, well, Then that will affect how it looks for the rest of the year.

Speaker 6

Okay. And then just last one for me for right now is just on the securities book. I'm sorry if you already touched on it And I missed it. Just want to get your thoughts on how that's going to ebb and flow and uses of securities, Cash flows at this point for the remainder of the year, you had negative growth the 1st 2 quarters of this year. Just wondering If we're going to continue to use that as a source of liquidity going forward?

Speaker 2

Yes.

Speaker 3

We've been cautious With and actually I've been building cash because of the uncertainty in the last couple of quarters. Brody, I think we feel a lot better than a lot of that is behind us now. So what Well, you should see starting this quarter is that we'll start to redeploy some of the cash. We will probably end up with lower cash Hopefully because we have a lot of loans first, but even without that, we'll start to redeploy some of that cash. It may not change the profile of the investment portfolio too much because some of that redeployment will probably be in T Bills Where the yield is going to be similar and the liquidity will be basically cash like, but it will provide us a tax benefit.

Speaker 6

Got it. Thank you for that.

Operator

Thank you. Our next question comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please proceed with your question.

Speaker 8

Hey, good morning all.

Speaker 2

Good morning.

Speaker 8

Thanks. Just keeping on that last question on the tax rate on the T Bills. Does the tax The rate range that you've provided the 22% to 25%, does that anticipate any additional investment into T Bills as the year progresses?

Speaker 3

Yes. That range incorporates our best guess of what we're going to do with the balance sheet the rest of the year, yes.

Speaker 8

Okay. And then I got to dig into just the comments on the buyback a little bit. Can you just Suraj, I know there's obviously a lot of uncertainty in the banking environment, but is it specifically uncertain around new capital rules for CCAR Banks? Is it specifically around waiting Credit develops or kind of what are the trigger points and then maybe just remind us how the process works if you do go through and raise the dividend. Is it Similar process to your normal capital plans or is it different in any way from what you normally go through each year?

Speaker 3

Okay. Let me try to walk through some thoughts on capital to So I think we'll try to address a lot of your questions, Alex. And as we mentioned in the prepared remarks, We expect to consider a dividend increase in 2023, probably late in Q3 of this year. And at this time, no buyback It's planned for the rest of this year. Obviously, the final decision on any dividend increase is expressed with our Board of Directors.

Speaker 3

So they'll have the final call on that. We've described sort of our thinking process in the past that as we look at capital action, it depends On us getting we're looking for 3 things to inform our actions. Number 1, clarity on the path of interest rates. Number 2, clarity on the path for the economy and lastly, clarity on the path for regulation. Those are sort of the inputs that help us And make decisions.

Speaker 3

Now it is still uncertain. I mean, we're getting some information from the Fed tomorrow on capital, Which would be a nice first step to start adding some clarity to the process. By the way, we're getting information on capital, we'll turn on getting haven't gotten anything On what liquidity framework that may change, which is also pretty important as we think this through. But we'll start getting some information From on that front at least hopefully tomorrow and that will start informing some of the uncertainty here. Now, so it's unclear exactly when we get clarity in this matters, but those are the inputs that we're looking for.

Speaker 3

Additionally, while it's not a required regulatory ratio TCE and therefore AOCI are considerations in our decision making process. So that is the consideration. What I can say today as far as the process, which is the second part of your question, Is that presently we do not plan to return to our historical cadence of a yearly capital actions announcement in January. Instead, while still not decided, moving forward, we will probably shift to a capital management process That is closer to what most other banks do, where we will periodically announce stock repurchase authorization that may be executed from time to So this is so what we can tell you so far and The process we always advise the regulators and anything we're doing with regards to capital, it will be no different this time. And hopefully I get back to you late in the Q3 with a decision on the demand.

Speaker 8

Okay. That's good information. I mean, just in terms of that process, like suppose we got some clarity on rates as early as today and some clarity on Regulation tomorrow and economy we're never going to get clarity on. But how long would it take you to actually go through that Like the whole process with the Fed, is that something that is a pretty quick thing? I remember when you guys Did the EVERTEC thing, it seems like the approval happened basically almost overnight.

Speaker 8

I'm just curious if that's evolved and gotten any easier over the years?

Speaker 3

I mean, the Fed always has the option of deciding everything on their timetable, but the fact is that we've been working very Effectively with our regulators over the last few years. In fact, you've seen it and what you mentioned on the approval of EVERTEC is a reflection of it We try to work closely with them. We try to never surprise them. They are always informed of what we're trying to do And if they have to be involved, they have been very responsive in working with us if we have a timetable that we're trying to meet. So, the relationship is very good and over the years they've gotten better understanding what we're doing.

Speaker 3

We're getting better at asking the right questions.

Speaker 9

Got it.

Speaker 8

And then one final question for me. I wanted to Just to sort of dig into a conversation we haven't talked about in probably a couple of conference calls about M and A in the North American franchise. And it just seems to me like Hearing anecdotally and seeing more announcements of loan sales, some of them related to specific asset classes that you may or may not want to be into, some of them related to rates. But It seems like there's going to be potentially a bunch of loan sales coming up, even some from the FDIC that are going to be potentially coming at pretty big discounts. I'm curious, you guys have tons of capital in North America, if you have appetite to do some loan purchases And if so, what the criteria might be?

Speaker 2

Yes. This is Ignacio. I think we've said it before, we ourselves as We view ourselves as opportunistic buyers of assets. So if there's pools of assets that interest us, we will definitely go there. I think the assets that would interest us would be mostly those things that we are that we feel we have a certain level of expertise in.

Speaker 2

So we have certain leverage expertise in CRE, our healthcare financing, the condominium association financing, those are things that would be of interest to us. So we're not going to buy office portfolios at a discount that kind of thing. Even if it's a very attractive price, we're not going to do something because it's not something You know that we have a particular level of expertise. I don't think we'd probably go after mortgage assets either. So I think it will be more in the commercial area.

Speaker 2

But if they're attractive assets in those areas that we feel we know well, we would be interested to look at them, sure.

Speaker 8

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Kelly Motta from KBW. Kelly, your line is now open. Please go ahead.

Speaker 2

Hi.

Speaker 10

Thank you so much for the questions and good morning. I thought I would just close the loop on the capital discussion. And I appreciate the commentary that you're reviewing the dividend now. Can you remind us what you guys Sort of target in terms of your dividend payout ratio and how we should be thinking about that as we review the dividend?

Speaker 3

Yes. There is what we target is what we hear from regulators, which seems to be something Ordering around 30% of income. So that's what we're trying to target. A couple of Recent announcements have taken banks slightly above that. So we're attentive to that.

Speaker 3

We also don't know what their forecasts are, so they may end up at 30% depending on what they have how they're looking at the year. But that's the broad guide is what we understand to be the regulatory preference that dividends be around that level.

Speaker 2

Yes. And this is Ignacio. We try to make the dividends, do it a little bit every year So that we don't have a big ramp up in 1 year. So we try to do it incrementally and I think we've been very successful in the past in doing that.

Speaker 10

Understood. Appreciate the color. I did want to flip to the deposit base, Specifically, the core deposit pace excluding the government deposits, it looks like there most of the growth came from the U. S. Can you Kind of walk us through your strategies there and any deposit campaigns you're running.

Speaker 10

And as we look ahead with Excess liquidity in Puerto Rico is still high, but and really money coming in, but obviously where we are in the cycle, just kind of Outlook for how much higher liquidity balances or whatever you want to call it is left and What we should be thinking about the deposit outlook putting that those dynamics together?

Speaker 3

Yes. As I mentioned in the earlier question, I think it's fair to assume that our cash balances will be coming down in the rest of the year from where they are today. The biggest part of the deposit increase this quarter was still public sector deposits in Puerto Rico. And then there is a good chunk at Popular Bank. We continue To try to strengthen the deposit business of Popular Bank, so that is a focus Of the company, the efforts actually the most obvious efforts are the increase in deposits through our online channel because that It reacts quickly, but there's another a bunch of other business efforts intended to actually improve the deposit business of Poker Bank as well.

Speaker 3

The problem with those is that they are less visible because they move slower. So that is not the only tool we have to improve Deposit business, which is our goal, we are moving different levers. This lever happens to be the most obvious one Because it is the one that moves the quickest.

Speaker 10

Got it. And Sorry, I didn't hear you.

Speaker 2

Yes, in terms of Puerto Rico, while deposits have gone down somewhat, The average balances of our retail and small business clients especially are still way above pre pandemic levels. So We don't I don't think we view the necessity of starting aggressive marketing campaigns in Puerto Rico at this point given our deposit levels.

Speaker 10

Appreciate the color. That was my follow-up. I'll step back then. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Our final question comes from Gerard Cassidy from RBC Capital. George, your line is now open. Please go ahead.

Speaker 9

Thank you. Good morning Ignacio and Carlos. Ignacio, can you guys give us some color? Obviously, Puerto Rico over the years has had a healthy Manufacturing component to your economy, I know in your prepared remarks that you talked about tourism and how well that's going. In stateside, there's clear evidence of the on shoring of manufacturing coming back to Ohio or Indiana, Are you guys seeing any evidence of the benefit of that possibly coming to Puerto Rico?

Speaker 2

The manufacturing sector based on the economic activity index is relatively healthy in Puerto Rico. It's been Sometimes it goes up for a few quarters and it goes down a bit. But frankly, it's been mostly in our traditional sectors. The medical device sector, which has been very strong in Puerto Rico, also the aerodynamic area The technology relating to airplanes and motors and that kind of thing is very popular in the West Coast. I haven't seen to date many brand new at the beginning of last year, we saw a couple of foreign firms come in, in India, An Indian company, I believe a Mexican company.

Speaker 2

So we've seen some foreign people foreign firms that don't have Perhaps any presence in the U. S. Using Puerto Rico as their initial point, especially in the pharmaceutical, the generic pharmaceutical side. But to be honest, I haven't seen a big impact from the onshoring yet. We had a big promise for that, but it's been Mostly the dynamism has been in the and there are traditional sectors that have been growing.

Speaker 9

Very good. And then as a follow-up, I believe the Prepper bankruptcy schedule was suspended in June. Do you guys have any updates on what's going on there with The bankruptcy preparation and the resolution then is?

Speaker 2

Not really. We don't know really more than we read in I mean, we're optimistic that the most recent proposal will get approved. Obviously, it means that cutting the debt down more and the rates will obviously Have to go up less than under the prior plan. So we're optimistic that we can get this behind us, but really we don't have a lot of inside baseball on what's going on there behind the scenes.

Speaker 9

Got it. And I apologize if you addressed this, I came late on to the call, but did you guys, Carlos, give us the burn down rate for the next Couple of years of the bond portfolio, what percentage of it will pay off by now in the end of 2024?

Speaker 11

Yes. I mean, it's on Page 8 of the deck, Gerard. Yes. So that kind of gives you an idea. So I mean it's some pretty aggressive roll down in the treasury portfolio for the next 2 years.

Speaker 11

MBSs I'll be kind of present there. They're praying very slowly. So that's something that as Carlos mentioned, if you have a rate reversal and prepayment fees start to pick up again, You could see some acceleration there, but we're not necessarily forecasting that. But you have about $8,000,000,000 or so That's an AFS and treasuries that has an average life of around 1.5 years. So that will kind of give you an idea of how that rolls in.

Speaker 11

As Carlos mentioned, just complementing that, we'd probably be at least for now reinvesting some of those proceeds in T bills, treasury curves inverted. So Actually picking up yield a bit, doing that and maintaining a relatively shorter portfolio as well.

Speaker 9

Very good. And then just lastly, the way the balance sheet is positioned today, if when we're on this call a year from now, let's say, Next July, what kind of interest rate environment would be ideal for Popular over the next 12 months, Both long and short end of the curve?

Speaker 11

I guess I can answer that. You basically if you have like a reduction in short term rates that's going to reduce the what we pay on the public sector deposits as Carlos mentioned as well, it's a market linked with a lag. So you'd see some pressure coming down from our cost of deposits from that standpoint and Steepening, so any kind of intermediate level assets kind of re pricing at a higher spread to short term rates This is naturally what typically a bank likes. Our positioning is relatively neutral right now, so we're not really expecting major swings due to interest rates, At least in our current balance sheet position.

Speaker 3

Like most banks, there are A normal yield curve at a lower short term level tends to be good for the business.

Speaker 9

Very good. I appreciate the color. Thank you.

Operator

Thank you. There are no further questions on the line. So at this time, I would like to hand back to Ignacio Alvarez for any closing comments.

Speaker 2

Thank you, everyone, for joining us today and for your questions. We look forward to updating you on our progress in October. Have a great day.

Operator

This concludes today's conference call, everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.

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Earnings Conference Call
Viatris Q2 2023
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