Popular Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to today's Popular Inc. 4Q Earnings Call. My name is Jordan, and I'll be coordinating your call today. I'm now going to hand over to Paul Cardillo, the Investor Relations Officer at Popular, Paul, please go ahead.

Speaker 1

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez our COO, Javier Ferrer our CFO, Carlos Vasquez And our CRO, Lidio Soriano. They will review our results for the full year and Q4 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 regarding Popular, such as projections of revenue, earnings, expenses and capital structure as well as statements regarding Popular's plans and objectives.

Speaker 1

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

Speaker 2

Good morning, and thank you for joining the call. In 2023, we delivered solid results in a challenging environment. Our annual net income of 541,000,000 register, compared to net income of $1,100,000,000 in 2022. Our adjusted 2023 adjusted net income was $587,000,000 compared to adjusted net income of $808,000,000 in 2,002. The variance was mainly driven by a higher provision for loan losses and higher operating expenses.

Speaker 2

We grew our loan portfolio by $3,000,000,000 or 9.3 percent during the year. BPPR generated loan growth across most business segments led by commercial loans, reflecting the continued strength of the local economy and our diversified product offerings. Popular banks achieved growth in commercial and construction loans. During the Q4, we increased our quarterly common stock dividend by $0.07 to $0.62 per share. Credit quality remained solid throughout 2023 as evidenced by lower nonperforming loans, even though our unsecured consumer portfolios did begin to normalize during the second half of the year from historically low levels.

Speaker 2

Our capital levels are strong with year end common equity Tier 1 ratio of 16.3%. Our tangible book value ended 2023 at $59.74 a 33% increase year over year, register primarily due to lower unrealized losses on investment securities and the year's earnings. Over the past year, we have been executing on a broad based register multi year technological and business process transformation. While many of these investments are foundational in nature and will take time to show meaningful results, We have already begun to see tangible revenue uplift from several of our early stage initiatives. In Puerto Rico, these include enhanced pricing segmentation in our commercial cash management business and streamline processing of small business loans.

Speaker 2

Our technology and business transformation continues to be a priority. We believe that there are opportunities to grow in our primary market as well as within our existing customer base, and these efforts will help us capitalize upon that opportunity. We are confident that these investments will make us a stronger, more efficient and profitable company. We continue to target a 14% return on tangible common equity by the Q4 of 2025. Please turn to Slide 4.

Speaker 2

Adjusted net income in the Q4, excluding the impact of the FDIC special assessment, totaled $140,000,000 flat from the last quarter. Register. Our loan balances grew by $1,000,000,000 with $729,000,000 at BPPR and $287,000,000 at Popular Bank. Register our net interest margin was 3.08 percent, increasing by 1 basis point, primarily driven by higher loan balances and the repricing of loans and securities in a higher interest rate environment. This was offset by higher deposit Non interest income remained solid, increasing by $9,000,000 Excluding the FDIC assessment, operating expenses decreased by 6,000,000 Credit quality trends remain generally positive with lower NPLs once again.

Speaker 2

However, we did continue to see credit normalization in the Puerto Rico unsecured consumer segments, which began in the second half of the year. We have taken actions to address these developments and are attentive to the evolving credit landscape. Deposit balances increased by approximately $300,000,000 primarily due to a higher level of online deposits at Popular Bank. Register the $9.54 increase in tangible book value per share in the quarter was primarily driven by a decrease in unrealized losses in our investment portfolio. Please turn to Slide 5.

Speaker 2

During 2023, we added 34,000 new customers in Puerto Rico And now serve more than 2,000,000 unique customers. Utilization of digital channels among our retail customers also remains strong. Active users on our Mibanco platform exceeded 1,100,000 or 54% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channels. Consumer spending remained healthy.

Speaker 2

Combined credit and debit card sales fell by 1% compared to the Q4 of 2022, which was a historically strong quarter. Our auto loan and lease balances increased by $61,000,000 compared to the Q3 as demand for new cars continued to be strong in Puerto Rico. Mortgage loan balances at BBPR increased by $103,000,000 in the 4th quarter, driven primarily by home purchase activity in our strategy to retain FHA loans. The Puerto Rico economy performed well during the quarter. Business activity is solid as reflecting the positive trends in total employment and other economic data.

Speaker 2

The tourism and hospitality sector continues to be a source of strength for the local economy. Passenger traffic at the San Juan International Airport increased by 18% in 2023 compared to the previous year. Register. And both the hotel occupancy rate and the average daily rate reflected a 5% to 6% increase over 2022. Register.

Speaker 2

There are roughly $50,000,000,000 of committed federal funds that have yet to be dispersed. The pace of disbursement of these funds has accelerated, and we anticipate that these funds register, we'll support economic activity for several years. We are encouraged by the performance of the Puerto Rico economy. We remain optimistic about the future of our primary market and are well positioned to support our clients during this historic period. We are pleased with our results for the quarter the year, particularly our strong loan growth in both Puerto Rico and the U.

Speaker 2

S. As well as the continued strength of our deposit base, which positions us well for 2024. Finally, I'd like to take this opportunity to recognize Carlos, who will retire in March after 27 years of service to Bublar. As our CFO since 2013 and in various senior leadership positions before that, he excelled due to his strategic mindset, register analytical skills and discipline. He has been an important contributor to our growth and financial strength, and we are thankful for his leadership throughout all these years.

Speaker 2

On a more personal note, I'm sincerely grateful for his support since I joined Popular and for his friendship, which began long before. Jorge Garcia, our comptroller since 2012, has worked alongside Carlos for many years, helping to build a strong finance team. He is widely respected within the organization, and we are confident he will do a great job as our new CFO. On that note, I will now turn the call over to Carlos for more details on our financial results.

Speaker 3

Thank you, Ignacio, for those kind words as well for your friendship and leadership. I would like to offer my gratitude to my colleagues at Popular. They make all our achievements possible. I also want to thank our analysts, bankers and investors whose keen insights, challenging questions, recommendations and advice, I have greatly appreciated and valued. Finally, I want to thank my successor, Jorge, For his support over the last 13 years during which we have collaborated.

Speaker 3

I leave all of you in good hands. It has been my pleasure and honor to contribute to this great company for 27 years. Please turn to Slide 6. We reported net income of 90 $5,000,000 in the Q4. Excluding the effect of the FDIC assessment, adjusted net income was $143,000,000 higher than the prior quarter.

Speaker 3

Net interest income was $534,000,000 flat with Q3. During the Q4, the net interest margin remained stable despite rising deposit costs. Based on our current and forecasted asset mix, Coupled with the expected rate environment, we should continue to see NIM expansion in Q1 and throughout the rest of 2024. In 2024, we expect net interest income to increase by approximately 9% to 13% from 2023 levels, driven by loan growth of 3% to 6% and the continued improvement in our earning asset mix in a higher rate environment. Non interest income was $169,000,000 an increase of $9,000,000 versus Q3.

Speaker 3

In 2024, we expect non interest income to be approximately $160,000,000 to $165,000,000 per quarter, an increase of $5,000,000 from our prior guidance. The provision of credit losses was $79,000,000 register compared to $45,000,000 in the Q3. Total operating expenses were $531,000,000 in Q4. Excluding the effect of the FDIC assessment, adjusted operating expenses were 459,000,000 a decrease of $6,000,000 from Q3 and below our prior guidance of $175,000,000 The variance in the quarter was driven primarily by a $23,000,000 non cash goodwill impairment in Q3 register and lower credit card processing and transactional expense by $8,000,000 mainly due to volume incentives recognized during the quarter from the card networks. For the year 2023, operating expenses increased by 9% to $1,900,000,000 register driven primarily by the higher FDIC deposit insurance expense, the goodwill impairment taken in Q3, Excluding the FDIC assessment in Q4, register 2020 3 expenses were $1,830,000,000 5 percent higher than in 2022, register, but below our original guidance of $1,870,000,000 For 2024, we expect annual expenses in a range of $1,89,000,000 to $1,950,000,000 Approximately half of the projected increase in expenses register, is related to technology investments, some that rolled over from 2023.

Speaker 3

The other half is mostly personal expenses register as we continue to invest in our people as well as expand our capabilities in cyber, risk, data and technology. This guidance includes transformation related expenses. Our effective tax rate for the quarter was negative 1.6%. Register. The additional FDIC expense changed the mix of exempt versus taxable income, increasing the proportion of exempt income.

Speaker 3

In addition, Q4 included a tax benefit resulting from the filing of the 2022 tax returns register that contributed to the negative rate for the quarter. For the full year 2023, the effective tax rate was 20%. Register. Excluding the impact of the FDIC assessment, it was 21.5%, close to the lower end of our guidance of 22% to 25%. In 2024, we expect the effective tax rate to be in a range from 19% to 23%.

Speaker 3

Please turn to Slide 7. Net interest margin increased by 1 basis point to 3.08% in Q4. On a taxable equivalent basis, NIM was 3.26%, an increase of 2 basis points versus Q3. Register. The increase was driven by improved earning asset mix, higher loan yields and balances across most major lending categories as well as higher yields on our cash balances and investments.

Speaker 3

This was offset by higher interest expense on deposits due to increased cost of public deposits register and growth in high cost deposit accounts at Popular Bank. At the end of the Q4, Puerto Rico public deposits were $18,100,000,000 an increase of roughly $300,000,000 compared to Q3 and at the upper end of our guidance. In 2024, we expect public deposits to be in a range of $15,000,000,000 to 18,000,000,000 register. As usual, seasonality should result in public deposit balances trending higher at the beginning of the year and peaking in Q2, register mostly related to tax receipts. Excluding Puerto Rico public deposits, consolidated customer deposit balances were flat compared to Q3.

Speaker 3

In Puerto Rico, customer deposits decreased driven by commercial outflows. For the year, approximately $1,300,000,000 deposit balances were transferred by commercial and retail customers from BPPR to Popular Securities. Register. In Q4, deposit increases at Popular Bank were primarily driven by increases in time and saving deposits from our online channel. Ending loan balances increased by $1,000,000,000 or 3% compared to Q3, driven by growth in most loan segments at BBPR and by commercial and construction at PB.

Speaker 3

In 2023, loan balances increased by $3,000,000,000 or 9.3 percent register versus $2,800,000,000 or 9.7 percent in 2022. We will continue to take advantage of prudent opportunities to register to extend credit and improve the use and yield of our existing liquidity. In 2024, we expect loan growth of 3% to 6% driven primarily by the commercial loan segment in both banks. Our interest rate sensitivity is relatively neutral. Register.

Speaker 3

We saw a small margin expansion in Q4 and expect the margin to remain in an upward trajectory in 2024. The magnitude will depend on our loan and deposit growth and mix, investment portfolio strategy as well as the pace of repricing of public funds and incrementally retail and commercial deposits in our U. S. Operation. Please turn to Slide 8.

Speaker 3

Deposit betas in the current tightening cycle are above the prior cycle. We have seen a total cumulative deposit a beta of 36% to date, driven by public deposits. The rate of increase in deposit costs for the corporation continued to slow down in the In BPPR, total deposit costs increased by 11 basis points compared to an increase of 24 basis points in Q3, register, led by public deposits. Excluding public deposit balances, total deposit costs remained flat at 55 basis points. Register At Popular Bank, deposit costs increased by 33 basis points compared to an increase of 29 basis points in Q3, register retail deposits, gathered primarily through our online channel.

Speaker 3

Puerto Rico government deposits are composed of numerous clients and accounts, the calculation methodology and rate of those accounts may vary depending on the timing of shifts in the related balances within accounts. On occasion, we may also provide temporary pricing concessions as part of our customary relationship managing activities. In Q4, the mix shift and the customer and the temporary preferential rates resulted in an overall increase of 34 basis points the cost of public deposits versus the 10 basis points we had anticipated at the end of the 3rd quarter. We expect the cost of public deposits to remain flat in Q1. Please note that on Page 14 of our investor presentation, We have added a page summarizing the enhanced guidance for 2024, which we are providing in this webcast.

Speaker 3

Please turn to Slide 9. Register. Our return on tangible equity was 6.3% in the quarter. For the full year, our RoTCE was 9.4%. Both ratios were impacted by the FDIC assessment.

Speaker 3

We continue to target a sustainable 14% RoTCE by the end of 2025. Regulatory capital levels remain strong. Our Q4 common equity Tier 1 ratio of 16.3% decreased by 51 basis points from Q3, reflecting continued strong growth in our loan portfolio, which carries a higher regulatory risk rating Tangible book value per share at quarter end was $59.74 an increase of $9.54 per share, up almost 19% from Q3. For the past 2 years, we have continued to effectively deploy our capital. This has been highlighted by the loan growth of almost $6,000,000,000 register the increasing trajectory of our dividend and multiple share repurchases, including the return to our shareholders of the gain on sale of our EVERTEC stake.

Speaker 3

We will revisit a couple of future capital actions in the second half of twenty twenty four. In the near term, we continue to seek more clarity on the outlook for rates, register the economy and the proposed regulatory response to events in the banking sector. Our long term outlook on capital return has not changed, register. Over time, we expect our regulatory capital ratios to gravitate for the levels of our main and peers plus a buffer. With that, I turn the call over to Lidio.

Speaker 4

Thank you, Carlos, and good morning. Overall, the corporation's mortgage and commercial portfolios continue to reflect credit metrics register your call. While credit quality metrics continue to normalize for Puerto Rico's register

Speaker 3

for the Q1 of 2019, we

Speaker 4

are closely monitoring the performance of our consumer portfolio and have made changes to our underwriting criteria to decrease exposure to higher risk segments. For the year, nonperforming loans decreased from $439,000,000 or 1.4 percent of total loans register to $358,000,000 or 1%. While net charge off increased from historic lows during the year, register. We continue to closely monitor changes in the macroeconomic environment register for the Q1, given higher interest rate and inflationary pressures. We believe that the improvements over recent years register the risk management practices and the risk profile of the corporation loan portfolios positions Popular to continue to operate successfully under the current environment.

Speaker 4

Turning to Slide number 10. Nonperforming assets and nonperforming loans decreased slightly during the quarter, driven by the mortgage portfolio in Puerto Rico. Commercial NPLs in Puerto Rico remained flat quarter over quarter, Notwithstanding the inflow of an $18,000,000 relationship in the renewable energy sector. This relationship drove the increase in NPL inflows for the quarter. Despite this inflow, the ratio of NPLs to total loans held in portfolio decreased to 1% from 1.1% in the previous quarter.

Speaker 4

Turning to Slide number 11. Net charge off amounted to $57,000,000 or annualized 66 basis points of average loans helping portfolio compared to $33,000,000 or 39 basis points in the prior quarter. The increase was mainly in Puerto Rico and the biggest variances we're seeing in commercial and consumer net charge off. Commercial net charge offs were 4,000,000 register for 17 basis points, a variance of $14,000,000 due to an $11,000,000 recovery in the previous quarter. Additionally, Consumer net charge off were $11,000,000 higher due to the credit normalization in auto, personal loans and credit cards.

Speaker 4

As we have discussed in the past, prior to the COVID pandemic, Popular net charge offs were generally between 75 on 125 basis points. For 2024, we expect net charge off for the full year to be between 65 to 85 basis points due to the ongoing credit normalization and general economic environment. Please turn to Slide number 12. The allowance for credit losses increased by $18,000,000 to $729,000,000 This was driven by a reserve build in the Puerto Rico commercial portfolio register, due to a $10,000,000 specific reserve for the previously mentioned new NPL, loan growth and higher reserves for the consumer portfolios due to credit normalization. In the U.

Speaker 4

S, the ACL increased by 3,000,000 driven by higher commercial loan reserve due to rating migration. The corporation ratio of ACL to loan settlement portfolio remains flat at 2.1%, while the ratio of ACL to NPL stood at 204% compared to 197% in the previous quarter. The provision for carry losses was $75,000,000 The $32,000,000 increase from the prior quarter Was driven by the $10,000,000 specific reserve mentioned earlier and credit normalization of the Puerto Rico retail portfolios. Also contributing to the increase were 3rd quarter events such as recoveries in the Puerto Rico commercial portfolio and the recalibration last quarter of the U. S.

Speaker 4

CRE allowance model, which led to a $50,000,000 reduction in reserves. To summarize, our Puerto Rico consumer loan portfolio continued to normalize during the quarter, while the corporation mortgage and commercial portfolios We are attentive to the evolving environment, but remain encouraged by the 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. Register your call today. 2020 3 was a good year for Popular despite a challenging environment, which included high interest rates, uncertainty in the geopolitical situation register and disruptions in the banking industry during the first half of the year. Our results reflected solid earnings, robust loan growth, register stable credit quality and continued customer growth. We achieved important milestones, including surpassing 2,000,000 unique customers in Puerto Rico.

Speaker 2

We also made great progress in our transformation efforts and some of the initiatives are already producing encouraging results. I would like to express my gratitude and appreciation to our employees for all their hard work and dedication during the year. In October, we celebrated our 130th anniversary. We are proud of the legacy that made Popular what it is today, a strong, register a vibrant organization with deep rooted values. Leveraging these strengths, we will continue to transform our organization to ensure success for many years to come.

Speaker 2

This entails meeting the rapidly changing needs of our customers, Providing our colleagues a workplace where they can thrive, promoting progress in the communities we serve and generating sustainable value for our shareholders. I am optimistic about our prospects in 2024. Economic trends in Puerto Rico continue to be positive, and we are well positioned to participate in the economic activity that is expected to be generated in the coming years. We're looking forward to a great year. We started with strong momentum, and the team is energized.

Speaker 2

We're now ready to answer your questions.

Operator

Our first question comes from Timur Razzillat of Wells Fargo. Timo, please go ahead.

Speaker 5

Hi, good morning. Looking at the NII guidance, it's pretty impressive for 20 24, Especially considering the expectation for loan growth to moderate in the coming year. Two part question. First, What are your rate assumptions embedded in that NII guidance? And second, can you maybe talk through NII Cadence throughout the year, especially now that public funds deposit costs have stabilized.

Speaker 3

Timur, the underlying rate our assumptions that are embedded in our forecast, We are in the lower end of the market as far as number of decreases in rates, and we have them all in the second half of the year. That changes every day, of course, today after GDP is lower than it was yesterday. But register. So we're at the low end of the consensus range and the second half of the year. The effect of the cost of government funds, If in fact rates are flat and coming down, should be pretty neutral moving forward.

Speaker 3

In fact, register I've mentioned in my prepared comments that we expect the cost of deposits to remain flat for the Q1. Register. So that will hopefully be one of the contributors. The rest of the contributors are going to be dependent on the register loan growth on what sector our loan growth happens, the speed at which it happens and then the repricing of our investment portfolio as well

Speaker 5

register Okay. And Carlos, can you provide just how many rate cuts you are assuming in the back end of the year?

Speaker 3

2.

Speaker 5

Okay. Maybe one for Lidio. So last quarter, you called out the low FICO used car borrower this quarter, you called out credit cards, personal loans and some segments of auto as being higher risk. Maybe just talk through the normalization of the consumer. What would you classify as being register higher risk balances and then how should we think about this segment relative to the current 11% allowance allocation?

Speaker 4

I think as generally, when you're looking at consumer and retail portfolios, The higher risk segments are always going

Speaker 3

to be driven by FICO.

Speaker 4

So your lower FICO is going to are the ones that are going to be higher risk. And We have seen, I think I last quarter also mentioned normalization of personal loans and credit cards. And what we have seen this quarter is a continuous On the spectrum, I think maybe a gradual increase also in delinquencies in charge of the order lease, which was maybe I did not mention the last one. What was the last part of your question? I'm sorry, Tim.

Speaker 5

Within 11% allowance ratio, Do you think this normalization causes increased allowance from here? Or is that normalization primarily in the charge offs With the allowance ratio staying relatively stable.

Speaker 6

I

Speaker 4

mean, I think the normalization we I expect Normalization to continue maybe through the first half of the year. And The movement that you have seen in our allowance should be replicated in the first half, which has been pretty consistent around the 2%, 2.1%. Excluding any changes in economic forecast or anything like that.

Speaker 5

Okay. And can you provide balances of what are the lower FICO more higher risk register

Speaker 4

That is not a disclosure that we provide.

Speaker 3

What we do provide as you know in the appendix Timur is the different consumer portfolios register and the originations over time in a very extended period of time. So from that, you will not get the actual balances that you're requesting, register So you get a sense of where the portfolio is because I think we have 8 or 9 years' worth of origination and most of these products have a life of 2 or 3 years.

Speaker 4

I think maybe most important then, looking at more from a macro context, looking at the strength of the Puerto Rico economy, the liquidity Of our clients, we don't foresee an acceleration of growth. I mean, we're seeing a trend of normalization,

Operator

Our next question comes from Ben Gurlinger of Citi. Ben, please go ahead.

Speaker 4

Hey, good

Speaker 7

morning guys.

Speaker 3

Good morning, Ben. Welcome.

Speaker 7

Yes. Thank you. I was curious if we could just take a moment. I know you said the loan growth It's being partially funded by just a mix in the loans from securities. How should we think about the overall balance sheet size?

Speaker 7

It should be obviously lower growth in loans, but it should and the static balance sheet side is somewhat acceptable or something we should expect or should we see a little bit of growth in the balance sheet as well?

Speaker 3

Register You've seen our balance sheet be pretty static actually this year despite the long the big loan growth because what ends up happening is that we have a big register So, I mean, I don't I mean, Balance sheet growth is not necessarily a target that we're pursuing. If it happens, it happens. But register We still have significant amount of liquidity. We still have significant amount of part of the investment portfolio maturing every quarter that is more than capable of funding non growth. So I would probably expect more shift from the investment portfolio and cash to loans and the overall size may not change ahead of a lot.

Speaker 7

Got you. Yes, that makes sense. And then it seems like you are reinvesting some just given the amount of liquidity it spits off. I was just curious where in the curve or In terms of duration, are you kind of approaching any sort of reinvestment?

Speaker 3

Yes. We are having all those discussions and have not made those decisions.

Speaker 8

Currently, they're being invested in shorter term instruments such as U. S. Treasury bills.

Speaker 3

Yes. So it's basically what maturity is staying in cash or cash like instruments, Timur. But we're having discussions of potential extension and the investment portfolio. We have not executed any of that. The extension we have achieved and is significant obviously is the move from cash to our loan book, which has a much higher duration than cash.

Speaker 7

Got you. If I can just sneak one more into I know you gave the expense guidance. Is that If it's a high end of the range on revenue, should we expect high end of the range on expenses as well? Does that include some sort of a commission or bonus payment as well or is that potentially even higher if revenue does come in on the high end?

Speaker 3

No, the range does not necessarily include our profit sharing, which I think is what you're referring to. We do as you know, we have to exceed our budget by a given margin for that to kick in, so it's not necessarily there. I wish there was a perfect connection as you'll suggest between the high end of 1 of the on the revenue on the high end of the expenses, but that's not necessarily the case.

Speaker 7

Got you. Appreciate the time, Carlos. It's been great working with you. Enjoy your retirement. You've always been really helpful.

Speaker 7

Thank you.

Speaker 3

Register. Thank you.

Operator

Our next question comes from Alex Twerdahl of Piper Sandler. Alex, please go ahead.

Speaker 9

Hey, good morning all.

Speaker 3

Good morning Alex.

Speaker 9

Just wanted to dig back into the NIM a little bit or The NII guide, in the past, you guys have kind of quantified each rate cut or each rate hike has a very specific impact on NII each quarter. Are you able to do that or

Speaker 3

Well, I mean, I think that The best way to think about that, Alex, is to go back to my comment that we are largely rate neutral in our balance sheet the right now, so a change in rates will not have a very material effect register on that range we provided, okay, because our balance sheet is to a large extent neutral to moving rates in the short

Speaker 7

term. Okay.

Speaker 9

And then on Slide 20, the maturity schedule of the U. S. Treasury notes, is it pretty fair to assume that the sort of $1,000,000,000 or so that comes off each quarter is right around that 1.5% yield?

Speaker 5

Yes. Register. That's the right number.

Speaker 9

Okay, great. And then

Speaker 2

register Just when

Speaker 9

I look at the net charge off guidance that you guys provided versus what we've seen over the last couple of years and really all the macro data and unemployment and sort of the momentum behind the economy, it feels like the net charge off guide is being a little bit conservative. When you come up with that guidance range, is it are you looking at specific Inputs or is it really just kind of a hunch that things kind of have to get worse from a pretty

Speaker 4

register I think it's a combination of things. We look obviously trends, recent trends, and we also look at the expected economic forecast register next year, which we provide to you in the allowance slide. So I think it's a combination of factor, those 2 being 2 of the most important factors.

Speaker 9

Okay. So I mean, I think in the past Carlos, you've I think a comment that has stuck with me is that how people when they're employed tend to pay their bills. And with unemployment being as strong as it has been, employment growing and all the momentum behind the economy and potential tax Additional tax breaks coming early this year for sort of the low income sector. I mean, it It feels like you should be able to do much better than that, at least better than that 65 to 85 basis point range.

Speaker 3

I think Alex that you have described the environment well. As I think we've discussed in the past, we are a little bit puzzled in trying to make the connection as well. We are doing our best to understand the drivers register on why this is happening when the underlying economy and employment register But while we are seeking to understand the connection better, we also cannot ignore the fact that we are seeing the increased delinquencies And so we have to make sure that we reflect that in our outlook. Register The other thing of course, the environment in the mainland is equally positive register Most banks in the mainland I see are seeing similar deterioration in the consumer portfolio. So I guess we're not the only ones with the conundrum and trying to connect how the economy is doing and employment is doing versus how some clients are behaving.

Speaker 3

Register But, so we're working on that. Okay.

Speaker 9

Thanks for taking my questions.

Speaker 3

Appreciate it.

Operator

Next question comes from Kelly Motta of KBW. Kelly, please go ahead.

Speaker 10

Hi. Thanks for the question. I guess, carrying on with that, and I got a little turned around earlier in the call when you're talking about net charge offs and the reserve. I don't know if I picked up on that clearly. I just wanted to circle back.

Speaker 10

It looks like In your ACL movement in Slide 12, you added about $63,000,000 related to consumer portfolio changes. Just wanted to register to confirm if that's related to that deterioration that you see in the consumer portfolio and if That implies that some of the increase that you're expecting may already be in your allowance.

Speaker 4

Register That portfolio change is a combination of things. It is portfolio growth, change in credit quality, it's replenishing the net charge off for the period. So it is all of that combined that leads to that 63% figure that you see in the slide.

Speaker 10

Got it. That's really helpful. And then I guess touching Turning around to the tax rate, it's come down a bit. Can you talk again I know there's some unique factors in Puerto Rico. Can you talk about What's taken your effective tax rate lower and what could cause us to come in the high end versus low end of that range?

Speaker 3

Yes. I mean the drivers of the 4th quarter were the 2 I mentioned, Kelly, register Because of the effect of the additional expense of the FDIC assessment, we ended up changing the mix of taxable versus exempt income, and we ended up ended the quarter with much higher proportion of exempt income versus non exempt income that obviously affects our tax rate. The other considering factor is that we finished our 2022 Tax returns and that resulted in a benefit that also lowered the taxes in the Q4. So those are the 2 effects. I certainly hope not to see another FDIC assessment, Definitely not at the size of this one moving forward.

Speaker 3

So that part of the condition should not repeat itself. And we already filed the 22 taxes, so I don't think we can refile them again anytime soon, Although there's always reviews and adjustments on those things. So I think and I'll look at my colleague here, Jorge, who is a former tax expert. I think the conditions that led to that variation are pretty asynchronic and pretty unique to last quarter.

Speaker 11

I would say this is Jorge. As we go forward, I mean, certainly the composition of taxable versus tax exempt income and that mix is always going to impact register that range that we're giving you. So if tax exempt income grows faster or the contribution of it because of the disallowed expenses, etcetera, becomes a higher proportion, our overall effective tax rate will come down. So that condition will exist beyond any type of

Speaker 3

register, that's why we give you a range.

Speaker 10

Okay. Thank you. I appreciate all the guidance. Maybe talking about fees, can you It looks like it implies an increase at least with the high end relative to last year. Can you discuss some of the initiatives you've taken on 1.

Speaker 10

And then 2, have you done a review at all how any of the proposed on interchange and overdraft might impact your fee income.

Speaker 3

Yes. Let me take the second part of your question first because it's the simplest to answer. I think in the last webcast, we were asked of the potential effect of the elimination of late fees on credit cards. We mentioned that our estimate of the potential effect of that was something around $9,000,000 The additional things that are being discussed now that were not on the table last quarter is a potential reduction in overdraft NFS fees. We don't have NFS fees for retail register We do have some overdraft fees, but the effect of that is somewhat muted Because our draft fees in Puerto Rico are already capped at $15 per occurrence and the proposal is and the high end of the proposal is at 14.

Speaker 3

So in that front, and of course, the proposals can change, our best guess is that the effect Could be something between $500,000 $2,000,000 worth of loss fees. And then the last piece of the puzzle that is in discussion now is the potential changes in interchange fees for debit. Register And our best guess right now is that could have an effect of up to $50,000,000 or something in that ballpark. So those three pieces are, again, all these are estimates. It will depend on how the final rule comes out and the levels that we end up setting and when it happens and everything else.

Speaker 3

Those are the best estimates we have a potential effect as far as lower fees. Now when we talk about the fees for 2023, register I want to make sure that we don't lose context. We lost a significant amount of fees in 2022 as the year evolved because of changes in NFS and overdraft fees. So our guidance went down in an immaterial amount because of our recognition that we had lost dump fees in 2022. Register We ended up doing a pretty good job.

Speaker 3

And if you just look at how our fees have changed over time, register You probably won't be able to tell that in 2022, we lost a significant amount of fees because we're pretty good at substituting them with other income in the fee category. The main contributors to that substitution are the 2 things that Ignacio mentioned. Number 1, we have repriced our offering of cash management services in the corporate sector and that brought in additional fees. And number 2, Yes. The main driver was that, the repricing of cash management services.

Speaker 3

So we ended up Conceptually making up for the loss fees in 2022 and the year ended up pretty flat. We expect some of the transformation efforts we're doing to continue to add register contribute to the fee income of the company. That in part is why we are increasing the guidance somewhat. Register It's not a big increase, but it's an increase that is not unimportant. We also saw

Speaker 2

register an increase in the interchange fees from our small commercial credit card. I think that's the second factor. I don't think I mentioned it, but that's

Speaker 3

the second factor. Thank you.

Speaker 10

Great. That's helpful. Last question for me. Do you have where new loans Are being originated now just to get a sense of the power for redeploying those cash flows that are coming off?

Speaker 3

Yes. I mean, we are as you know, Kelly, we haven't provided that information in the past, and We are all done with adding guidance and information.

Speaker 10

Fair enough. I thought I could slip one by

Speaker 3

register But I mean, obviously, this will vary, but you have register the yields of our different books in our levels and yields in the press release, and you can work off of that as a guide at least to start your work of front and back books.

Speaker 10

Awesome. Thanks so much.

Operator

Our next question comes from Brody Preston of UBS. Brody, please go ahead.

Speaker 6

Hey, good morning, everyone.

Speaker 3

Hey, Brian. How are you?

Speaker 6

Good. Good. How are you? I just wanted to ask within the NII guidance, I I think I heard you that you got 2 cuts in the back half of the year, but wanted to ask, what you all are assuming, for a Retail and Commercial Deposit Beta within that NII Growth Guidance.

Speaker 3

We have not discussed for looking data, Brody. But I think it's not unreasonable to assume that the rate of increase in beta should subside with stable rates and more so if rates start to drop, But we have not given details on this forward looking beta.

Speaker 6

Got it. Okay. I wanted to circle back register the consumer credit discussion, I just want to make sure, the consumer credit allowance is About 5.25%, right? So, that looks relatively unchanged quarter over quarter, actually came down just a little bit, just given the growth of the loan portfolio. I guess, the first question there is, what's the life of The life alone assumption for the consumer book under CECL.

Speaker 4

I will say a lot of my consumer books is pretty short dated in terms of duration. So Let's call it a year 2 years, thereabout.

Speaker 6

Okay. And is this the 3% level that you had for annualized charge offs in the consumer book. When I just kind of quickly look back at my model, it looked like to register Outside of a couple of quarters during COVID, this is the highest period for consumer credit losses that you all have had either from a dollar amount or from a NCO rate perspective. And so is this the kind of new level that we should expect to register to see here and if it is, if it's 2 years and we're talking about 3% of charge offs, Is there a case to be made that we need to walk the consumer reserve incrementally higher from here than where it actually is?

Speaker 4

You're asking a lot of questions, but I will say this. I mean, we'll go back to what I mentioned in our prepared remarks. Our outlook In terms of losses, we expect losses next year to be between 65 basis points to 85 basis points. A lot of the drivers in the losses are associated with our retail book. We expect normalization register continues in those portfolios, so we'll see.

Speaker 4

And we are close in terms of the losses that we experienced prior to the pandemic visavis the losses that we're experiencing As I also mentioned, we remain very positive for the outlook of our consumer books, given the strength of the economy and the liquidity of our clients.

Speaker 6

Got it. So is there anything specific going on that's causing the charge off rate to move to a level that's register Kind of at the high end, I guess, of what you would consider normal just given the strength of the economy and given the fact that employment is so

Speaker 4

I think as part of the conundrum that Carlos referred to, We have seen you have also seen banks in the U. S. Experience the same in terms of Given the face of a very strong economy, you're seeing consumer portfolios deteriorate. If you wanted me to speculate, I could say, I mean, there is potentially a couple of things. I will say the played out of inflation on higher rates register as having an impact in the cash flows of some of our customers that we might be leading to strategic defaults.

Speaker 4

And I mean, there is If you look at some of the analysis and studies done by some of the credit bureaus, there is something that relates they call FICO inflation, in which register After the pandemic, the FICO's of a lot of the consumers went up, and that also created an environment in which now FICO's

Speaker 2

Brody, one more thing. Yes, go

Speaker 3

ahead. Brody, you've heard Olivier before say that historically, our losses have gravitated in a range between 35 and 125 basis points. So the range of losses we're talking about, 65%, 35% is register It's sort of in the low end of that historic range. So I wouldn't characterize That range is a very high level of losses. It's the low end of our historic ranges.

Speaker 6

No. The commercial book

Speaker 3

and then

Speaker 6

the resi mortgage has been great for you guys. I was speaking more specifically, Carlos, to the consumer book Stand alone by itself. So thank you very much for taking my question, guys.

Speaker 4

Thank you, Bernie. You're welcome.

Operator

Our next question comes from Gerard Cassidy of RBC. Gerard, please go ahead.

Speaker 12

Good morning, everyone. This is Thomas Letty calling on behalf of Gerard. The commercial relationship in the PR commercial portfolio that you guys called out is driving the NPL inflows in the quarter. I think you said it was in the renewable energy sector. Is there any further color you can give us there?

Speaker 12

Are you guys keeping a closer eye on similar relationships?

Speaker 2

Yes. This is Ignacio. Lidio can answer in more detail, but really that case is idiosyncratic. I mean, the things that led to that problem have nothing to do with the industry in general. It's more internal to that client.

Speaker 4

We don't have any significant exposure in that industry either.

Speaker 12

Okay. Got it. That's helpful. And then just high level, given the positioning of the balance sheet today, you guys mentioned pretty rate neutral over the short term. What kind of an interest rate environment would be ideal for Popular over the next 12 to 24 months, both on the short and long end of the curve?

Speaker 3

That's a better question. The generic answer For us, a normal curve is the thing we wish for. Well, we're going to get a normal curve in the next 18 to 24 months, I don't know, Thomas. But generically, A normal curve will always make the business of banking easier.

Speaker 12

Okay, got it. Fair enough. Thank you for taking my questions and congratulations Carlos on your retirement.

Speaker 3

Thanks Dan. Thank you.

Operator

Our next question is a follow-up from Timur Braziler of Wells Fargo. Timur, please go ahead.

Speaker 5

Hi. Thanks for the follow-up. Just looking at capital repatriation, can you provide us an update or a reminder as to back from a timing standpoint in reengaging a buyback.

Speaker 3

Yes. I mentioned that the the second half of the year. Historically, we have done our stress test in the 3rd quarter, register And that has normally been an important part of our discussions. But I think we have also mentioned a number of times That we are rethinking how we manage our capital return activities. We've also mentioned that in all probability, we will gravitate to a format that's more similar to what other banks to, meaning that we will probably not be announcing a buyback and immediately doing an ASR, but rather be announcing an authorization register for a buyback to be executed over a period of time.

Speaker 3

That's the kind of changes we're talking about. In conjunction with those changes, we may also change other parts of how we do capital planning. So register Well, historically, our stress test in the Q3 have been an important contributor. Register Even that is something that we may change depending on things evolve. So it's all in the same planning process, Timur.

Speaker 3

Our best guess right now is that we will number 1, get the clarity we're looking for register in the three factors we mentioned, rates, economy and regulator by the summer and then that will allow us

Operator

With that, I'll hand back to Ignacio for closing remarks.

Speaker 2

Thank you everyone for joining us and for your questions. We look forward to updating you on our Q1 results in April, and

Speaker 12

We'll have

Speaker 2

a order leading the pack then. So thank you very much.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.

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