Popular Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to the Popular Incorporated Third Quarter Earnings Call. My name is Elliot, and I'll be coordinating your call today. I would now like to hand over to Paul Gardella, Investor Relations Officer at Copedar. 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 President and COO, Javier Ferrer our CFO, Jorge Garcia and our CRO, Lidio Soriano. They will review our results for the Q3 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, taxes 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 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. In the Q3, we achieved net income of $155,000,000 a decrease of $23,000,000 from the Q2. These results were primarily driven by a higher provision for credit losses, which was partly a result of loan growth at BBPR. Credit quality trends remained stable in the period. Net interest income increased by $4,000,000 compared to the 2nd quarter.

Speaker 2

While this was below what we had anticipated, it was largely a result of a $1,800,000,000 reduction in deposit levels at PPPR, which impacted the balance and mix of earning assets. That said, average retail customer deposit balances remain approximately 30% above pre pandemic levels, and we continue to add new deposit clients during the quarter. Going forward, we expect to continue to benefit from the repricing of our investment portfolio and loan originations. We achieved strong loan growth in the quarter with balances increasing by $603,000,000 or nearly 2%. BPR's loan portfolio grew by $583,000,000 primarily in the commercial segment, but reflecting growth across almost all lending categories.

Speaker 2

Popular Bank saw a $21,000,000 increase in loan balances driven by commercial loans. Our net interest margin expanded by 2 basis points to 3.24 percent, mainly driven by higher average loan balances and the repricing of loans and reinvestment of securities in a higher interest rate environment. This was partially offset by higher deposit costs and a lower average balance of investment securities. Operating expenses decreased by $2,000,000 to $467,000,000 During the quarter, we repurchased 600,000 of our shares for approximately $59,000,000 We continue to believe that our shares are attractive to repurchase at current prices. Tangible book value per share increased by 10% to $69.04 driven by lower unrealized losses in our investment portfolio.

Speaker 2

Please turn to Slide 4. Business activity in Puerto Rico remains solid as reflected in the favorable trends in total employment, consumer spending and other economic data. Consumer spending remained healthy. Combined credit and debit card sales for BPR customers increased by approximately 4% compared to the Q3 of 2023. Our auto loan and lease balances increased by $105,000,000 compared to the 2nd quarter as demand for new cars continue to be strong in Puerto Rico.

Speaker 2

Mortgage loan balances at BPPR increased by $104,000,000 in the 3rd quarter, driven primarily by home purchase activity and our existing strategy of retaining FHA loans in portfolio. 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 5% in the Q3 compared to the Q3 of 2023 and hotel occupancy continues to be healthy. There is a significant amount of committed federal funds that have yet to be dispersed. Disbursement of these funds will continue to support economic activities for several years.

Speaker 2

We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years. On that note, I turn the call over to Jorge for more details on our financial results.

Speaker 3

Thank you, Ignacio. Good morning and thank you all for joining the call today. Please turn to Slide 5. As Ignacio stated, we reported net income of $155,000,000 in the Q3, dollars 23,000,000 lower than the prior period's results. Net interest income increased by $4,000,000 This increase was below what we had expected.

Speaker 3

The lower NII was driven primarily by an anticipated decrease in deposits in Puerto Rico, which impacted the balance of higher yielding tax exempt T Bills in our investment portfolio. Ending customer deposit balances at BPPR, excluding Puerto Rico public deposits, decreased by $856,000,000 in ending balances and by approximately $1,000,000,000 in average balances during the quarter, primarily in low cost interest bearing deposit accounts. From the beginning of March and through most of the Q2, retail deposit balances in BBPR benefited from tax refunds of more than $1,200,000,000 During Q3, in addition to continued outflows of deposit balances, driven by rate seeking behavior among our commercial and affluent retail deposit customers, we also saw a significant increase in spending and use of these balances across our retail client base, reversing the increase in average deposit balances we saw in Q2. At quarter's end, average retail deposit balances at BBPR are still approximately 30% higher than pre pandemic levels, down from a peak of roughly 50% that we saw in Q2 2022. At the end of the Q3, Puerto Rico public deposits were 18,700,000,000 dollars down $1,000,000,000 compared to Q2 and slightly above the upper end of our year end guidance range.

Speaker 3

Average public deposit balances were higher during the quarter as the bulk of the reduction occurred on the last day of the quarter. Going forward, we expect public deposits to be in a range of $17,000,000,000 to $19,000,000,000 While we do not anticipate this level of contraction on our deposit balances, the benefits of investment repricing, stable non public deposit costs and loan growth in the quarter contributed to a $4,000,000 increase in net interest income despite the reduction in the investment portfolio. Our net interest margin expanded by 2 basis points on a GAAP basis driven by loan growth and by the repricing of loans and securities. NIM on a tax equivalent basis contracted by 1 basis point, primarily resulting from lower balances of tax exempt securities and higher levels of disallowed deposit expense. Loan growth was solid, increasing by $603,000,000 in the quarter, driven by activity at BPPR, where we saw increases across nearly all categories, led by commercial, lending, auto and mortgage originations.

Speaker 3

Non interest income was $164,000,000 a decrease of $2,000,000 from Q2, driven primarily by lower income from mortgage banking activities as a result of a decrease in the fair value of MSRs. We continue to expect non interest income to be approximately $160,000,000 $165,000,000 in Q4. We're pleased to see that credit metrics remain stable during the Q3. The provision for credit losses of $71,000,000 although $25,000,000 higher than the 2nd quarter, increased in part due to loan growth during the quarter in addition to charge off activity in the consumer loan portfolio. Total operating expenses were $467,000,000 or $2,000,000 lower than last quarter, driven by lower professional fees and reserves for operational losses, offset in part by higher technology costs related to our transformation efforts and higher personnel expenses due to annual merit increases.

Speaker 3

We expect total full year expenses of approximately $1,910,000,000 within the range of our original 2024 guidance of $1,89,000,000 to 1,950,000,000 dollars Our effective tax rate was 22% compared to 19% in the prior quarter driven by the lower tax exempt income. We now expect an effective tax rate for the year of 23% at the top end of our prior guidance range of 21% to 23%. Please turn to slide 6. During the quarter, we began to reinvest investment maturities in 2 to 3 year U. S.

Speaker 3

Treasury notes, buying approximately $1,100,000,000 at an average yield of 3.75 percent. We expect to continue this strategy as a way to hedge against lower rates. In BBPR, deposit costs increased by 6 basis points to 1.89%. The deposit cost at BBPR continued to be impacted by the proportion of public deposits to total deposits. As discussed last quarter, approximately $800,000,000 of low cost government related accounts managed by our Fiduciary Services Group were repriced during the last month of Q2 to market linked rates.

Speaker 3

The full effect of that adjustment is reflected in our Q3 deposit cost run rate and margin. At Popular Bank, deposit cost decreased by 8 basis points during the quarter. This change reflected a reduction in the cost of intercompany deposits. The underlying economic activity and demand for credit in Puerto Rico remains strong. In our U.

Speaker 3

S. Markets, we have begun to see a pickup in the demand for credit. As a result, we now expect consolidated loan growth in the Q4 of approximately 1%. This will result in total loan growth in 2024 of approximately 4% within the original 3% to 6% guidance range for the year. We anticipate 4th quarter NII will increase by approximately 1.5% to 2% compared to Q3, driven by continued reinvestment of securities and loan originations coupled with the beginning of the repricing of Puerto Rico public deposits and online deposits at Popular Bank.

Speaker 3

This will result in a year over year growth in 2024 NII of approximately 6% to 7%, below our previous 8% to 10% guidance. Additionally, we expect NIM expansion to reaccelerate in Q4 and continue into 2025. Our deposit mix and our ability to reduce the cost of deposits in the U. S. And the volume and cost of public deposits in Puerto Rico will continue to present the biggest risk to achieving the expected level of expansion in NIM.

Speaker 3

Please turn to Slide 7. Regulatory capital levels remain strong. Our CET1 ratio of 16.4 percent decreased by 6 basis points from Q2, mainly due to an increase in risk weighted assets. Tangible book value per share at the end of the quarter was $69.04 an increase of $6.33 per share from Q2, mostly resulting from the decreased AOCI and our quarterly net income, offset in part by dividends and stock repurchase activity during the quarter. During the last 2 months of the quarter, as part of the previously announced common stock repurchase authorization, we repurchased approximately 600,000 shares for roughly $59,000,000 or an average price of about $98 per share.

Speaker 3

Return on tangible common equity for the quarter was 10%, a reduction from the 11.8% last quarter, driven by the higher provision expense and higher effective tax rate. As we look forward to 2025, given a variety of drivers including the impact of the reduction in deposit balances experienced this year, the mix shift to higher cost deposits along with the limited loan growth year to date in the U. S, we no longer expect to achieve our target of 14% ROTCE by the end of Q4 2025. We now anticipate that we should be able to generate at least a 12% ROTCE in the Q4 of 2025. Longer term, we as a management team continue to be focused on achieving a sustainable 14% return on tangible common equity.

Speaker 3

We are confident that our transformation efforts, the repricing of our investment portfolio and loan demand in all of our markets will be important catalysts to achieve this target over time. With that, I turn the call over to Lidio.

Speaker 4

Thank you, Jorge, and good morning. Credit quality metrics remained stable during the Q3. The corporation's mortgage and commercial portfolios continue to reflect credit metrics significantly below pre pandemic levels. Consumer portfolios reflected increased delinquencies and net charge off driven by the auto loan portfolio. Delinquencies and net charge off in this portfolio have gradually increased, but remained slightly below pre pandemic levels.

Speaker 4

We are closely monitoring changes in the macroeconomic environment and on borrower performance, given higher interest rates and inflationary pressures. We believe that the improvements over recent years in risk management practices and the risk profile of the corporation loans portfolios positions Popular to continue to operate successfully under the current environment. Turning to Slide number 8. Non performing assets and non performing loans increased during the quarter driven by Popular Bank. NPLs in Popular Bank increased by $18,000,000 related to higher mortgage NPLs by $70,000,000 impacted by a single loan that reenter NPL status after becoming current in the 2nd quarter.

Speaker 4

NPLs in BBTR increased by $2,000,000 mainly driven by $9,000,000 increase in auto, partially offset by $6,000,000 reduction in mortgage and a $2,000,000 reduction in commercial. OREOs in BBPR decreased by $7,000,000 driven by sales of residential real estate properties. Interest of NPLs decreased by $7,000,000 In BBPR, the decrease was driven by mortgage. In Popular Bank, the $19,000,000 reduction in commercial was offset in part by the $17,000,000 mortgage loan that reenter NPL status. It is important to note that this residential property is well located as a loan to value below 50% and that we have no additional lending exposure to this client.

Speaker 4

The ratio of NPLs to total loans held in portfolio remained flat at 1%. Turning to Slide number 9. Net charge offs amounted to $59,000,000 or annualized 65 basis points of average loans held in portfolio compared to $54,000,000 or 61 basis points in the prior quarter. Net charge off in DBPR increased by $5,000,000 driven by higher consumer by $9,000,000 offsetting part by lower commercial and construction by 3,000,000 dollars In Popular Bank, net charge off remained flat quarter over quarter. Given the credit performance in the 1st 3 quarters of the year and our outlook for the Q4, we expect net charge off for the full year at the low end of our initial guidance of 65 to 35 basis points.

Speaker 4

Please turn to Slide number 10. The allowance of credit losses increased by $14,000,000 to $744,000,000 In BBPR, the ACL increased by $23,000,000 mainly due to a combination of growth in the commercial portfolios and changes in credit quality trends in the auto and credit cards portfolio. In Popular Bank, the ACL decreased by $8,000,000 mainly driven by lower reserve in the commercial and construction portfolios due to improvements in risk ratings. The corporation ratio of ACL to loans held in portfolio was 2.06% versus 2.05% in the prior quarter. The ratio of the ACL to NPLs was 206% compared to 214% in the previous quarter.

Speaker 4

The provision for credit losses was $73,000,000 compared to $44,000,000 in the prior quarter, reflecting higher balances, higher losses and changes in credit quality. In BBBR, the provision was $77,000,000 compared to $49,000,000 while in Popular Bank, the provision was a benefit of $4,000,000 similar to the prior quarter. To summarize, credit quality metrics remained stable during the Q3. 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.

Speaker 4

Thank you.

Speaker 2

Thank you, Lidio and Jorge for your updates. While the increase in revenues was lower than we anticipated, the underlying drivers of our business continue to be favorable as demonstrated by the progression of net interest income and margin, loan growth and stable credit trends. We are making headway in our business transformation with meaningful progress in modernizing our customer channels and improving the customer experience. We have streamlined the process of rolling out updates to our various customer facing applications. For example, our consumer digital banking application in Puerto Rico has improved the time to production of releases by 30% over the past 2 years.

Speaker 2

Additionally, we are increasing the personalization of our offering to provide customers the right solution at the right time and to the right channel to deepen our relationships with them. I am optimistic about our prospects for the remainder of the year and beyond. Business 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 are now ready to answer your questions.

Operator

Thank you. Our first question comes from Brett Rabatin with Hovde Group. Your line is open. Please go ahead.

Speaker 5

Hey, guys. Good morning. Wanted to start with the deposit trends on the retail side that you've discussed, in your prepared commentary. Was there just a, maybe not an all of a sudden move, but was there just a concerted move this quarter with maybe some activity? Can you talk a little bit more about what happened with how high net worth retail and clients were moving deposits, etcetera?

Speaker 5

I'm just trying to get a sense of where you think that might go from here.

Speaker 3

Sure, Brett. So when we look back last 7 or 8 quarters, what we have seen is a pretty consistent trend focused on our high net worth and corporate clients looking for yield enhancements. We've seen a lot of movement into our popular security subsidiary. It's pretty normal. This is consistent with what we have seen in the U.

Speaker 3

S. Is a restrictive monetary policy, people will move. What was new during this quarter and we have said SIPI money wakes up. We did see a little bit of an acceleration of more money moving out and into those higher yielding assets. But what surprised us was the level of expenditure across our retail network.

Speaker 3

As I mentioned in my prepared remarks, from the period of March through June, our retail clients received roughly $1,200,000,000 in refunds from their tax refunds in Puerto Rico. That was about $200,000,000 more than last year. Traditionally, that money stays longer and it circulates within our client base and structure. We did not see that. There's nothing to pinpoint.

Speaker 3

I think there when we look at the market, there's nothing to pinpoint of deposit moving within the banking system. It's really moving out. Expenditures, we have seen an increase in our debit card purchases, increases in the payment levels on credit cards. It's just the aggregate impact of everything. As we look through, as I mentioned, we have our average balances are about 30% higher than pre pandemic levels.

Speaker 3

We certainly would not expect at this stage people to go back to those levels. Obviously, a passage of time, people are making more money in Puerto Rico, etcetera. But we've tried to kind of size what do we think is at risk. It's very hard when you're talking about the broad based retail network, talking over 1,700,000 clients, you're talking about people's psychology, what they're doing. These are a little bit unprecedented times in terms of the amount of stimulus that Puerto Ricans have received through the pandemic and beyond.

Speaker 3

But we do believe our best estimate right now is that maybe there is still risk of somewhere in the $600,000,000 to $800,000,000 in our deposit base. But in terms of timing or ability, we are not sure. But we are very focused on this. The one other thing I would say, I mean, obviously, the NII, we've talked about NII being a catalyst of our growth both in terms of achieving our goals for this year and for next year. That hasn't changed.

Speaker 3

I mean, in terms of the dynamic, the repricing of the investment portfolio continues, loan origination and the repricing of our portfolio also continues. When we look at not ready to give you guidance for 2025, we will do that in more detail in January on our call. But I think at this stage, we would expect that at least in 2025, we would see that same level of growth of 7% or so that we are seeing this year in 2024. But we'll give you more information in January when we have a little more visibility and we see how the Q4 trends and our clients behave.

Speaker 5

Okay. That's really helpful. And then wanted to dive a little further into the expense growth guidance specifically for the Q4 with the full year at $1,910,000,000 which would intimate about $45,000,000 of growth in the Q4. Can you guys maybe talk about that? Is there some consulting going on into the end of the year?

Speaker 5

And I know you're probably not ready to give guidance for 25, but any early thoughts on how the 4th quarter levels might matriculate into next year?

Speaker 3

Yes. Brad, wanted to make sure that when we give the guidance of the $1,900,000 it's on a GAAP basis. I just want to make sure that you're looking at Okay. Yes, there's some FDIC related costs and

Speaker 4

I

Speaker 3

think we had some late penalties on the taxes in the Q1. I think those 2 are I think they combined to maybe like $22,000,000 $23,000,000 So I think

Speaker 6

the

Speaker 3

target probably

Speaker 7

Lower.

Speaker 3

Closer to $5,000,000 to $30,000,000 range rather than the $45,000,000 that you mentioned. It's still an increase.

Speaker 4

Okay.

Speaker 3

And to your question, yes, it is related in part to the efforts of transformation, professional fees, consulting related expenses, as well as seasonal expenses that occur every year towards the end of the year, local holiday spending promotions, donations and different things that if you look at our historical, the Q4 always tends to have an uptick in expenses. Of course, we're conscious of Of course, we're conscious of controlling costs, particularly given the NII missed this quarter and we'll do our best to control that. As far as next year, we'll provide you that guidance in January.

Speaker 4

Okay.

Speaker 5

If I can just follow-up on that, how much of the 4th quarter increase might be repeatable with an out that you could think about 25, I. E. The year end bonuses and Christmas?

Speaker 3

Yes. We'll give you guidance in January.

Speaker 5

Okay, fair enough.

Speaker 3

Same thing. But if you can look back, you see some seasonality in our expenses.

Speaker 5

Okay, fair enough. Appreciate all the color guys.

Speaker 4

Okay.

Operator

We now turn to Frank Schiraldi with Piper Sandler. Your line is open. Please go ahead.

Speaker 8

Good morning. Just wondering if you can Jorge, maybe talk a little bit about the ability to reprice deposits here, what you're seeing far given the 50 basis point cut in September. I'd imagine maybe just given some of the numbers you talk about is potentially being at risk on the deposit side maybe makes it a little bit more difficult to reduce costs. Just wondering if you could give us an update on thoughts of deposit betas really here, I guess, in the near term?

Speaker 3

Sure. So we like to think of that in different buckets. Let's first talk about the public deposits in Puerto Rico. Those as you know, our market linked to short term indexes. We don't disclose the indexes, but they're short term indexes and it's not tied to Fed funds.

Speaker 3

We're already seeing the benefits of that. Those are priced with a lag, but some of the short term index are maybe moving ahead of projected or expected movement by the Fed. So we're already seeing the benefit of that in the Q4 on the public deposits and we would expect that to continue. The second group is the retail and commercial network in Puerto Rico. As you know, we've had very low betas on the way up in Puerto Rico.

Speaker 3

We don't expect to see a lot of opportunities to move down, particularly in the early stages of movements. So that we don't we would expect that to have very low betas on the way down. And then you have the U. S. Deposits.

Speaker 3

They are both the direct online channel as well as the branch network. We have had high betas in both of those channels. We would expect and we have already begun to see reductions in both of those deposit sources. But those are a little bit more subject to market competitive dynamics. For example, I think in the online channel, we were able to bring down our savings accounts, I think, 30 basis points versus the Fed's move 50 basis points.

Speaker 3

We have seen competitors in this space actually increase rates in the last couple of weeks. So right now, we're pricing to maintain deposits. We're not pricing to grow. There is opportunity there and we'll be very focused. That's an area of opportunity for us.

Speaker 3

But given the competitive stand of the U. S. Franchise, any changes in liquidity in the marketplace or pricing by bigger banks or competitors could have an impact. But over time, there is an opportunity there.

Operator

Okay.

Speaker 8

And then just in terms of the updated the 12% ROTCE, I think you mentioned you're targeting now by the Q4 or in the Q4 of 2025. Does that continue to not benefit from any AOCI loss? Does that continue to exclude AOCI that ROTCE target?

Speaker 3

That is correct. That is the same calculation.

Speaker 9

Okay.

Speaker 8

And any thoughts on in terms of as you obviously the NII, reduction in NII expectations set you back a little bit in terms of getting to a higher return on tangible common equity. But any sort of updated thought on that 14% bogey

Speaker 3

in terms

Speaker 8

of timing or too early to say?

Speaker 3

It's early to say. I mean, I would say that number 1, as a management team, we're still focused on that 14%. The dynamics of Popular haven't changed in just 1 quarter. We still believe that the transformation efforts and management focus towards a determined target, albeit aspirational, is still there and important for us. I think it will take us longer.

Speaker 3

We're going to have to work a lot harder to get there, but we are focused on that. In terms of the 12% ROTCE, I think the simplest way I can describe it, I look at the Q2 results and the Q3 results. We took a step back in those ROTCEs. We're coming from a lower base. We want to get back to that growth in that level that we had anticipated before and work hard towards achieving that.

Speaker 8

And if I could just sneak in one last one. Just on in the past, I think you guys have done sort of the accelerated buyback route and so kind of harder to get a sense. But could you is there any would you say there's any seasonality to buyback activity here? Just trying to get a sense of what the quarterly run rate could look like going forward?

Speaker 3

So one thing I'll make sure listeners know we started the 3rd quarter's buyback in August. So really we're in the market for 2 months out of the quarter. We hope that over time you'll get to see a cadence of our activity. We obviously haven't given a timeframe on that authorization, but we intend to use it, but maintain the flexibility. Like our peers, we see peers change in terms of when they're in and out of the market, we just want to retain that flexibility.

Speaker 3

But at the end, we didn't put an authorization just as a benchmark for you, but for us to execute upon that. NII growth will still continue to be the driver to improve ROTCE. But as you know, obviously, now that we have an authorization, we it should contribute to improving that return from where we're at today.

Speaker 8

Okay. All right, great. Thank you.

Operator

Our next question comes from Kelly Motta with KBW. Your line is open. Please go ahead.

Speaker 9

Hi, Kelly.

Speaker 10

Hey, good morning. Thanks for the question. Maybe just a housekeeping item on expenses. I appreciate that you're guiding on a GAAP basis. Just want to clarify, does that include any OREO gains and losses in there?

Speaker 3

Sure. Yes, that's part of our expense base.

Speaker 10

Got it. And loan growth was really strong this quarter. As you look ahead, I'm interested in I appreciate 4% for the year. As you look ahead, wondering where you're seeing good opportunities, how you're seeing demand on the island for loans and if you expect an acceleration in that with the rates coming down?

Speaker 2

This is Ignacio. I mean, really, we demand in Puerto Rico, as you said, has been very strong and we didn't be able close a number of loans. I don't know if I would use the word accelerate, but I think it's going to continue to be strong. The pipeline looks good. Some of the loans are bulky, so it depends when we've closed them and what payoffs we have.

Speaker 2

But we're seeing good demand across the board, especially in commercial. We're seeing a lot of interest in investment in Puerto Rico, assets continue to trade. We're seeing people coming to the island. So we're very confident. I mean almost across all sectors are we seeing strong loan growth, especially in the commercial area.

Speaker 3

And one thing I would add, Kelly, is I mean that's Puerto Rico. In the U. S. This year, we've had no we went backwards, right? In the first two quarters, we went down.

Speaker 3

This quarter, we grew about $20,000,000 We are seeing a pickup in demand, credit demand in the U. S, in particular in construction and in community association lending in Florida in particular. I think that's an area where we might be able to see more acceleration certainly from the level this year. Part of that slow loan growth is what's affected our projections for next year and the change in the ROTCE guidance.

Speaker 2

I mean, the things in Puerto Rico continue to really steady growth. I mean, the numbers just came out for unemployment in September and the unemployment rate went down again from 5.7% to 5.5% and we added private sector jobs of 16,000 in the month. So that gives you sort of a benchmark of economic activity on the island.

Speaker 10

Got it. That's helpful. Maybe last one for me. I think in your prepared remarks, ex liquidity on the island remains high. You did have now 2 quarters of NIBs outflows.

Speaker 10

I'm wondering, is there any way that you're approaching the deposit base in terms of NIBs that could continue to be at risk? And how does that factor into your revised kind of NII profitability outlook from here?

Speaker 3

Yes. So, what I mentioned before is that looking at the average balances being around 30% higher than pre pandemic and seeing the behavior that we saw in this last quarter in particular with our retail clients, it's hard to predict. We think that our best guess right now is that you still have $600,000,000 to $800,000,000 possibly at risk from that base. And I don't in terms of timeline or anything, we don't have that and we certainly would expect that in the Q2 next year, we'll see the same cyclicality of tax refunds coming in at the same level. There's no reason to expect that they will be significantly different or lower.

Speaker 3

It's just whether the client behavior changes. We're not seeing people certainly the affluent and corporate clients, commercial clients have been consistent over the last 7 or 8 quarters in improving and enhancing their excess liquidity, using it for working capital or simply going for higher yield. We're not seeing necessarily a lot of clients in the mass affluent group moving to other banks or be competitive in terms of yield and cost. So it's really a matter of balancing client behavior with our offerings of deposit service and being strategic with our larger relationships to make sure that we retain those deposits.

Speaker 10

Got it. That's helpful. I'll step back. Thank you.

Operator

We now turn to Jared Shaw with Barclays. Your line is open. Please go ahead.

Speaker 11

Hi, thanks. Good morning. Good morning. I guess maybe just first on the new RoTE target. What capital level are you assuming to support that?

Speaker 11

Are you expecting to see capital be significantly lower or potentially lower? Or is it still grinding higher with that base?

Speaker 3

Yes. Jared, I mean, I think the NII continues to be the driver of increased profitability. That doesn't change with the change in the targets. I would again, we have a the authorization is out. We're executing upon that.

Speaker 3

We know that that's a lever certainly, but we want to make sure that what we're doing is sustainable and NII will continue to be the big driver. We haven't given that target number. We'll have to think about it and see if it helps in the future, but NII continues to be the driver.

Speaker 11

Okay. And then just shifting to credit, you look at charge off levels, they've been better than that longer term normalized range, call it 75 basis points to 125 basis points. Is this a new good long term level? Or is there a reason to think we should be we should expect to see credit costs and charge offs migrate back up higher?

Speaker 4

I will say certainly that in the short term that will not be the case. I mean we still see strong performance by our commercial mortgage portfolios with actually in the mortgage portfolio we're seeing negative charge offs for benefits. So I mean, I think in the short to medium term, probably not. In the long term, long term, we'll see.

Speaker 11

Okay. Thanks.

Operator

We now turn to Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

Speaker 9

Hi, good morning. Just going back to the NII guidance, tax equivalent NII declined in 3Q. The guide for 4th quarter, is that on a tax equivalent basis? Or is there going to be continued movement between the adjustment in tax equivalent and the tax rate there that might change the tax equivalent expectation versus the GAAP NII expectations?

Speaker 3

No. The guidance is GAAP. It's based on GAAP.

Speaker 4

But one of the drivers obviously

Speaker 3

we had lower tax exempt income because of the lower earning assets, Timur, but with the increase in the deposit costs in Puerto Rico that just essentially makes your tax exempt portfolio less efficient. That's why you had kind of this weird relationship between an expansion in the GAAP, in the name GAAP versus the tax effect effective GAAP.

Speaker 9

Okay. I mean, could we extrapolate that same level of increase in the tax equivalent NII for next quarter or not?

Speaker 3

Yes, I don't think of it that way. So I'd be giving you an answer without really having looked at it. What I would say is that we are anticipating the NIM to expand. I would expect that both the GAAP NIM and the tax affected NIM to expand as well.

Speaker 9

Okay. Thanks for that. And then just again on the deposits, any line of sight for public fund outflows in 4Q? I guess the decline that happened in 3Q, was there anything that maybe got pulled forward? And I guess to what extent do you need a stable deposit base in the Q4 in order to achieve that 4th quarter NII guide?

Speaker 3

Well, let me first say, we don't have a large in our guidance right now for the end of the year. We gave 17 to 19, sorry, 17 to 19. We're not anticipating anything large in the Q4. We had anticipated the Q3 payoff that was part of our we had visibility in that and why we had not increased the range in this when we announced in the second quarter. In the Q1, the government does have some geo payments and other disbursements that might impact the Q1, but right now, we're not expecting anything large.

Speaker 9

Okay. And then just last for me, trying to extrapolate consumer credit trends with the fact that consumers are starting to utilize more of their liquidity. How closely correlated are those 2? We've seen kind of consumer trough earlier in the year and now starting to tick a little higher and those delinquencies as some of that liquidity is being rolled off. Can you maybe provide us an update on where you see consumer credit peaking out here?

Speaker 4

Well, I mean, the way we look at the consumer outlook for it, I mean, we have a very strong market, a very strong unemployment market with, as Ignacio mentioned, unemployment at record low 5.5%. We also have consumers that still have a lot of liquidity, 30% above the liquidity that they have prior to the pandemic. So we are generally positive about the outlook for the consumer on a going forward basis. And also with rates coming down, I think that is also going to also be helpful for some of the outstanding debt that they may have, particularly in credit cards.

Speaker 9

Great. Thanks for the question.

Operator

Our next question comes from Ben Gurlinger with Citi. Your line is open. Please go ahead.

Speaker 4

Hey, good morning. Hi, good morning, Dan. Just wanted

Speaker 6

to clarify,

Speaker 8

in the prepared remarks, you said,

Speaker 6

if I caught it correctly, up at least 12% or should we kind of year market for 12%. I know it's a bit of a modeling and backing into it. I'm just trying to make sure that we're not expecting too low of expectations here.

Speaker 3

I did say at least 12%. At least, okay. That's the target.

Speaker 6

Got it. Okay. The cushion is to blow a little bit here. But when you think about credit,

Speaker 7

I know we just touched on

Speaker 6

it here with the last question. But I know in 2Q, you made initiatives kind of calling people within

Speaker 8

the consumer book a little bit faster

Speaker 6

and doing things behind the scenes. That's clearly showed an improvement in 2Q. 3Q seemed to show a little slippage and it's not like you guys are the only one in the other banks in Puerto Rico seem to have a similar component. But when you go forward here, is there any color you can provide on kind of marrying the 2 of like you just said, unemployment is lower wages are up. We're still seeing a little bit of slippage.

Speaker 6

Is it legacy FICO

Speaker 4

kind of working its way through

Speaker 6

the pipeline here or just any thoughts on credit?

Speaker 3

I mean, I think you did touch upon some of the things. We did see that deterioration in the second half of last year and we reacted by changing underwriting, collection efforts, etcetera. Some of that, as you said, is to pick through the pipes and it will take some time to get through and clear up. It's important that the U. S.

Speaker 3

Is also seeing strong unemployment numbers, strong consumer and they're seeing consumer losses as well. So it's not unique to us. We're still well below pre pandemic levels in some of our portfolios, particularly around delinquencies. I think where we see some of the noise in Puerto Rico, we do have some purchased portfolios that we bought from FinTechs in 2022 2021 2022. Those have higher losses than the Puerto Rico numbers.

Speaker 3

So that skews the number a little bit. If you want to get a sense, you can look at the losses in the consumer loan portfolio in PV and those losses are very similar. And you can kind of get a sense, I think there's about $100,000,000 in that portfolio. So that impacts those number. And then the other is the auto loans, they do tend to be a little bit more lumpy because you do have to do the recovery of those delinquent autos and repossess them and that can be lumpy in the numbers for charge offs.

Speaker 3

I don't know, Olivier?

Speaker 4

No, two things maybe to add to that. I would say first, when we're looking at things on a vintage basis, we see very strong performance by the recent vintages. So that is very encouraging from a going forward basis. We also see the trends in early delinquency also very positive. So notwithstanding the current performance, we think as we look into the future, things are headed in the right direction.

Speaker 6

Got you. And I know you're not going to give guidance on 2025 expenses yet, but I also do know that you're also doing behind the scene initiatives. Is any of that rolling off in 2025?

Speaker 3

No. I mean, I think the transformation effort, it will be ongoing. As we've said, we look at early on a slowdown in expense increases, not necessarily a recovery or reduction of expenses. But what we see is a lot of shifts, right? So maybe today, we're spending money in consultants and doing work while we're capitalizing software development.

Speaker 3

Next year, you might see reductions in consultants and then you pick up on depreciation and amortization of software, capitalized software. So it's a trend that kind of bounces out, but this transformation effort is going to take some time. It doesn't end in 2025.

Speaker 6

Got it. Okay. I got it. So nothing down, but the pace of increase probably slows. Okay, helpful.

Speaker 4

I appreciate it. Thank you.

Operator

We now turn to Jared Cassidy with RBC. Your line is open. Please go ahead.

Speaker 4

Good morning, gentlemen.

Speaker 12

Jorge, share with us Jorge, can you share with us, I think when I looked at your 2Q, 10Q, you guys in your asset sensitivity table indicated that you were asset sensitive that rise in rates would positively affect net interest income. And I noticed this quarter the investment portfolio duration extended out a little bit from the Q2. Are you currently asset sensitive still today? And then as the second part of the question is, and I'm not asking for 25 guidance, but if the forward interest rate curve is correct and we see the short end of the curve coming down possibly the 3.5% by the end of next year, would that be an added headwind for net interest income growth for you guys?

Speaker 3

So first, Jerry, I want to say, we are fairly neutral in our interest rate position, right? We measure that on a 12 month period. So I want to make sure that we highlight that. In terms of the quarter, we did start during this quarter, we bought about $1,100,000,000 in 2 to 3 year treasury notes both in Puerto Rico and in the U. S.

Speaker 3

Bank to try to mitigate any or hedge against rates coming down. So we're trying to become a little bit more liability sensitive. We expect to continue that, not necessarily adding more to it, but as new notes mature, reinvesting them in that 2 to 3 year period, trying to maintain a similar level of duration for the entire portfolio. And over time, that will help mitigate. Certainly, we all would like to see a normal sloping curve that would be very helpful to us and a higher for longer environment with the loan growth that we're seeing in Puerto Rico and certainly helps if you eventually get to reduce your funding costs.

Speaker 3

But given our position and the repricing of those that investment portfolio that today is underwater against the cost of public funds, we see that we still see a lot of tailwinds, positive tailwinds through the next few quarters, I think through 2026 for repricing and getting a lift from where we're at today to where those should reprice.

Speaker 12

Very good. Thank you. And then just to follow-up on the credit conversation we've been having on this call. The credit card portfolio, Slide 24, you give us very good detail on what's going on with delinquencies and charge offs. I'm curious, it seems odd that when I look at your FICO mix of originations, they steadily have increased from the pre COVID period to where we are today.

Speaker 12

But you point out in this slide that your delinquency levels as well as your charge offs as a percentage of the portfolio have risen above pre COVID levels. What's accounting for the disconnect of a high FICO score, but now you're seeing higher charge off and delinquency levels?

Speaker 4

In regards of credit cards, originations don't necessarily equate with outstanding balances. So because it takes time so it takes a little bit of time for it to build up. So the relations that you're seeing in the slide might coincide with a very small percentage of our total balance. So that explains why notwithstanding the fact that you're seeing improved significant improvement in the FICO, you are not seeing the same level of improvements in delinquency and charges.

Speaker 12

I see. And would that do you have a sense of the outstandings, not the originations, but where the FICO scores sit for the outstandings as of the Q3?

Speaker 4

We have that information. That is not something that we have publicly made available. We'll think about it and maybe provide that in the future.

Speaker 6

Okay. Thank you.

Speaker 3

I would also add, I mean, certainly when we look at pre pandemic, I mean, the current rate environment is fairly high, right? So I think that does have some impact too. And hopefully this is one portfolio that as rates start coming down, the borrower should see some very quick relief in terms of the level of payments, etcetera.

Speaker 12

Correct. Okay. Thank

Operator

We now turn to Samuel Bargo with UBS. Your line is open. Please go ahead.

Speaker 7

Good morning. I just wanted to go back to the public deposits for a minute. Given some of the short term rate moves, for example, like the 1 year treasury over the last few weeks, Is there an argument to be made that there's going to be some headwinds to repricing them down in 4Q?

Speaker 3

There's I mean, there's always basis risk internally. When we talk about being neutral, we talk about being neutral over a 12 month period. But bottom line that means that our assets and we have still a number of assets and liabilities that we price, right? There is a difference in basis. So there's always that risk.

Speaker 3

The risk is not always negative, right? The rates can get ahead of Fed movements and benefit. And we have assets that may be repricing based on prime versus liabilities, pricing based on different indexes. So that could create some noise. So I'm always hesitant to say that it's a headwind, that there is a timing difference.

Speaker 3

I mean these are priced on a lag, so that you always have the risk that the full effect will take longer. But we've also tried to stagger some of our T bills to account for some of these things and we try to manage to that. I think the issue and the hesitation is that it is $18,000,000,000 $19,000,000,000 portfolio. So 5, 10 basis points does make a difference there.

Speaker 11

Yes. Thank you for that.

Speaker 7

And then just wanted to go back to you talked through the different deposit channels and sort of the repricing opportunities. It sounds like you're happy to pay the rate to keep deposits sort of the non public deposits at least flat. Is that the right way to read it? Or could we see you get sort of aggressive enough to drive some deposit growth in the non public part of the base?

Speaker 2

Ignacio, I think we'd only get aggressive if we thought we were losing deposits to price competition. And I don't think that's the case. I mean, there is some price competition from U. S. Treasuries, but we can't raise deposit rates enough to compete with that.

Speaker 2

And in terms of regular deposits from our commercial competitors, we're not seeing that. So we're just seeing people either moving money to these other alternative investments or spending the money. So we don't think at this point it would be productive to raise rates. Now we will be like Hoda mentioned earlier in the call, we don't think we're going to be able to lower rates much either because we're starting from a low point.

Speaker 7

Understood. Thanks for taking my question.

Operator

This concludes our Q and A. I'll now hand back to Ignacio Alvaros, CEO, for any final remarks.

Speaker 2

Thanks again for joining us today and for your questions. We look forward to updating you on our 4th quarter results in January. Have a nice day.

Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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