What a time to take over as CEO of the biggest bank based in Puerto Rico.
The San Juan-based company has mostly protected itself from direct losses, having scaled back for years on government debt. Puerto Rico on Wednesday filed for the largest-ever local-government bankruptcy, unable to repay roughly $70 billion in debt.
Still, Popular faces the daunting prospect of diminished growth on its home turf over the long term. As Puerto Rico has struggled with a steady outmigration from the island and a poverty rate of over 45%, Popular has depended on its U.S. operations in New York and South Florida for asset growth.
How the bankruptcy process plays out from here is somewhat unclear — but Alvarez predicts that looming cuts to government services and benefits could be painful for his retail and commercial customers. He said he is confident, however, that his company will have a role to play in eventually spurring economic growth, such as by arranging financing for highways and other infrastructure projects.
Carrion and Alvarez spoke candidly about the debt crisis, a recent protest that turned violent outside the company's headquarters, succession planning and the long-term outlook for Popular in an interview with American Banker. Here is an edited transcript.
What does Title III bankruptcy mean for Popular — and for the banking sector?
RICHARD CARRION: Bear in mind that we have hardly any central government debt, so in that sense it does not impact us. The impact may be more indirect. What will these negotiations do to the Puerto Rico economy? That’s what concerns us. The debt will need to be renegotiated. Budgets will need to be balanced and, as we’ve said, in the short term that will be a negative impact on the economy when you reduce government expenses.
On the other hand, we do see some opportunities such as public-private partnerships where we could see more investment coming in. Ultimately that’s going to be the area where we could get growth.
IGNACIO ALVAREZ: As Richard said, we only have approximately $15 million in [sales-tax financing] securities that are subject to the procedure right now. Obviously we’re going to be prudent. Once you file for Title III — like in most bankruptcylike proceedings — the court will have the ability to void certain contracts, and obviously restructure the debt. So we need to be careful how that may affect our clients.
Where will the Puerto Rico economy be five years from now?
CARRION: As [Yogi Berra] said, It’s tough to make predictions, but particularly about the future. We’ve said all along that Puerto Rico’s future depends on three things: One is obviously that the fiscal imbalance that exists and has to be brought into balance. Secondly the debt will have to be restructured, and that will be a painful process, but there is a framework under Title III.
The third and probably most important leg of the stool will be economic growth. Unless we can reverse the outmigration trend, unless we can get money, investments and people to come back into the island, the first two are not enough to hold up the stool.
ALVAREZ: If you take a look at Detroit, it took about 18 months to go through the process. You could argue that ours is more complex, but on the other hand there’s been a lot of negotiation pre-Title III, so it’s not as if they’re starting from zero.
So, I think as Richard said, the key to Puerto Rico is investment, and the key to investment is certainty and stability. I think for Puerto Rico, the sooner we get an idea of what the grand bargain is going to be — like with Detroit, it was very controversial, people screamed and yelled. But when they cut the deal, and really pretty quickly you began to see things improve in Detroit.
So I think we’re in for a lot of yelling and screaming, and very painful actions, and a lot of pain will be inflicted, both on unions, on pension holders, on bondholders. But at the end of the day, I think once people know what the grand bargain is, then we can move forward and accelerate the investment, which we need for the growth.
Was Popular affected by the May Day protests in San Juan?
ALVAREZ: Yes, we were the victim of some vandalism. More than 22 windows were destroyed.
Wow, at 22 branches?
ALVAREZ: No, at our main offices. The May Day protest was all restricted to the financial district.
ALVAREZ: You know, generally it started as a peaceful demonstration, where a number of unions were involved. Near the end a group of people who were wearing masks became violent. They started throwing rocks and stones with slingshots, cherry bombs, and basically damaged what had been an otherwise peaceful demonstration. So that was very distressing for us.
What does it say about the sentiment on the island?
ALVAREZ: This Title III is going to be, like I said, don’t underestimate it. There’s going to be a lot of pain in terms of health care benefits. [The federal control board] is talking about very large cuts to the public university. They are cutting marginal benefits of the public employees. There’s a lot of angst, and there’s a lot of uncertainty where it’s all going to end. This is just beginning, so people are concerned.
CARRION: And understandably so. You hear a lot of people in the states and the more conservative jurisdictions complaining about the cuts to bondholders, who may suffer. But there’s going to be a lot of cuts here in education, health and other things.
Mr. Alvarez, what will be at the top of your agenda for the first year?
ALVAREZ: Well, I think that the interesting thing about this job is that I’ve been the president and chief operating officer now for three years, so it’s not like I’m going to come in and radically change what we’re doing. The [Puerto Rican] market is not growing, but we have been able to grow in certain segments — we’re growing in deposits, we’re growing in automobiles. Obviously the states will be an area of business growth.
What kind of technology investments does Popular have in the pipeline?
ALVAREZ: We’re making technology investments in a number of different areas. We have a platform in the States called Eloan, which used to be primarily an online mortgage lender. Then we evolved it more to a deposit-gathering platform. We’re now changing it.
We’re going to be partnering with a fintech company to allow us to offer personal loans on an online basis across the United States, and later other deposit products.
Which fintech company?
ALVAREZ: I’m not sure we’re at liberty to say that, but when we announce it, we’ll tell you who the company is.
When will you announce it?
ALVAREZ: it will happen in the summer, so we should be in a position to announce something before July.
On the separation of the chairman and CEO roles — does the company intend that to be a permanent separation?
CARRION: We’ll see how that goes. … We’ve traditionally been an organization where the chairman and CEO are one in the same, but we’ll transition to something different. I’ve been CEO for 27 years, so I don’t exactly qualify as an independent chairman. We will keep — and this is important to mention — we will keep the lead independent director role.
Quote"So I think we’re in for a lot of yelling and screaming and very painful actions," incoming CEO Ignacio Alvarez says in describing the economic fallout in Puerto Rico that Popular will have to deal with.
Are there any opportunities for acquisitions within Puerto Rico?
CARRION: Given our market share, I think it would be very difficult to do an acquisition. We would focus on lines of business, different lines of business. We are not the No. 1 player in insurance, so we would either pursue organic growth there, or pursue acquisitions along the lines.
ALVAREZ: One of the things we’ve done successfully in Puerto Rico is, every few years, we’ve identified portfolios of assets we’ve been able to buy from other institutions that for one reason or another are exiting that line of business. So we’ll keep an eye on that as we go forward.
What have some of those portfolios been?
ALVAREZ: Primarily residential mortgage loans.
Last year Popular launched a credit card that can be used in Cuba. What are the growth prospects there?
CARRION: I think there’s more sizzle than steak in that one. It’s something that we’ve looked at for a long time, and Ignacio and I have visited Cuba in the past couple of years, but it will ultimately depend on the State Department and U.S.-Cuba relations.
I think it’s something that we’ll look at, it’s something that we see long-term for us, but I don’t think it’s anything that will move the needle anytime soon. I don’t think much will happen there until the administration’s position on U.S.-Cuba relations is clear.
ALVAREZ: And the only thing that’s predictable about the U.S.-Cuba relationship is that it’s unpredictable.
CARRION: That’s a good one.
Mr. Alvarez, are you seeking any advice from your predecessor before you start your new role as CEO?
ALVAREZ: One of the excellent things about this transition is Richard has been an iconic leader of Popular. He’s been here forever. We’re doing an orderly transition and he’s going to be around. … Richard and I, we talk constantly. We even share a drink and a cigar once in a while, and I will continue looking forward to those. I think we have a good relationship, and with the transition, I think it will work well.