Puerto Rico's biggest bank finds ways to grow as island population shrinks

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Under the toughest of conditions in Puerto Rico — including a mass exodus of residents following a devastating hurricane last year — the island’s biggest bank has found ways to expand.

Profits at Popular surged in the third quarter compared with results issued a year earlier, shortly after Hurricane Maria ripped through the island. Steady loan growth and a lower provision for loan losses were the primary reasons for the improvement.

Perhaps more telling about the company’s post-storm recovery — and its future profitability — are the growth pockets it has found within a shrinking economy.

According to data from the San Juan airport, roughly 180,000 residents left Puerto Rico in the year after the storm. Roughly a third of those residents have returned since power was restored, Ignacio Alvarez, Popular’s president and CEO, said during a conference call with analysts Wednesday.

In the face of the outmigration, though, Popular has added scores of new customer accounts — 55,000 to be exact. Asked about the influx, Alvarez said his $47.9 billion-asset company has simply gained share as some of its local competitors closed branches after the storm.

“Some of our competitors have abandoned some of the markets we’re in, and closed some of the branches.” Alvarez said, though he did not point to other companies by name. “Normally, when you close branches and we remain, we pick up customers.”

Alvarez, who said the company only has anecdotal explanations for the uptick, also said that the number of people on Puerto Rico who have more than one bank account has increased. Additionally, he said, the federal government encouraged residents to accept federal aid money through an official bank account.

Overall deposits rose 16% from a year earlier to $39.6 billion.

Popular has grown in other ways since the storm. Most notably, it completed its acquisition of a $1.6 billion-asset auto loan portfolio from Wells Fargo in August. The addition of the portfolio added $12 million to the company’s net income and scores of new customers.

Alvarez said the company has come a long way in the past year.

“At the time of our earnings call last October, approximately 70% of Puerto Rico was still without power. Many schools and businesses remained closed, and we were all working tirelessly to stabilize the situation,” Alvarez said during the call. “While saddened by the loss of life and massive property damage that affected so many people, we are extremely proud of how we recovered despite these many obstacles.”

Popular reported profits of $140.7 million, compared with $20 million in the third quarter of 2017.

A lower provision was the driving factor behind the results. The company set aside $54.4 million for problem loans during the quarter, down from $157.7 million a year earlier.

Net interest income climbed 19% to $451.5 million, while total loans increased 12% to $25.9 billion thanks in part to the auto acquisition.

Alvarez said key economic metrics, such as debit and credit card activity, have returned to normal. Other indicators, such as auto originations and even commercial cement sales — an indicator of construction activity — are also trending positively, he said.

“September 2017 was an anomaly, as the island was literally in the dark and out of business for a significant part of the month,” Alvarez said.

Still, Popular has taken a financial hit from the storm. Net charge-offs within the company’s Puerto Rico operations increased 30% to $58.8 million due to problem loans in its consumer and mortgage loan portfolios. The company attributed the increase partly to the end of a yearlong moratorium on foreclosures by federal agencies.

Overall, the charge-off ratio within the company’s Puerto Rico operations climbed 19 basis points to 1.24%.

In the months ahead, Puerto Rico expects to rely on its mainland U.S. operations in New York and Florida to drive loan growth, executives said.

Additionally, the company has embarked on a number of initiatives to reduce deposits costs, including the launch late last year of a private wealth division.

Popular’s mainland U.S. operations, which focus largely on commercial lending, account for roughly 20% of its total assets, according to the Federal Deposit Insurance Corp.

“We’re growing our loan book, also, but we’re growing it prudently,” Alvarez said. “We’re not doing anything crazy, so we’d rather grow slower, but prudently.”

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