Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: PlanMaestro on January 24, 2013, 10:22:27 AM

Title: BPOP - Banco Popular
Post by: PlanMaestro on January 24, 2013, 10:22:27 AM
It took me some time to get comfortable with the very weak Puerto Rican economy and a dilutive capital injection. But it looks like the credit indicators (NPLs, NPAs, 30-89) are finally starting to relent and capital ratios are improving.

http://finance.yahoo.com/news/popular-inc-reports-net-income-130000110.html

Dominant position in Puerto Rico facing a weakened competition after the crisis. Already profitable with a PTPP probably in the $760 million range (too many one-offs), that could make it a 1.3-1.4% ROA bank in a more normal environment.

At 0.7x TBV and 3x PTPP it's very cheap.

Common equity per share    $39.35
Tangible common book value per common share (non-GAAP)    $32.55
Tangible common equity to tangible assets (non-GAAP)       9.38%   
Title: Re: BPOP - Banco Popular
Post by: constructive on January 24, 2013, 10:35:35 AM
How much PR bonds do they hold? What will be the effect on BPOP if PR is downgraded to junk?

http://www.bloomberg.com/news/2012-12-17/puerto-rico-facing-junk-has-worst-year-since-08-muni-credit.html
Title: Re: BPOP - Banco Popular
Post by: PlanMaestro on January 24, 2013, 10:53:10 AM
How much PR bonds do they hold? What will be the effect on BPOP if PR is downgraded to junk?

http://www.bloomberg.com/news/2012-12-17/puerto-rico-facing-junk-has-worst-year-since-08-muni-credit.html

On August 8, 2011, Moody’s Investors Service downgraded the rating of the outstanding general obligation (GO) bonds of the Commonwealth of Puerto Rico from ‘A3’ to ‘Baa1’, with negative outlook. Moody’s new Baa1 rating is at par with Fitch’s BBB+ and one notch above the BBB rating Puerto Rico received from S&P last March when the latter upgraded Puerto Rico’s credit rating for the first time in 28 years.

At December 31, 2011, the Corporation had $1.3 billion of credit facilities granted to or guaranteed by the Puerto Rico Government and its political subdivisions, of which $0.1 billion were uncommitted lines of credit. Of these total credit facilities granted, $1.2 billion were outstanding at December 31, 2011. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities.

Furthermore, at December 31, 2011, the Corporation had outstanding $158 million in obligations of Puerto Rico, States and political subdivisions as part of its investment securities portfolio. Of that total, $154 million was exposed to the creditworthiness of the Puerto Rico Government and its municipalities.
Title: Re: BPOP - Banco Popular
Post by: PlanMaestro on January 24, 2013, 10:58:01 AM
Investors presentation: http://www.snl.com/Cache/1500045935.PDF?D=&O=PDF&IID=100165&Y=&T=&FID=1500045935

Check EVERTEC the transaction processing subsidiary: 48.5% stake carried at $74 million; $24 million cash dividend; adjusted EBITDA first 9 months 2012 $117.8 million.
Title: Re: BPOP - Banco Popular
Post by: constructive on January 24, 2013, 12:34:18 PM
Sounds pretty good.

Kasper Gutman is short BPOP, you may want to check out his stuff.

http://stableboyselections.com/2012/11/30/its-up-to-the-ratings-agencies-whether-puerto-rico-will-fail-its-really-that-simple/

Despite the limited risk from PR downgrade, I wouldn't want to be holding a large position when a downgrade hits, since that seems like a predictable negative catalyst.
Title: Re: BPOP - Banco Popular
Post by: PlanMaestro on January 24, 2013, 01:10:18 PM
Thanks. Hey I wasn't long, but to be short BPOP at those prices? Not a good idea.

Sounds pretty good.

Kasper Gutman is short BPOP, you may want to check out his stuff.

http://stableboyselections.com/2012/11/30/its-up-to-the-ratings-agencies-whether-puerto-rico-will-fail-its-really-that-simple/

Despite the limited risk from PR downgrade, I wouldn't want to be holding a large position when a downgrade hits, since that seems like a predictable negative catalyst.
Title: Re: BPOP - Banco Popular
Post by: luck on February 16, 2013, 10:39:49 AM
interesting idea and interesting article. just noticed that stableboy/kasper is already at -50% on his short in a few months and second curve, paulson, and valinor all seem to be betting against him per the just released 13f's.
Title: Re: BPOP - Banco Popular
Post by: PlanMaestro on April 09, 2013, 05:11:37 PM
Evertec is selling about 21.1m shares, or 26.5 per cent of the company, at a price range of $18-$20.
Title: Re: BPOP - Banco Popular
Post by: muscleman on October 16, 2013, 09:56:58 AM
It took me some time to get comfortable with the very weak Puerto Rican economy and a dilutive capital injection. But it looks like the credit indicators (NPLs, NPAs, 30-89) are finally starting to relent and capital ratios are improving.

http://finance.yahoo.com/news/popular-inc-reports-net-income-130000110.html

Dominant position in Puerto Rico facing a weakened competition after the crisis. Already profitable with a PTPP probably in the $760 million range (too many one-offs), that could make it a 1.3-1.4% ROA bank in a more normal environment.

At 0.7x TBV and 3x PTPP it's very cheap.

Common equity per share    $39.35
Tangible common book value per common share (non-GAAP)    $32.55
Tangible common equity to tangible assets (non-GAAP)       9.38%

Hi Plan,
    I am looking at this bank right now. It seems to me that as they aggressively get rid of the NPA, the PPTP is dropping as well. If we use the PPTP of the Q2 2013 data multiplied by 4, the one year PPTP would be around 590 million, which makes the current price/PPTP ratio to be around 4.1, which is less cheap than a few months ago.
   So at current price, maybe it is a potential 2x? The other way to measure the upside is to use its current total asset multiplied by your expected 1.3% ROA. Then we get to 480million per year net income in a normalized environment. Am I missing something here? :P
   I can't find any valuable info regarding its TARP, except one slide of its presentation saying that the TARP has been dealt in a way that is most shareholder friendly. Do you have any info?


Thanks!
MM
Title: Re: BPOP - Banco Popular
Post by: muscleman on November 30, 2013, 10:51:36 AM
I have acquired a 10% stake in BPOP around $26. I have been following PlanMaestro for a few years and he almost always give decent picks on bank stocks. ;D
Title: Re: BPOP - Banco Popular
Post by: muscleman on January 23, 2014, 09:00:00 AM
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9721219-5370-138380&type=sect&TabIndex=2&companyid=1012&ppu=%252fdefault.aspx%253fsym%253dBPOP

2013 Q4 is out. Not bad! Incoming bad loan decreased 42% YoY. That is the single most important factor I care about.
Title: Re: BPOP - Banco Popular
Post by: constructive on January 23, 2014, 10:24:51 AM
muscleman, are you also familiar with GTS?

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gts-triple-s-management/
Title: Re: BPOP - Banco Popular
Post by: rpadebet on February 25, 2014, 07:58:53 PM
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9721219-5370-138380&type=sect&TabIndex=2&companyid=1012&ppu=%252fdefault.aspx%253fsym%253dBPOP

2013 Q4 is out. Not bad! Incoming bad loan decreased 42% YoY. That is the single most important factor I care about.

Muscleman, what do you think about their TARP repayment and how they will do it (if approved)?

If I read their recent Q correctly, they have to repay about 1 billion of Tarp debt carried on their books at about $590 mill ($411 million un-amortized discount). When they repay, they say they will incur a $411 million non cash charge due to this discount i.e. tangible book value will be reduced by about $4 if they do it.

Secondary concern is they don't have the cash at the holding company to repay $1 bill of this debt. They either have to issue new debt ( which is not counted as capital and has to be approved by the regulators) or they have to dilute the existing shareholders by issuing new equity. On the Sep 13 analyst call they said they have about 400 mill at the holding company and if we assume they can use all of that to repay TARP (big assumption), they have to issue debt or equity of up to $600 million more. If it is equity, that is almost a 20% dilution.

Added to that there is the Puerto Rican economy which has to withstand the new taxes and lower spending in future by the govt. According the management they have 2 bill of excess capital, but I don't see how the fed would approve repayment of the bailout given the economic situation of the island especially using funds from newly issued debt.

Lower NPL's are a lagging indicator. What is to say 3-6 months from now they wont get worse given the new economic austerity on the island. How do you get comfortable with all this?
Title: Re: BPOP - Banco Popular
Post by: muscleman on February 25, 2014, 10:02:51 PM
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9721219-5370-138380&type=sect&TabIndex=2&companyid=1012&ppu=%252fdefault.aspx%253fsym%253dBPOP

2013 Q4 is out. Not bad! Incoming bad loan decreased 42% YoY. That is the single most important factor I care about.

Muscleman, what do you think about their TARP repayment and how they will do it (if approved)?

If I read their recent Q correctly, they have to repay about 1 billion of Tarp debt carried on their books at about $590 mill ($411 million un-amortized discount). When they repay, they say they will incur a $411 million non cash charge due to this discount i.e. tangible book value will be reduced by about $4 if they do it.

Secondary concern is they don't have the cash at the holding company to repay $1 bill of this debt. They either have to issue new debt ( which is not counted as capital and has to be approved by the regulators) or they have to dilute the existing shareholders by issuing new equity. On the Sep 13 analyst call they said they have about 400 mill at the holding company and if we assume they can use all of that to repay TARP (big assumption), they have to issue debt or equity of up to $600 million more. If it is equity, that is almost a 20% dilution.

Added to that there is the Puerto Rican economy which has to withstand the new taxes and lower spending in future by the govt. According the management they have 2 bill of excess capital, but I don't see how the fed would approve repayment of the bailout given the economic situation of the island especially using funds from newly issued debt.

Lower NPL's are a lagging indicator. What is to say 3-6 months from now they wont get worse given the new economic austerity on the island. How do you get comfortable with all this?

First of all, it is not mandatory to repay the TARP. I have tracked other banks like FCZA, which would raise 6% preferred equity to pay TARP.
It is not like debt, which is due on a specific date. It is just that after a specific date, the interest will jump from 5 to 9%. But given the strong capital ratios in the subsidiary, can't they move money to the parent company to pay it off?

Second, you have to look at how they survived through 2008 crisis. The current PR "crisis" is nothing compared to the scale of 2008.

The reasons that you listed are all valid, and I think that is exactly why the stock is cheap.
Title: Re: BPOP - Banco Popular
Post by: rpadebet on February 26, 2014, 07:14:53 AM
Maybe I worded it wrongly, they don't have to repay TARP, but I think they said they recently applied to repay. So I guess they want to repay in the short term. Any idea when the rate resets? Wouldn't it be good to wait until the last moment given the credit issues with PR issuers?

Regarding shifting capital, it isn't clear how they plan to do that. I initially though they can sell some of their marketable securities, but then there might be issues with liquidity coverage ratios. Not sure where they are with that.

Other possibility (which I kind of prefer), is they should raise their deposit interest rates a little bit to attract some more deposits. This gives them the liquidity and they can replace the 5% capital with 60 bps deposit. Fed would like it as well because deposits are considered stable funding. But from their call, it seems they want to reduce deposit funding costs further (I don't get the logic behind this).

Possibility of equity dilution is what makes me uncomfortable here. Chances seem slim because of statements management has made ("repayments will be done in a shareholder friendly way"), but from some of my other investments I have learnt not to trust management words completely.

EVERTEC and that investment in the bank in Dominican republic are attractive and maybe they offset the overstatement of T.Book Value due to the TARP notes.
Title: Re: BPOP - Banco Popular
Post by: muscleman on February 26, 2014, 08:34:18 AM
Maybe I worded it wrongly, they don't have to repay TARP, but I think they said they recently applied to repay. So I guess they want to repay in the short term. Any idea when the rate resets? Wouldn't it be good to wait until the last moment given the credit issues with PR issuers?

Regarding shifting capital, it isn't clear how they plan to do that. I initially though they can sell some of their marketable securities, but then there might be issues with liquidity coverage ratios. Not sure where they are with that.

Other possibility (which I kind of prefer), is they should raise their deposit interest rates a little bit to attract some more deposits. This gives them the liquidity and they can replace the 5% capital with 60 bps deposit. Fed would like it as well because deposits are considered stable funding. But from their call, it seems they want to reduce deposit funding costs further (I don't get the logic behind this).

Possibility of equity dilution is what makes me uncomfortable here. Chances seem slim because of statements management has made ("repayments will be done in a shareholder friendly way"), but from some of my other investments I have learnt not to trust management words completely.

EVERTEC and that investment in the bank in Dominican republic are attractive and maybe they offset the overstatement of T.Book Value due to the TARP notes.

If the conditions are stressful, it is likely that management's promise not to dilute shareholders can easily break. But right now I don't think that is the case here. BPOP's cap ratio is very strong.

The way to get comfortable is to view it through a variety of scenarios and ask yourself which scenario's probability is which. I think right now your eye is glued to the much less likely scenario that makes you uncomfortable, and that makes you ignore all the other scenarios. :)
Title: Re: BPOP - Banco Popular
Post by: rpadebet on February 26, 2014, 09:41:19 AM
Well I don't usually get comfortable with investments which don't make me uncomfortable initially. Otherwise there is no answer to the question "why am I the rare one able to spot the great deal!"

A chance to buy a well capitalized bank at significantly below tangible book is rare nowadays (maybe Citi is the only other one). That and the possibility of near term catalysts like tarp repayment, followed by dividend increases and/or buybacks got me excited.  But I was trying to find/imagine scenarios in which it could get killed. Seems like in the low probability bear case here we get diluted by 20% in the near term and then we can hope to see a ramp back to TBV. In the worst case there is dilution and the PR economy really falters worse than 2008, but there is some comfort in the fact that we have a decently well capitalized bank here and a permanent loss of investment is a very very low probability.

Btw, midcap regional banks, which is where I would consider this to be, as a group are now trading at close to 2x 2013 TBV and 14.5x 2015 PE. So there is potentially significant upside from here if things normalize.

So tip toeing in ahead of the CCAR.
Title: Re: BPOP - Banco Popular
Post by: xtreeq on April 02, 2014, 08:38:59 AM
BTIG - Popular, Inc.: Initiating Coverage
http://www.btigresearch.com/wp-content/uploads/2014/03/Popular-Inc.-Initiation.pdf
Title: Re: BPOP - Banco Popular
Post by: greenwave on May 31, 2014, 11:23:17 AM
Maybe I worded it wrongly, they don't have to repay TARP, but I think they said they recently applied to repay. So I guess they want to repay in the short term. Any idea when the rate resets? Wouldn't it be good to wait until the last moment given the credit issues with PR issuers?

Regarding shifting capital, it isn't clear how they plan to do that. I initially though they can sell some of their marketable securities, but then there might be issues with liquidity coverage ratios. Not sure where they are with that.

Other possibility (which I kind of prefer), is they should raise their deposit interest rates a little bit to attract some more deposits. This gives them the liquidity and they can replace the 5% capital with 60 bps deposit. Fed would like it as well because deposits are considered stable funding. But from their call, it seems they want to reduce deposit funding costs further (I don't get the logic behind this).

Possibility of equity dilution is what makes me uncomfortable here. Chances seem slim because of statements management has made ("repayments will be done in a shareholder friendly way"), but from some of my other investments I have learnt not to trust management words completely.

EVERTEC and that investment in the bank in Dominican republic are attractive and maybe they offset the overstatement of T.Book Value due to the TARP notes.

If the conditions are stressful, it is likely that management's promise not to dilute shareholders can easily break. But right now I don't think that is the case here. BPOP's cap ratio is very strong.

The way to get comfortable is to view it through a variety of scenarios and ask yourself which scenario's probability is which. I think right now your eye is glued to the much less likely scenario that makes you uncomfortable, and that makes you ignore all the other scenarios. :)

-----------
********************************************
Banco Popular-Doral deal in the works
Edition: May 29, 2014 | Volume: 42 | No: 20

In behind-the-scenes efforts to not allow Doral Bank to go under, the Treasury Department has been working with Banco Popular to see how to save the day. The Federal Deposit Insurance Corp., which already lost some $5 billion in Puerto Rico in the last rash of closings and takeovers, is apparently not interested in helping this time around. So, the deal said to be in the works would have Banco Popular purchase a great deal of Doral's good and toxic assets, in return for which Treasury would honor a deal signed with Doral in 2005 (long before the 2011 one Treasury isn't recognizing), whereby the $300-plus million so-called tax credit could be used by Popular against future earnings.
********************************************

Any of you BPOP followers know if the above information dated May 29,2014 may be  accurate ? 

Thank you,

greenwave
Title: Re: BPOP - Banco Popular
Post by: PlanMaestro on May 31, 2014, 12:03:30 PM
Doral is a walking dead, and only BPOP and FBP are in conditions to carry a deal with the above conditions. Sounds close enough.
Title: Re: BPOP - Banco Popular
Post by: rpadebet on July 03, 2014, 06:46:14 AM
TARP repaid with newly issued debt.
I would still like for them to increase the deposit rates a bit to attract more stable funding and get rid of this debt.