Puerto Rico's Popular (Nasdaq: BPOP) is getting ready to face a tougher 2008 given an ongoing recession in the island which may even lead to hedging some assets in order to protect its balance sheet, CFO Jorge Junquera told BNamericas.
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Popular saw first quarter net income drop 12.9% to US$103mn compared to the year-ago quarter, or US$0.36 earnings per share.
Junquera said the quarterly figure was "a good number" for Popular, although one-time gains totaled approximately 90% of pretax earnings. Popular used a substantial portion of this to bolster reserves and strengthen capital ratios.
Popular set aside US$168mn as a provision for bad loans in 1Q08, an US$71.9mn increase from the year-ago quarter.
Junquera said the strengthening of the bank's balance sheet will likely lead to lower provision expenses for the remainder of the year.
"We've been doing a number of things to improve our financial profile," Junquera said, adding the bank will keep looking for ways to extend the maturity of assets and shorten liabilities given recent interest rate cuts.
"Hedging would allow us to fix asset rates and offset lower yields as they mature," Junquera said, declining to give more details.
The latest quarter included a one-time gain of US$49.3mn on the sale of shares in credit card processor Visa (NYSE: V), which went public in March.
LOWER US SUBPRIME EXPOSURE
Since launching its restructuring plan in early 2007, Popular has been reducing its exposure to subprime mortgages and other US areas where returns have been weak, and focused on its Puerto Rican banking operations.
In January, Popular completed the sale of a significant portion of its US consumer finance loan portfolio to American General Finance for approximately US$1.48bn.
The move - coupled with an asset recharacterization and the adoption of accounting rule FASB number 159 to the remaining Popular Financial Holdings (PFH) US subprime portfolio - allowed Popular to lower its US subprime mortgage exposure to US$3bn from US$6.3bn in September 2007.
Popular will mark-to-market the remaining PFH subprime portfolio every quarter. Junquera said that if the economy and credit situation in Puerto Rico keeps worsening, it may lead to a negative markdown on these assets in June.
The sale to American General Finance will also allow Popular to pay a US$1.2bn senior debt coming due this year - US$525mn in May and US$625mn in October.
Popular recently announced a US$350mn preferred stock issuance, which will likely ease the holding company's liquidity needs for this year.
However, a weakening liquidity profile for next year led Moody's to change Popular's ratings outlook to negative from stable earlier this week.
HUNGRY FOR R&G?
Popular is believed to be after some of the assets of ailing Puerto Rican bank R&G Financial Corporation (R&G).
Last month, R&G decided to suspend dividends on its preferred stock and defer interest payments on its trust preferred securities as it "continues to explore strategic options."
While Junquera declined to comment on the matter, he said the bank will keep looking for ways to grow in Puerto Rico despite the island's tough economic situation.
If going shopping, market observers believe that in order to avoid local antitrust issues Popular would end up splitting R&G's assets with fellow banks Oriental Financial Group (NYSE: OFG) and Doral (NYSE: DRL).
Popular offers retail and commercial banking services in Puerto Rico and the US mainland. Local banking subsidiary Banco Popular de Puerto Rico has US$24.7bn assets and is the largest player on the island in terms of loans and deposits.
San Juan-based Popular reported total assets of US$41.8bn as of March 31.
