Los Angeles-based financial research firm B Riley gave Popular Inc. a cautious pat on the back this week, saying the banking institution has “solidified its capital base, and it appears to be turning the corner on asset quality,” following several years of substantial losses.
In a report released Wednesday, B Riley’s Chief Financial Analyst Joe Gladue offered his insight on the bank’s status following investor meetings this week revealing that Popular Inc. has gotten asset quality under control, but is still struggling to achieve “sustained profitability” and earn back its cost of capital.
“The company is solidly profitable in Puerto Rico, despite the enduring recession. Management believes that in a more normal environment, profitability in Puerto Rico could reach 1.30 percent return on average assets (ROAA) and 18 percent return on average equity (ROAE). Both of these measures are well in excess of expected industry norms,” Gladue said.
In his analysis, Gladue concluded that Popular Inc. is well on its way toward taking advantage of its acquisition of approximately $9.39 billion of Westernbank’s failed assets last year, with which it will use “to make a return to sustained profitability.”
“The Federal Deposit Insurance Corp.-assisted Westernbank acquisition continues to perform better than originally anticipated,” he said.
Nevertheless, he said pressures such as a weak local economy continue to play upon Popular Inc.’s asset quality, while its problems on the U.S. mainland are waning. Banco Popular North America has pretty much completed its restructuring process, through which it scaled back operations by selling off assets. However, future expansions are still viable, under the right conditions, Gladue offered.
“Popular may eventually consider making acquisitions in the U.S. market. Such acquisitions could be as large as $5 billion in assets, but the company could also complete several smaller purchases that provide a similar level of assets,” Gladue said. “Management is determined that it will remain disciplined and focused on improving profitability in any such acquisitions, rather than just growing assets.”
If any assets are picked up, they would likely be along the U.S. eastern seaboard, B Riley said.
In his analysis, Gladue also touched upon two other issues Popular Inc. still needs to address — its debt with the U.S. government and the $500 million bad loan portfolio it unsuccessfully tried to sell earlier this year — to move its finances forward.
“The collapse of negotiations for the sale of a pool of roughly $500 million of nonperforming Puerto Rico … loans in May was unfortunate, but the parties could not agree to mutually satisfying terms. Popular will continue to attempt to sell these loans, most likely in smaller pieces,” the analyst predicted.
Meanwhile, Popular Inc. has yet to repay the U.S. Department of Treasury the $950 million it received through the Troubled Assets Relief Program in November 2008. The bank has said it is looking to repay that debt with its earnings, rather than by issuing additional common stock.