Popular, Inc. (BPOP) Business Profile

What it does

Popular, Inc. is a financial holding company headquartered in Hato Rey, Puerto Rico. Javier Ferrer-Fernández is its president and chief executive officer. Its principal banking businesses serve consumers and commercial customers in Puerto Rico, the mainland United States and the U.S. and British Virgin Islands.

Banco Popular de Puerto Rico provides banking services in Puerto Rico, including deposits, commercial loans, mortgages and consumer credit. Its consumer lending includes personal loans, credit cards and automobile loans. The bank also offers automobile financing through dealerships. Businesses can borrow for working capital, equipment and other projects, or obtain financing secured by commercial real estate.

Popular Bank, a New York-chartered subsidiary, operates branches in New York, New Jersey and Florida. Banco Popular also provides loans and deposits to retail and commercial customers in the Virgin Islands and conducts commercial banking in New York. The company has broker-dealer and investment adviser subsidiaries, as well as subsidiaries involved in insurance activities.

Popular accepts deposits and lends to customers, earning revenue from its loan portfolio. It also provides services that generate fees, including card, asset management and insurance services. Substantially all deposits at its two banking subsidiaries are insured up to applicable limits by the Federal Deposit Insurance Corporation’s Deposit Insurance Fund.

How it makes money

Popular’s principal source of revenue is its loan portfolio. It lends to businesses and households, while taking deposits through its banks. Interest earned on loans and investments, less interest expense on deposits and other funding, contributes to net interest income. That income changes as assets and deposits are repriced and as their balances change.

Commercial lending includes loans and leases for business operations, working capital and equipment. Popular also finances income-producing and owner-occupied commercial properties, multifamily buildings and construction projects. Residential mortgages finance home purchases and refinancing; consumer loans include unsecured personal loans, credit cards and auto loans. Banco Popular’s lease financing is primarily automobile loans and leases made through dealerships.

Popular also earns noninterest income from fee-generating activities. These include debit and credit cards, asset management and insurance. Its broker-dealer and investment adviser subsidiaries operate alongside its banks. Deposit gathering includes branch banking and online platforms that gather insured institutional deposits.

Net interest income increased in the first quarter as fixed-rate assets repriced, investment balances rose and deposit costs fell at both banks.

Popular competes on pricing, branch convenience, delivery methods, product range and service. Competition can put pressure on the rates it charges on loans and pays on deposits.

Customers and how it sells

Popular serves individual and business customers through Banco Popular de Puerto Rico and Popular Bank. Consumer products include deposits, mortgages, personal loans, credit cards and auto financing. Commercial customers borrow for operations, equipment, real estate and construction. In the U.S. and British Virgin Islands, Banco Popular offers loans and deposits to retail and commercial customers.

Puerto Rico is the center of the business. Banco Popular’s banking operations are primarily based there. Popular Bank has branches in New York, New Jersey and Florida; Banco Popular also conducts commercial banking in New York.

Customers can use physical branches and digital services. Popular gathers insured institutional deposits through online platforms and offers automobile financing through dealerships. Its Mi Banco app includes a merchant marketplace that gives retail customers access to offers and enables businesses to reach potential customers.

Apart from exposure to the Puerto Rico and U.S. governments, Popular does not consider any individual account or group of related accounts material to its total assets, deposits or overall business.

Suppliers and costs

As a bank, Popular funds its activities in part through deposits. The interest it pays on those deposits is a cost of earning net interest income. Deposit costs fell at both banks in the first quarter, including through lower pricing on Puerto Rico public deposits and lower online savings and time-deposit costs at Popular Bank.

Operating expenses include personnel, technology and software, professional fees and business promotion. Expenses declined from the preceding quarter, partly because personnel costs were lower, while technology and software expenses increased as the company continued to invest in transformation.

The banking subsidiaries also pay deposit insurance assessments to the FDIC. For larger institutions such as Banco Popular and Popular Bank, the assessment methodology considers measures intended to capture the probability of failure and its potential impact on the insurance fund.

Popular invests in its physical network, digital capabilities and technology. It uses credit policies, underwriting procedures and loan monitoring to manage lending risk, and it records provisions for credit losses.

Competitive position

Popular competes with banks and credit unions in Puerto Rico, as well as specialized financial businesses. Credit unions, locally known as cooperativas, provide consumer services and have fewer regulatory constraints and a lower cost structure. Nonbank businesses also offer financial services, including through electronic and internet-based channels. Popular faces competition from institutions outside Puerto Rico as technology and e-commerce reduce geographic barriers.

On the mainland, Popular operates in markets that include New York City, northern New Jersey and greater Miami. Those markets have community, regional and national banks. Popular competes for business on pricing, branch convenience, delivery methods, product range and service. No individual competitor is named in the available competition discussion.

Banco Popular has a retail banking franchise in Puerto Rico. Popular also combines a physical network with digital services, including the Mi Banco merchant marketplace. It offers products for both consumers and businesses, and its marketplace connects those groups.

Our reading: The Puerto Rico retail franchise and breadth of services give Popular a meaningful competitive position, although the available evidence does not establish how durable that advantage is. Our reading: Digital and branch access can support customer relationships, but nonbanks and outside institutions can also reach customers through digital channels.

Growth opportunities

Popular is investing in technology, digital capabilities and business processes as part of a multi-year transformation. Its stated aims include making services more accessible, personalizing customer interactions and creating more agile processes. The company has worked on modernizing channels and its physical network, and it implemented a cloud-based enterprise resource planning platform.

Popular recently launched a marketplace within Mi Banco. The service gives retail customers access to merchant offers and helps businesses reach potential customers. It also launched corporate credit cards and a financial program for doctors, dentists and veterinarians. These initiatives sit alongside its retail and commercial banking activities.

In the first quarter, mortgage and commercial balances at Banco Popular grew modestly, while auto-lending trends were weaker. Popular expects consolidated loan growth to be at the low end of its original range, reflecting slower demand in consumer and auto lending.

Popular expects net interest income growth at the upper end of its guidance range, citing deposit trends in Puerto Rico. It also expects to continue investing in people and technology while seeking expense efficiencies.

Structural risks

• Puerto Rico concentration. A significant portion of Popular’s business is concentrated in Puerto Rico, making its results dependent on the island’s economy and particularly its residential and commercial real estate markets. Economic weakness, unemployment and other changes in local conditions can affect customers and the bank.
• Credit and real estate. Popular’s loan portfolio includes real estate-related loans. Borrowers may experience financial difficulties, and commercial real estate repayment can depend on property cash flows, sales or refinancing.
• Rates and funding. Deposit costs and balances affect Popular’s net interest income. The company’s margin also depends on deposit mix and the repricing of public deposits, which is influenced by short-term rates.
• Competition. Banks, credit unions and nonbank providers compete for deposits and lending. Popular could have to pay higher deposit rates or charge lower loan rates, adversely affecting profitability. Technology has also reduced geographic barriers for outside competitors.
• Regulation and capital. Popular and its banks are subject to supervision, deposit insurance assessments and capital requirements. Restrictions can limit dividends from bank subsidiaries, while changes in laws or regulations could affect the business.
• Oil and commodities. Popular is monitoring geopolitical developments because sustained higher oil and commodity prices could affect its customers.

Bottom line

Our reading

Our reading: Popular is a deposit-funded bank whose Puerto Rico retail franchise and range of consumer and commercial services support its business, while tying much of its performance to the island’s economy. Its loan book, deposit pricing and competitive pressures matter to profitability, and the company is investing in digital services alongside its physical network.