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American Banker

Why Is Popular Stuck In Neutral? Answers Vary

By Matthias Rieker

April 28, 2004
Copyright © 2004 Thomson Media Inc. All rights reserved.

American Banker
Vol. 169, No. 81

CHARLOTTE -- Until mid-January shares of Popular Inc. had risen steadily for more than a year, but they have since lagged the stellar performance of other banking companies, in Puerto Rico and elsewhere.

Both analysts and the San Juan company's executives have expressed some puzzlement at the stock's performance, citing its strong fundamentals. (This month Popular reported double-digit profit growth for the first quarter and earnings per share that beat analyst estimates by a nickel.)

"I am not aware of any fundamental reason" for the stock's worsening performance," said Claus W. Hirsch, an analyst at Corinthian Partners LLC in New York. Popular's fundamentals are improving, particularly credit quality.

But Popular has fared worse than bank stocks overall. The $38.1 billion-asset company's stock has fallen 7.8% this year, while the American Banker index of 225 banks, including Popular and other Puerto Rican banking companies, has risen 0.8%.

And other Puerto Rican companies have done better than Popular. Doral Financial Corp., for example, has risen 4.5% so far this year, while Oriental Financial Group Inc. has risen 12.9% and R&G Financial Corp has risen 11.2%.

However, of the Puerto Rican banking companies, Popular has the most exposure to the mainland U.S. market, which accounts for a third of its assets.

A bid to expand in the mainland United States, including through acquisitions, could be part of the stock's problem, according to Jorge A. Junquera, Popular's chief financial officer.

On March 19 it unveiled a $345 million cash deal for Quaker City Bancorp Inc. of Whittier, Calif. Shares of companies that investors perceive as acquirers have been weak since the recent M&A wave erupted in the fall, though Popular's stock did not move much immediately after it announced its deal.

Mr. Junquera defended the Quaker City deal. It was not cheap, but it also was not "not as pricey as other institutions have paid for recent acquisitions," he said.

Bain Slack, a Keefe, Bruyette & Woods Inc. analyst, wrote in an e-mail Tuesday, "Banco Popular's management has been very vocal about increasing their exposure to the U.S. mainland via acquisitions, which may spook investors, but this fear is overblown.

"I still think the company is unknown to a lot of investors," Mr. Slack wrote. "More U.S. mainland exposure will help them."

But Popular's exposure to the U.S. mortgage market could be another factor in the stock's lack of momentum. Many mortgage lender stocks have underperformed, because a combination of reduced mortgage originations and rising interest rates traditionally make the stocks less attractive.

Washington Mutual Inc.'s stock, for example, is more in line with Popular's. Wamu rose earlier this year when mortgage rates were falling, but since March 1 it has retreated 9.8%.

In particular, Popular's subprime lending could be a concern for investors, according to Joseph Gladue, an analyst at Cohen Brothers & Co. of Philadelphia.

Doral and R&G are both large mortgage lenders, but mainly in Puerto Rico. And many observers say that market is more stable than the one in the mainland United States, because Puerto Rico's population is growing more quickly and demands more housing.

However, Mr. Junquera says that only half of Popular's $14 billion of mainland U.S. loans are residential mortgages. At the end of the first quarter its total loan book was $23 billion.

So far diversifying into the mainland United States has been good for Popular, and it plans further expansion there, he said.

Mr. Junquera also blames broad market forces for the stock's decline. Many bank stocks have been under pressure lately, because of investors' fear that rising interest rates could hurt earnings. That fear has persisted, despite statements to the contrary from bankers, analysts, and some fund managers. Popular's stock rose 0.1% Tuesday.

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