Attached files
| file | filename |
|---|---|
| 8-K - 8-K - POPULAR, INC. | d941480d8k.htm |
| EX-99.1 - EX-99.1 - POPULAR, INC. | d941480dex991.htm |
 2015 Annual Stress Test Disclosure
Dodd-Frank Act Stress Test Results
Supervisory Severely Adverse Scenario
June 2015 Exhibit 99.2 |
 Forward-Looking Statements
1 The information contained in this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties that may cause the Corporation's actual results to differ materially from any future results expressed or implied by such forward-looking statements. Other than to the extent required by applicable law, the Corporation undertakes no obligation to publicly update or revise any forward-looking statement. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2014 and other SEC reports for a discussion of those factors that could impact our future results. |
 Index 2 2015 Supervisory Severely Adverse Scenario Results 3 Page Risk Methodologies 8 Macro-Economic
Scenario
13 |
 Overview 3 Popular, Inc. (“Popular” or the “Corporation”) is the leading financial services provider in Puerto Rico (“PR”) and ranks among the 50 largest bank holding companies by assets in the United States (“U.S.”), with consolidated assets of $35.6 billion as of March 31, 2015. Popular operates 234 branches across its principal markets, Puerto Rico, the U.S. mainland and the Virgin Islands. In Puerto Rico, Popular provides retail, commercial, and mortgage banking services through its principal banking subsidiary Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, investment banking, broker-dealer, and insurance services through specialized subsidiaries. BPPR represented approximately 80% of the Corporation’s total assets as of March 31, 2015. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”) under the trade name of Popular Community Bank (“PCB”). Currently, PCB operates in New York, New Jersey, and South Florida, providing a broad range of financial services and products. According to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as a bank holding company and a state member bank with average total assets of between $10 billion and $50 billion, Popular and BPPR are required to submit an annual company-run stress test (“DFAST”) based on certain hypothetical economic scenarios (in addition to Puerto Rico specific economic scenarios developed internally). The DFAST is meant as a process to assess the potential impact of hypothetical macro-economic and financial market scenarios on the consolidated earnings, losses, and capital of the organization over a defined planning horizon. The DFAST requires nine-quarter forecasted results under a base, adverse, and severely adverse economic scenarios, starting in the fourth quarter of 2014 and extending through the fourth quarter of 2016. These hypothetical scenarios are prescribed by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Under the Federal Reserve’s regulations implementing the stress testing requirements of the Dodd-Frank Act, bank holding companies such as the Corporation must assume a standard set of capital actions over the forecast horizon. Accordingly, the Corporation includes as the only capital action during the nine-quarter planning horizon, the continuation of the current practice of paying regular dividends on outstanding preferred stock amounting to $3.7 million annually. These dividends are currently funded through new stock issuance under the Corporation’s savings and investment plans. These assumed capital actions may not represent the actual capital actions that may be taken under severely adverse conditions or specific capital actions the Corporation may have requested as part of its capital plan. The 2015 DFAST results also do not include approximately $1.7 billion in loans acquired and $2.2 billion in deposits assumed from the FDIC as receiver of Doral Bank on February 27, 2015. Federal Reserve regulation requires the disclosure of summary stress test results under the Federal Reserve’s Supervisory Severely Adverse Scenario. The disclosure in this presentation, including projections of our financial results and condition, are not intended to be our forecast of expected future economic or financial conditions or our forecast of the Corporation’s or BPPR’s expected future financial results or condition, but rather reflect possible results under the prescribed hypothetical, severely adverse scenario. Our future financial results and condition will be influenced by actual economic and financial conditions and various other factors as described in our reports filed with the Securities and Exchange Commission and available at www.sec.gov. |
 Capital and RWA Projections (Severely Adverse Scenario)
4 Projected stressed capital ratios Projected risk-weighted assets ¹
1 Projected risk weighted assets were calculated using Basel I risk weightings for 2014 and the Basel III standardized approach from
2015 through 2016. 2
Popular risk weighted assets at Q3 2014 include discontinued assets pertaining to BPNA’s California Region. These assets were sold during Q4 2014 and excluded from the analysis for the subsequent quarters. 1 Common equity tier 1 ("CET 1") capital ratio for Q3 2014 reflects the tier 1 common capital ratio calculated by Popular
considering Basel I criteria. Popular was not subject to the Basel III CET 1 ratio for Q3 2014 and Q4 2014. 2 Ratios for Q1 2015 through Q4 2016 are based on Basel III regulatory framework.
3 Lowest level during the nine-quarter planning period. Q4 2016 Lowest Level 3 Common Equity Tier 1 Capital ¹
14.7% 11.4% 11.4% 6.5% Tier 1 Risk-Based Capital 16.9% 11.4% 11.4% 8.0% Total Risk-Based Capital 18.1% 14.5% 14.5% 10.0% Tier 1 Leverage 11.1% 8.9% 8.9% 5.0% 15.1% 11.9% 11.9% 6.5% Tier 1 Risk-Based Capital 15.1% 11.9% 11.9% 8.0% Total Risk-Based Capital 16.4% 13.1% 13.1% 10.0% Tier 1 Leverage 10.3% 9.2% 9.2% 5.0% Severely Adverse Capital Ratios 2 Regulatory Well Capitalized Minimums Actual Q3 2014 Popular, Inc. 2 22,414 22,918 BPPR 17,616 19,072 Actual Q3 2014 (Basel I) Projected Q4 2016 (Basel III) (in millions) Common Equity Tier 1 Capital ¹ |
 Profit & Loss Projections (Severely Adverse Scenario)
5 Nine-quarter cumulative provision for loan and lease losses, PPNR, and net income (Q4 2014-Q4 2016)
Nine-quarter cumulative projected loan losses (Q4 2014-Q4 2016)
Total Losses
$2,209 10.4% $2,005 11.3% (in millions) Popular, Inc. 9-Qtr Cumulative Loss Cumulative Portfolio Loss Rate BPPR 9-Qtr Cumulative Loss Cumulative Portfolio Loss Rate 1 Average assets is the nine-quarter average of total assets (from Q4 2014 through Q4 2016).
2 Pre-provision net revenue includes losses from operational-risk events, mortgage repurchase expenses, and other real estate owned
(“OREO”) costs. Note: Projections included above are not intended to be our forecast of expected future economic or financial conditions or our forecast of the
Corporation’s or BPPR’s expected future financial results or condition, but rather reflect possible results under the hypothetical, severely adverse scenario prescribed by the Federal Reserve. Percent of average assets Pre-Provision Net Revenue (PPNR) 2 $1,026 3.3% Loan Loss Provision 1,988 Realized Gains (Losses) on Securities (31) Income Tax Benefit (289) Net Income / (Loss) ($704) -2.2% Pre-Provision Net Revenue (PPNR) 2 $1,106 4.3% Loan Loss Provision 1,753 Realized Gains (Losses) on Securities (27) Income Tax Benefit (298) Net Income / (Loss) ($376) -1.5% (in millions) 9-Qtr Cumulative Impact 1 |
 14.74% 14.74% 15.98% 11.73% 11.39% 11.40% 1.24% 4.54% -8.79% -0.33% 0% 5% 10% 15% 20% 25% Q3 2014 Basel 1 Tier 1 Common BASEL III Impact PPNR Provision Other Q4 2016 Basel III CET 1 2015 DFAST Pro Forma Capital Ratio Key Drivers 1 Dotted lines represent minimum well capitalized ratio requirement. 2 Basel III Impact represents the effect of the initial adoption of Basel III in Q1 2015.
3 Reduction is mainly due to the effect of Basel III threshold deductions and higher risk weighted assets after Q1 2015.
6 Popular, Inc. CET1 ratio under Supervisory Severely Adverse Scenario Popular, Inc. Tier 1 leverage ratio under Supervisory Severely Adverse Scenario 11.14% 11.14% 11.43% 8.28% 8.28% 8.87% 0.29% 3.36% -6.50% 0.58% 0% 5% 10% 15% 20% 25% Q3 2014 BASEL III Impact PPNR Provision Other Q4 2016 6.5%
1 5.0%
1 BPPR CET1 ratio under Supervisory Severely Adverse Scenario 15.10% 15.10% 16.56% 13.12% 11.86% 11.85% 1.46% 5.89% -9.34% -1.26% 0% 5% 10% 15% 20% 25% Q3 2014 Basel 1 Tier 1 Common BASEL III Impact PPNR Provision Other Q4 2016 Basel III CET 1 6.5% 1 BPPR Tier 1 leverage ratio under Supervisory Severely Adverse Scenario 10.33% 10.33% 11.97% 9.40% 9.21% 9.21% 1.64% 4.40% -6.97% -0.19% 0% 5% 10% 15% 20% 25% Q3 2014 BASEL III Impact PPNR Provision Other Q4 2016 5.0%
1 2 2 2 2 3 |
 Index 7 2015 Supervisory Severely Adverse Scenario Results 3 Page Risk Methodologies 8 Macro-Economic
Scenario
13 |
 Key
Risks Captured in Stress Test Projections 8
Credit Risk Potential for default or loss resulting from an obligor’s failure to meet the terms of any contract with the Corporation or
any of its subsidiaries, or failure otherwise to perform as
agreed. Credit risk arises from all activities where success
depends on counterparty, issuer, or borrower performance.
Interest Rate Risk
Interest rate risk is the risk to earnings or capital arising from changes in
interest rates. Interest rate risk arises from differences
between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across
the spectrum of maturities (yield curve risk); and from interest related
options embedded in bank products (options risk).
Market Risk Potential for loss resulting from changes in market prices of the assets or liabilities in the Corporation’s or in any of
its subsidiaries’ portfolios.
Liquidity Risk Potential for loss resulting from the Corporation or its subsidiaries not being able to meet their cash payment
obligations as they come due. This could be a result of market conditions, the
ability of the Corporation to liquidate assets or manage various
funding sources. Operational Risk
Possibility that inadequate or failed systems and internal controls or
procedures, human error, fraud or external influences such as
disasters, can cause loss. It includes the risk for those processes that have been outsourced to third parties, and for the inadequate use of models. Compliance and Legal Risk Potential for loss resulting from violations of or non-conformance with laws, rules, regulations, prescribed practices,
existing contracts or ethical standards.
Strategic Risk Potential for loss arising from adverse business decisions or improper implementation of business decisions. Also, it
incorporates how management analyzes external factors that impact the
strategic direction of the Corporation, and incorporate such
emerging risks within its strategies. Reputational Risk
Potential for loss arising from negative public opinion.
|
 Model and Risk Components Captured in Stress Test
9 Key risks captured Model components Capital (Earnings) 1 Credit 2 Revenue and expense fluctuations generated by business activities. Risks captured include: •Interest
risk •Market risk •Liquidity
risk •Operational risk •Compliance and Legal
risk •Reputational risk •Pre-provision
net revenue model (“PPNR”) for loans,
deposits, expense and income categories. •Other than temporary impairments (“OTTI”) on Available for Sale and Held to Maturity securities, mark to market losses related to the Trading portfolio, potential losses on equity investments, OREO related expenses, and HFS re-valuation write-downs. •Operational losses
model Credit risks impacted by:
•Probability
of default •Loan transition to different delinquency status •Loss given default
•Commitment
utilization •Credit models
(Projections of net charge-offs, reserves, and non-performing loan balances) |
 Model and Risk Components Captured in Stress Test
10 1 Risks embedded in earnings – Gains/losses on securities, Trading securities, Equity investments, OREO, HFS loans losses
Purpose Estimated future impairment and/or valuation losses impacting the capital base for other assets positions (i.e., non- loan portfolio) under a specified macro-economic scenario. Methodology •Stressed OTTI write-downs due to credit losses are estimated at the security-level based on lifetime expected losses in
security cash flows assuming rating downgrades based on the
applicable macro-economic scenario. • Non-US Agency
trading securities are modeled for potential mark-to-market (“MTM”) losses due to widening of market spreads under the Federal Reserve’s macro-economic stressed scenario of BBB corporate spreads. Quarterly projected MTM losses/gains due to stressed credit spreads are calculated based on duration approximation. •OREO balances are calculated based on average life assumptions and estimated re-valuation write-downs. Existing OREOs are
modeled for future depreciation of foreclosed asset values under
the stress scenario. OREO operational expense is forecasted as a ratio of the OREO balance. •SPVs and joint ventures equity loss is calculated by applying a property value depreciation percent to the assets owned by the
entity. In the case of joint ventures, Popular’s capital
base is impacted by its share of the underlying loss.
•Strategic equity investments equity pickup forecast deterioration are
mainly driven by historical stress factors and other model assumptions, taking into consideration Popular’s equity participation. Risks embedded in earnings – PPNR Purpose PPNR Model provides forecast of net interest income, non interest income and expenses by correlating macro-economic variables and
interest rates with historical business activity
data. Methodology
• Net interest income is estimated for each scenario taking into
consideration the contractual maturities and combining them with loan growth, deposit balances, and pricing forecasts based on each macro-economic scenario.
• Assumptions for loan growth, pricing, deposit balances, non-interest income, and non-interest expense are determined using a
bottom-up modeling framework constructed based on historical
performance. This model captures critical products/categories and projects them into the future based on a correlation of macro-economic factors under the specified economic scenarios. Results are subject to review and approval by
management. •The modeling approach has been implemented for
the different deposit, loan, fee and expense categories considering the current size of the balance sheet or income statement item, granularity of data on specific drivers and data availability. |
 Model and Risk Components Captured in Stress Test
11 1 Credit risk model Purpose Provide the projection of future credit losses, charge-offs and ALLL based on the level of the Corporation’s exposure to credit
risk within the loan portfolio.
Methodology •A variety of models are used to project losses on loans. Estimated losses are a function of many factors, including historical
performance, the forecasted economic scenarios, current credit
characteristics, and credit quality ratings.
•Losses
from the accruing loan portfolio are projected at the loan level using an expected loss modeling framework, where future charge-offs are estimated as a function of quarterly probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). Econometric statistical techniques were used to determine and estimate relationships between PD and macro-economic factors for each loan portfolio. LGD and EAD assumptions are based on the historical performance under similar macro-economic environment for each loan category, as
applicable. •NPLs and OREO properties are modeled
separately, with a mark-to-market adjustment model for future additional charge-offs or expenses due to losses from the depreciation of underlying collateral value under the modeled scenarios.
• The Credit Model forecast also incorporates idiosyncratic risks
particular to the Corporation into its stress testing process, including: (1) Puerto Rico government exposure, (2) potential losses due to further deterioration of the government’s fiscal condition, including a potential
debt restructuring of any of its agencies, and (3) the potential
impact of covered portfolio losses occurring after the expiration of the loss-share agreement with the FDIC. 2 Risks embedded in earnings – Operational losses Purpose Estimated operational losses expected in each quarter under varying macro-economic conditions.
Methodology • Losses related to operational risk events are a component of PPNR and include losses resulting from inadequate or failed internal
processes, people and systems, or from external
events. •Estimates for losses related to operational risk are a combination of various approaches, including scenario analysis, historical trends,
and econometric techniques. A combination of
historical trends and econometric techniques are used to project recurrent events while scenario analysis is used to identify low-probability, high-severity loss events. |
 Index 12 2015 Supervisory Severely Adverse Scenario Results 3 Page Risk Methodologies 8 Macro-Economic
Scenario
13 |
 2015 DFAST Annual Supervisory Severely Adverse Scenario
The Supervisory Severely Adverse Scenario, as provided by the Federal Reserve, reflects a substantial weakening in global economic activity. The economic variables provided show large reductions in asset prices and increases in unemployment rates, among other negative trends. The Federal Reserve provides 28 variables (16 variables for the U.S. and 12 for other countries) that measure economic activity, asset prices and or financial conditions, and interest rates forecasted over a 13-quarter horizon. Popular’s principal market is Puerto Rico. As part of the DFAST process, the Corporation developed a tailored set of economic variables that are more reflective of the Puerto Rico economy. Forecasts were developed for the economic activity index, unemployment rate and house price index (HPI) for Puerto Rico. The model for Puerto Rico specific macro-economic scenarios is based on scenarios that are statistically consistent with the Federal Reserve’s U.S. national stress scenarios using robust statistical techniques. This tailored set of economic variables have historically demonstrated the highest correlation with our Puerto Rico based banking business. The table below represents the comparison between the Federal Reserve provided hypothetical scenarios and those developed internally and used for the Puerto Rico stress scenario. Note: For a complete description of the 2015 Supervisory Severely Adverse Scenario, refer to the Federal Reserve’s
“2015 Supervisory Scenarios for Annual Stress Tests Required under the
Dodd-Frank Act Stress Testing Rules and the Capital Plan
Rule” (October 23, 2014) . 13
1 FED U.S. CCAR Economic Activity Indicator refers to US Real GDP. For Puerto Rico, the Economic Activity Indicator refers to GNP using the
Government Development Bank’s Economic Activity Index as a proxy. 2 The US House Price Index is based on the CoreLogic house price index, seasonally adjusted by the Federal Reserve (the “US HPI”)
and the PR House Price Index is based on the Federal Housing Finance Agency HPI index, purchase- only, seasonally adjusted (the “PR HPI”). The peak-to-trough decline in the US HPI was 45% during the last cycle
(2006-2014) compared to 28% for the PR HPI. Economic Activity Indicator 1 House Price Index Growth 2 Unemployment Rate Federal Reserve U.S. CCAR -1.1% -12.1% 9.2% Puerto Rico -3.3% -9.5% 18.8% 9-Quarter Average |
 2015 Annual Stress Test Disclosure
Dodd-Frank Act Stress Test Results
Supervisory Severely Adverse Scenario
June 2015 |