Popular Inc

NASDAQ:BPOP

Earnings Call Analysis

Popular Inc.'s Solid 2023 Amidst Challenges

In a difficult economic landscape, Popular Inc. reported a resilient annual performance in 2023, with net income of $541 million, down from $1.1 billion the previous year. The decline was mainly due to higher loan losses and operational costs. Nonetheless, the company achieved a 9.3% growth in its loan portfolio, with significant expansion in commercial and construction loans. The tangible book value also saw a substantial 33% year-over-year increase to $59.74. Anticipating the future, Popular Inc. is targeting a 14% return on tangible common equity by Q4 2025 and expects an increase of 9% to 13% in net interest income for 2024, along with a projected quarterly noninterest income boost to $160-165 million.

2023 Performance Review and Dividend Increase

Despite a challenging global economic environment, the company stood resilient in 2023, delivering robust results. Annual net income fell to $541 million from the previous year's $1.1 billion, primarily due to an increase in provisions for loan losses and operational expenses. Nevertheless, the loan portfolio expanded by $3 billion, or 9.3%, with solid contributions from commercial lending segments. Credit quality remained healthy, marked by lower nonperforming loans, although the unsecured consumer segment showed signs of normalizing in the latter half of the year. Acknowledging this solid performance, the company raised its quarterly dividend by $0.07 to $0.62 per share.

Capital Strength and Technological Investments

The company's financial foundation remains strong, with a common equity Tier 1 ratio of 16.3% and a significant 33% year-over-year rise in tangible book value to $59.74. Investments in technology and operational transformations geared towards revenue generation and improved efficiency are underway, with plans to target a 14% return on tangible common equity by the fourth quarter of 2025.

Solid Quarterly Results and Growth Trends

Fourth-quarter adjusted net income was stable at $140 million, excluding a one-time FDIC special assessment. Growth was driven by a $1 billion increase in loan balances, improved net interest margins, and solid noninterest income. Deposit balances grew by $300 million, thanks primarily to increased online deposits at Popular Bank. These growth metrics, paired with a well-performing Puerto Rico economy buoyed by tourism and pending federal funds disbursement, offer a positive outlook for 2024.

Leadership Transition

The quarter also saw a transition in the executive ranks, with the retirement of CFO Carlos after 27 years of service. His leadership contributed significantly to the company's growth and financial strength. Jorge Garcia, the controller since 2012, will continue Carlos’ work to maintain a robust finance team.

Financial Forecasts for 2024

The company expects to see continued expansion in net interest income by approximately 9% to 13% and projects loan growth of 3% to 6%, primarily in commercial loans. Additionally, noninterest income is forecasted to be $160 million to $165 million per quarter, exceeding previous expectations, reflecting the company's overall healthy financial trajectory.

Expense Management and Tax Outlook

Operating expenses rose by 9% in 2023 but remained below the guidance threshold. The 2024 fiscal year projects expenses to range between $1.89 billion and $1.95 billion. Meanwhile, the effective tax rate stood at a moderate 20% for 2023 and is expected to settle between 19% and 23% in the upcoming year.

Bolstering Net Interest Margin and Return on Equity

The net interest margin saw a slight increase to 3.08% in Q4, and the company is poised to continue this upward trend. Public deposit costs are expected to hold steady in Q1 of 2024. The company reported a return on tangible equity of 6.3% for the quarter and 9.4% for the year, setting a future target of 14% by the end of 2025. Moreover, substantial loan growth and active capital deployment strategies underscore the company's commitment to shareholder returns.

Credit Quality and Risk Management

The company's mortgage and commercial portfolios maintain credit metrics considerably below pre-pandemic levels thanks to proactive risk management practices. Net charge-offs experienced an uptick yet remain within favorable ranges when compared to historical data, supporting the company's strong position to navigate the uncertain macroeconomic landscape. Net charge-offs for the full year of 2024 are expected to be between 65 to 85 basis points due to the ongoing credit normalization and economic conditions.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to today's Popular Inc. 4Q earnings call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions]. I'm now going to hand over to Paul Cardillo, the Investor Relations Officer at Popular, Paul, please go ahead.

[Paul Cardillo, executive]

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our COO, Javier Ferrer; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano. They will review our results for the full year and fourth quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that on today's call, we may make forward-looking state and guarding popular, such as projections of revenue, earnings, expenses and capital structure as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

[Ignacio Alvarez, executive]

Good morning, and thank you for joining the call. In 2023, we delivered solid results in a challenging environment. Our annual net income of $541 million compared to net income of $1.1 billion in 2022. Our adjusted 2023 -- our 2023 adjusted net income was $587 million compared to adjusted net income of $808 million in 2002. The variance was mainly driven by a higher provision for loan losses and higher operating expenses. We grew our loan portfolio by $3 billion or 9.3% during the year. BPPR generated loan growth across most business segments led by commercial loans reflecting the continued strength of the local economy and our diversified product offerings. Popular Bank achieved growth in commercial and construction loans. During the fourth quarter, we increased our quarterly common stock dividend by $0.07 to $0.62 per share. Credit quality remained solid throughout 2023, as evidenced by lower nonperforming loans, even though our unsecured consumer portfolio did begin to normalize during the second half of the year from historically low levels.

Our capital levels are strong with year-end common equity Tier 1 ratio of 16.3%. Our tangible book value ended 2023 at $59.74, a 33% increase year-over-year, primarily due to lower unrealized losses on investment securities and the year's earnings. Over the past year, we have been executing on a broad-based multiyear technological and business process transformation. While many of these investments are foundational in nature and will take time to show meaningful results, we have already begun to see tangible revenue uplift from several of our early-stage initiatives. In Puerto Rico, these include enhanced pricing segmentation in our commercial cash management business and streamline processing of small business loans. Our technology in business transformation continues to be a priority. We believe that there are opportunities to grow in our primary market as well as within our existing customer base, and these efforts will help us capitalize upon that opportunity. We are confident that these investments will make us a stronger, more efficient and profitable company. We continue to target a 14% return on tangible common equity by the fourth quarter of 2025.

Please turn to Slide 4. Adjusted net income in the fourth quarter, excluding the impact of the FDIC special assessment, totaled $140 million, flat from the last quarter. Our loan balances grew by $1 billion with $729 million at BPPR and $287 million at Popular Bank. Our net interest margin was 3.08%, increasing by 1 basis point primarily driven by higher loan balances and the repricing of loans and securities in a higher interest rate environment. This was offset by higher deposit costs. Noninterest income remained solid, increasing by $9 million. Excluding the FDIC assessment, operating expenses decreased by $6 million. Credit quality trends remain generally positive with lower NPLs once again. However, we did continue to see credit normalization in the Puerto Rico unsecured consumer segment, which began in the second half of the year. We have taken actions to address these developments and are incentive to the evolving credit landscape.

Deposit balances increased by approximately $300 million, primarily due to a higher level of online deposits at Popular Bank. The $9.54 increase in tangible book value per share in the quarter was primarily driven by a decrease in unrealized losses in our investment portfolio. Please turn to Slide 5. During 2023, we added 34,000 new customers in Puerto Rico, and now serve more than 2 million unique customers. Utilization of digital channels among our retail customers also remain strong. Active users on our Mi Banco platform exceeded $1.1 million or 54% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channels. Consumer spending remains healthy. Combined credit and debit card sales fell by 1% compared to the fourth quarter of 2022, which was a historically strong quarter. Our auto loan and lease balances increased by $61 million compared to the third quarter as demand for new cars continue to be strong in Puerto Rico. Mortgage loan balances at BPPR increased by $103 million in the fourth quarter, driven primarily by home purchase activity and our strategy to retain FHA loans.

The Puerto Rico economy performed well during the quarter. Business activity is solid as reflecting the positive trends in total employment and other economic data. The tourist and hospitality sector continues to be a source of strength for the local economy. Passenger traffic at the San Juan International Airport increased by 18% in 2023 compared to the previous year. And both the wholesale occupancy rate and the average daily rate reflected a 5% to 6% increase over 2022. There are roughly $50 billion of committed federal funds that have yet to be disbursed. The pace of disbursement of these funds has accelerated, and we anticipate that these funds will support economic activity for several years. We are encouraged by the performance of the Puerto Rico economy. We remain optimistic about the future of our primary market and are well positioned to support our clients during this historic period. We are pleased with our results for the quarter and the year, particularly our strong loan growth in both Puerto Rico and the U.S. as well as the continued strength of our deposit base, which positions us well for 2024.

Finally, I'd like to take this opportunity to recognize Carlos, who will retire in March after 27 years of service to Popular. As our CFO since 2013 and in various senior leadership positions before that, he excelled due to his strategic mindset, analytical skills and discipline. He has been an important contributor to our growth and financial strength, and we are thankful for his leadership throughout all these years. On a more personal note, I'm sincerely grateful for his support since I joined Popular and for his friendship, which began long before. Jorge Garcia, our controller since 2012 has worked alongside Carlos for many years helping to build a strong finance team. He is widely respected within the organization, and we are confident he will do a great job as our new CFO. On that note, I will now turn the call over to Carlos for more details on our financial results.

[Carlos Vazquez, executive]

Thank you, Ignacio, for those kind words as well as for your friendship and leadership. I would like to offer my gratitude to my colleagues at Popular, they make all our achievements possible. I also want to thank our analysts, bankers and investors, whose keen insights, challenging questions, recommendations and advice. I am greatly appreciated by you. Finally, I want to thank my successor Jorge for his support over the last 13 years during which we have collaborated. I leave all of you in good hands. It has been my pleasure and honor to contribute to this great company for 27 years. Please turn to Slide 6. We reported net income of $95 million in the fourth quarter. Excluding the effect of the SDX assessment, adjusted net income was $140 million, $3 million higher than the prior quarter. Net interest income was $534 million, flat with Q3. During the fourth quarter, the net interest margin remained stable despite rising deposit costs. Based on our current and forecasted asset mix, coupled with the expected rate environment, we should continue to see NIM expansion in Q1 and throughout the rest of 2024. In 2024, we expect net interest income to increase by approximately 9% to 13% from 2023 levels, driven by loan growth of 3% to 6% and the continued improvement in our earning asset mix in a higher rate environment. Noninterest income was $169 million, an increase of $9 million versus Q3.

In 2024, we expect noninterest income to be approximately $160 million to $165 million per quarter, an increase of $5 million from our prior guidance. The provision of credit losses was $79 million compared to $45 million in the third quarter. Total operating expenses were $531 million in Q4, excluding the effect of the SXC assessment, adjusted operating expenses were $459 million, a decrease of $6 million from Q3 and below our prior guidance of $175 million. The variance in the quarter was driven primarily by a $23 million noncash goodwill impairment in Q3 and and lower credit card processing and transactional expense by $8 million, mainly due to volume incentives recognized during the quarter from the card networks. For the year 2023, Operating expenses increased by 9% to $1.9 billion, driven primarily by the higher FDIC deposit insurance expense, the good wound impairment taken in Q3, personnel costs and expenses related to customer activity. Excluding the FDIC assessment in Q4, 2023 expenses were $1.83 billion, 5% higher than in 2022. But below our guidance of $1.87 billion.

For 2024, we expect annual expenses in the range of $1.89 billion to $1.95 billion, approximately half of the predicted increase in expenses is related to technology investments, some that rolled over from 2023. The other half is mostly personnel expenses as we continue to invest in our people as well as expand our capabilities in cyber, risk, data and technology. This guidance includes transformation-related expenses. Our effective tax rate for the quarter was negative 1.6%. The additional FDIC expense changed the mix of exempt versus taxable income, increasing the proportion of exempt income. In addition, Q4 included a tax benefit resulting from the filing of the 2022 tax returns that contributed to a negative rate for the quarter. For the full year 2023, the effective tax rate was 20%. Excluding the impact of the FDIC assessment, it was 21.5%, close to the lower end of our guidance of 22% to 25%. In 2024, we expect the effective tax rate to be in a range from 19% to 23%. Please turn to Slide 7. Net interest margin increased by 1 basis point to 3.08% in Q4. On a taxable equivalent basis, NIM was 3.26%, an increase of 2 basis points versus Q3. The increase was driven by improved earning asset mix, higher loan yields and balances across most major lending categories as well as higher yields on our cash balances and investments. This was offset by higher interest expense on deposits due to increased cost of public deposits and growth in high-cost deposit accounts at Popular Bank.

At the end of the fourth quarter, Puerto Rico [ part ] deposits were $18.1 billion, an increase of roughly $300 million compared to Q3, and at the upper end of our guidance. In 2024, we expect poly deposits to be in a range of $15 billion to $18 billion. As usual, seasonality should result in public deposit bonds is trending higher at the beginning of the year, and peaking in Q2, mostly related to tax receipts. Excluding Puerto Rico public deposits, consolidated customer deposit balances were flat compared to Q3. In Puerto Rico, customer deposits decreased driven by commercial outflows. For the year, approximately $1.3 billion in deposit balances were transferred by commercial and retail customers from BPPR to popular securities. In Q4, deposit increases at Popular Bank were primarily driven by increases in time and saving deposits from our online channel. Ending loan balances increased by $1 billion or 3% compared to Q3, driven by growth in most loan segments at BPPR and by commercial and construction at PV.

In 2023, loan balances increased by $3 billion or 9.3% versus $2.8 billion or 9.7% in 2022. We will continue to take advantage of prudent opportunities to extend credit and improve the use and yield of our existing liquidity. In 2024, we expect loan growth of 3% to 6%, driven primarily by the commercial loan segment in both banks. Our interest rate security is relatively neutral. We saw a small margin expansion in Q4 and expect the margin to remain in an upward trajectory in 2024. The magnitude will depend on our loan and deposit growth and mix, investment portfolio strategy as well as the pace of repricing of public funds and incrementally retail and commercial deposits in our U.S. operation. Please turn to Slide 8. Deposit betas in the current tightening cycle are above the prior cycle. We have seen a total cumulative deposit beta of 36% to date, driven by public deposits. The rate of increase in deposit costs for the corporation continued to slow down in the quarter.

In BPPR, total deposit costs increased by 11 basis points compared to an increase of 24 basis points in Q3, led by public deposits. Excluding public deposit balances, total deposit costs remained flat at 55 basis points. At Popular Bank, deposit costs increased by 33 basis points compared to an increase of 29 basis points in Q3, led by retail deposits catered primarily to our online channel. Puerto Rico covered deposits are composed of numerous clients and accounts, the calculation methodology and rate of those accounts may vary depending on the timing of shifts in the related balances within accounts. On occasion, we may also provide temporary pricing concessions as part of our customary relationship management activities. In Q4, the mix shift and the customer and the temporary preferential rates resulted in an overall increase of 34 basis points in the cost of [ pulp ] deposits versus the 10 basis points we had anticipated at the end of the third quarter. We expect the cost of public deposits to remain flat in Q1. Please note that on Page 14 of our investor presentation, we have added a page summarizing the enhanced guidance for 2024, which we are providing in this webcast.

Please turn to Slide 9. Our return on tangible equity was 6.3% in the quarter. For the full year, our ROTCE was 9.4%. Both ratios were impacted by the FDIC assessment. We continue to target a sustainable 14% ROTCE by the end of 2025. Regulatory capital levels remained strong. Our Q4 common equity Tier 1 ratio of 16.3% decreased by 51 basis points from Q3 and reflecting continued strong growth in our loan portfolio, which carries a higher regulatory risk weighting, I'm sorry. Tangible book value per share at quarter end was $59.74 and an increase of $9.54 per share, up almost 19% from Q3. Over the past 2 years, we have continued to effectively deploy our capital. This has been highlighted by the loan growth of almost $6 billion, the increasing trajectory of our dividend and multiple share repurchases, including the return to our shareholders of the gain on sale of our EVERTEC stake. We will reveal future capital actions in the second half of 2024. In the near term, we continue to seek more clarity on the outlook for rates, the economy and the proposed regulatory response to events in the banking sector. Our long-term outlook on capital return has not changed, anchored by our strong regulatory capital ratios. Over time, we expect our regulatory capital ratios to gravitate toward the levels of our mainland peers plus a buffer. With that, I turn the call over to Lidio.

[Lidio Soriano, executive]

Thank you, Carlos, and good morning. Overall, the corporation's mortgage and commercial portfolios continue to reflect credit metrics significantly below pre-pandemic levels, while credit quality metrics continue to normalize for Puerto Rico's personal loans, credit cards and auto and lease finance loans. We are closely monitoring the performance of our consumer portfolio and have made changes to our underwriting criteria to decrease exposure to higher-risk segments. For the year, nonperforming loans decreased from $439 million or 1.4% of total loans to $258 million or 1%. While net charge-offs increased from historic lows during the year, they still compare very favorably against pre-pandemic averages. We continue to closely monitor changes in the macroeconomic environment and [ on power ] performance, given higher interest rate and inflationary pressures. We believe that the improvements over recent years in risk management practices and the risk profile of the corporation loan portfolio positions Popular to continue to operate successfully under the current environment.

Turning to Slide #10. Nonperforming assets and nonperforming loans decreased slightly during the quarter, driven by the mortgage portfolio in Puerto Rico. Commercial NPLs in Puerto Rico remained flat quarter-over-quarter, notwithstanding the inflow of an $18 million relationship in the renewal energy sector. This relationship drove the increase in NPL inflows for the quarter. Despite this inflow, the ratio of NPLs to total loans held in portfolio decreased to 1% from 1.1% in the previous quarter. Turning to Slide #11. Net charge-offs amounted to $57 million or annualized 66 basis points of average loans held in portfolio compared to $33 million or 39 basis points in the prior quarter. The increase was mainly in Puerto Rico and the biggest variances we're seeing in commercial and consumer net charge-offs. Commercial net charge-offs were $4 million or 17 basis points, a variance of $14 million due to an $11 million recovery in the previous quarter.

Additionally, consumer net charge-offs were $11 million higher due to the credit normalization in auto, personal loans and credit cards. As we have discussed in the past, prior to the COVID pandemic,, Popular net charge-offs were generally between 75 and 125 basis points. For 2024, we expect net charge-offs for the full year to be between 65 to 85 basis points due to the ongoing credit normalization and general economic environment. Please turn to Slide #12. The allowance for credit losses increased by $18 million to $729 million. This was driven by a reserve build in the Puerto Rico commercial portfolio due to a $10 million specific reserve for the previously mentioned new NPL, loan growth and higher reserves for the consumer portfolios due to credit normalization. In the U.S., the ACL increased by $3 million driven by higher commercial loan reserve due to rating migration. The corporation ratio of ACL to loans of the portfolio remained flat at 2.1%. And while the ratio of ACL to NPL stood at 204% compared to 197% in the previous quarter. The provision for carry losses was $75 million, the $32 million increase from the prior quarter was driven by the $10 million specific reserve mentioned earlier and credit normalization of the Puerto Rico retail portfolios.

Also contributing to the increase or third quarter events, such as recoveries in the Puerto Rico commercial portfolio and the re-calibration last quarter of the U.S. CRE allowance model, which led to a $50 million reduction in reserves. To summarize, our Puerto Rico consumer loan portfolio continued to normalize during the quarter. While the corporation mortgage and commercial portfolios continue to reflect strong credit quality trends with low net charge-offs and decreasing nonperforming loans. We are attentive to the evolving environment but remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

[Ignacio Alvarez, executive]

Thank you, Lidio and Carlos, for your updates. 2023 was a good year for Popular despite a challenging environment, which included high interest rates, uncertainty in the geopolitical situation, and disruptions in the banking industry during the first half of the year. Our results reflected solid earnings, robust loan growth, stable credit quality and continued customer growth. We achieved important milestones, including surpassing 2 million unique customers in Puerto Rico. We also made great progress in our transformation efforts and some of the initiatives are already producing encouraging results. I would like to express my gratitude and appreciation to our employees for all their hard work and dedication during the year. In October, we celebrated our 130th anniversary. We are proud of the legacy that made Popular what it is today, a strong, vibrant organization with deep rooted values. Leveraging these strengths, we will continue to transform our organization to ensure success for many years to come. This entails meeting the rapidly changing needs of our customers, providing our colleagues a workplace where they can thrive, promoting progress in the communities we serve and generating sustainable value for our shareholders. I am optimistic about our prospects in 2024. Economic trends in Puerto Rico continue to be positive, and we are well positioned to participate and the economic activity that is expected to be generated in the coming years. We're looking forward to a great year. We started with strong momentum and the team is energized. We are now ready to answer your questions.

[Operator]

[Operator Instructions]. Our first question comes from Timur Braziler of Wells Fargo.

[Timur Braziler, analyst]

Good morning. Looking at the NII guidance, it's pretty impressive for 2024, especially considering the expectation for loan growth to moderate in the coming year. Two-part question. First, what are your rate assumptions embedded in that NII guidance? And second, can you maybe talk through NII cadence throughout the year, especially now that public funds deposit costs have stabilized.

[Carlos Vazquez, executive]

All right. Timur, the underlying rate, our assumptions are embedded in our forecast we are in the lower end of the market as far as number of decreases in rates, and we have them all in the second half of the year. That changes every day, of course, today after GDP is lower than it was yesterday. But -- so we're at the low end of the consensus range and the second half of the year. And with regards to NII, I mean, we've the effect of of the cost of government funds, if in fact rates are flat at coming down should be pretty neutral moving forward. In fact, we've -- I've mentioned in my prepared comments that we expect the cost of deposits to remain flat for the first quarter. So that will hopefully be one of the contributors. The rest of the consumers are going to be dependent on the loan growth, on what sector our loan growth happens, the speed at which it happens and then the repricing of our MS portfolio as well as it continues to mature.

[Timur Braziler, analyst]

Okay. And Carlos, can you provide just how many rate cuts you are assuming in the back end of the year?

[Carlos Vazquez, executive]

Two.

[Timur Braziler, analyst]

Okay. Maybe one for Lidio. So last quarter, you called out the low FICO use card borrower. This quarter, you called out credit cards, personal loans and some segments of auto as being higher risk. Maybe just talk through the normalization of the consumer what would you classify as being higher risk balances? And then how should we think about this segment relative to the current 11% allowance allocation?

[Lidio Soriano, executive]

I think generally, when you're looking at consumer and retail portfolios, the high-risk segments are always going to be driven by cycle. So your lower FICO is going to the ones that are going to be higher risk. And we have seen -- I think I -- last quarter also mentioned normalization of personal loans and credit cards. And what we have seen this quarter is that continues around the spectrum. I think maybe a gradual increase also in delinquencies or charge-offs or lease, which was maybe I did not mention in the last quarter. What was the last part of your question, I'm sorry, Tim?

[Timur Braziler, analyst]

With an 11% allowance ratio, do you think this normalization causes increased allowance from here? Or is that normalization primarily in the charge-offs with the allowance ratio staying relatively stable?

[Lidio Soriano, executive]

I mean I think we -- I expect normalization continue maybe through the first half of the year. And the movement that you have seen in our allowance should be replicated in the first half, which has been pretty consistent around the 2.1%, excluding any changes in economic forecast or things like that.

[Timur Braziler, analyst]

Okay. And can you provide balances of what are the lower FICO more higher-risk consumer balance [indiscernible].

[Lidio Soriano, executive]

That is not a disclosure that we provide. So, no.

[Carlos Vazquez, executive]

What we do provide, as you know, in the appendix, Timur, is the different consumer portfolios and the originations over time in a very extended period of time. So from that, you will not get the actual balances that you're requesting, but you get a sense of where the portfolio is because I think we have 8 or 9 years' worth of origination and most of these products have a life of 2 or 3 years.

[Lidio Soriano, executive]

I think maybe most important in looking at more from a macro context, looking at the strength of the Puerto Rico economy, the liquidity of our clients, we don't foresee an acceleration of growth. I mean we're seeing a trend of normalization, and that's our forecast and embedded in the forecast and the guidance that we provided for losses next year.

[Operator]

Our next question comes from Ben Gerlinger of Citi.

[Benjamin Gerlinger, analyst]

I was curious if we could just take a moment, I know you said the loan growth is being partially funded by just a mix in the loans or securities. How should we think about the overall balance sheet size? It should be obviously lower growth in loans, but it should -- is this static balance sheet size is somewhat acceptable or something we should expect? Or should we see a little bit of growth in the balance sheet as well?

[Carlos Vazquez, executive]

You've seen our balance sheet be pretty static actually this year despite the big loan growth because what ends up happening is that we have a big shift for securities and cash into the loan portfolio. So I mean, I don't -- balance sheet growth is not necessarily a target that we're pursuing. If it happens, but it -- we still have significant amount of liquidity. We still have significant amount of part of the investment portfolio maturing every quarter, that is more than capable of funding loan growth. So I would probably expect more shift from the investment portfolio and cash to loans and the overall size may not change ahead of a lot.

[Benjamin Gerlinger, analyst]

Got you. That makes sense. And then it seems like you are reinvesting some, just given the amount of liquidity fits off. I was just curious where in the curve or in terms of duration? Are you kind of approaching any sort of reinvestment.

[Carlos Vazquez, executive]

Yes. We are having all those discussions and have not made those decisions.

[Benjamin Gerlinger, analyst]

Not currently, they're being invested in shorter-term instruments such as U.S. treasury bills.

[Carlos Vazquez, executive]

Yes. So it's basically what maturity is paying in cash or cash-like instruments timer. But we haven't -- we are having the discussions of potential extension in the investment portfolio. We have not executed any of that. The extension we have achieved and is significant, obviously, is the move from tax to our loan book, which has a much higher duration than cash.

[Benjamin Gerlinger, analyst]

Got you. If I can just sneak one more into. I know you gave the expense guidance. Is that -- if it's the high end of the range on revenue, should we expect high end of the range on expenses as well does that include some sort of a commission or bonus payment as well? Or is that potentially even higher if revenue does come in at the high end?

[Carlos Vazquez, executive]

No. The range does not necessarily include our profit sharing, which I think is what you're referring to. We do, as you know, we have to exceed our budget by a given margin for that to kick in. So it's not necessarily there. I wish there was a perfect connection as you suggest between the high end of one of the -- on the revenue on the high end of the expenses, but that's not necessarily the case.

[Operator]

Our next question comes from Alex Twerdahl of Piper Sandler.

[Alexander Roberts Twerdahl, analyst]

Just wanted to dig back into the NIM a little bit or the NII guide. In the past, you guys have kind of quantified each rate cut or reach rate hike has a very specific impact on NII each quarter. Are you able to do that? Or?

[Carlos Vazquez, executive]

Well, I mean, I think the best way to think about that, I like to go back to my comment that we are luckily rate neutral in our balance sheet composition right now. So a change in rates will not have a very material effect on that range we provided, okay? Because our balance sheet is, to a large extent, neutral to mobile rates in the short term.

[Alexander Roberts Twerdahl, analyst]

Okay. And then on Slide 20, the maturity schedule of the U.S. treasury notes, is it pretty fair to assume that the sort of $1 billion or so that comes off each quarter is right around that 1.5% yield.

[Lidio Soriano, executive]

Yes. That's the right number.

[Alexander Roberts Twerdahl, analyst]

Okay. Great. And then just when I look at the net charge-off guidance that you guys provided versus what we've seen over the last couple of years and really all the macro data and unemployment rate and sort of the momentum behind the economy. It feels like the net charge-off guide is being a little bit conservative. Are you -- when you come up with that guidance range, is it -- are you looking at specific inputs? Or is it really just kind of a hunch that things kind of have to get worse from a pretty good -- pretty solid level where they've been?

[Lidio Soriano, executive]

I think it's a combination of things. We look obviously at trends, recent trends, and we also look at the expected economic forecast over the next year, which we provide to you in the allowance slide. So I think it's a combination of factors, those two of the most important factors.

[Alexander Roberts Twerdahl, analyst]

Okay. So I mean I think in the past, Carlos, you've -- I think, a comment that has stuck with me is that people, when they're employed tend to pay their bills, and with unemployment being as strong as it has been in employment growing and all the momentum in the economy and potential tax -- additional tax break coming early this year for sort of the low income sector. I mean is -- I mean, it feels like you should be able to do much better than that or at least better than that 65 to 85 basis point range.

[Carlos Vazquez, executive]

I think, Alex, that you have described the environment well. As I think we've discussed in the past, we are a little bit puzzled in trying to make the connection as well. We are doing our best to understand the drivers on why does this happen when the underlying -- the underlying economy and employment situation is strong. But while we are seeking to understand the connection better, we also cannot ignore the fact that we are seeing the increased delinquencies and so we have to make sure that we reflect that in our outlook. The other thing, of course, the environment in the mainland is equally positive. And most banks in Mainland, are seeing similar deterioration in the consumer portfolio. So I guess we're not the only ones with the conundrum in trying to connect how the economy is doing and employment is doing versus how some clients are behaving. But -- so we're working on that.

[Operator]

Next question comes from Kelly Motta of KBW.

[Kelly Motta, analyst]

Thanks for the question. I guess, carrying on with that, and I got a little turned around earlier in the call when you were talking about net charge-offs and the reserve. I don't know if I picked up on that clearly. I just wanted to circle back. It looks like in your ACL movement in Slide 12, you added about $63 million related to consumer portfolio changes. Just wanted to confirm if that's related to that deterioration that you see in the consumer portfolio and if that implies that some of the increase that you're expecting may already be in your allowance?

[Lidio Soriano, executive]

That portfolio change is a combination of things. It is portfolio growth, changing credit quality, is replenishing the net charge-offs for the period. So it is all of that combined leads to the $63 million that you see in the slide.

[Kelly Motta, analyst]

Got it. That's really helpful. And then I guess, turning around to the tax rate. It's come down a bit. Can you talk again, I know there's some unique factors in Puerto Rico. Can you talk about what's taken your effective tax rate lower? And what could cause us to come in the high end versus low end of that range?

[Carlos Vazquez, executive]

Yes. I mean the drivers of the fourth quarter were the two I mentioned, Kelly, is because of the effect of the additional expense of the FDIC assessment we ended up changing the mix of taxable versus exempt income, and we ended the quarter with a much higher proportion of exempt income versus nonexempt income, that obviously affects our tax rate. The other considering factor is that we finished our 2022 tax returns, and that resulted in a benefit that also lowered the taxes in the fourth quarter. So those are the two effects. I certainly hope not to see another FDIC assessment and definitely not at the size of this one moving forward. So that part of the condition should not repeat itself. And we already filed the 22 taxes. So I don't think we can refile them again anytime soon. Although there's always reviews and adjustments on those things. So I think -- and I'll look at my colleague here, Jorge, who is born a tax expert I think the conditions that led to that variation are pretty syncratic and pretty unique to last quarter.

[Jorge Garcia, executive]

I would say -- this is Jorge. As we go forward, I mean, certainly, the composition of taxable versus tax income, and that mix is always going to impact that range that we're giving you. So if that is something grows faster, or the contribution of it because of the disallowed expenses, et cetera, becomes a higher proportion, our overall effective tax rate will come down. So that condition will list beyond any type of period adjustments that are more unique.

[Carlos Vazquez, executive]

That's why we give you a range.

[Kelly Motta, analyst]

Okay. And I appreciate all the guidance. Maybe talking about fees. Can you -- it looks like it implies an increase, at least with the high end relative to last year. Can you discuss some of the initiatives you've taken on one? And then two, have you done a review at all how any of the proposed interchange and overdraft might impact your fee income?

[Carlos Vazquez, executive]

Yes. Let me take the second part of your question first because it's the simplest to answer. I think in the last webcast, we were asked of the potential effect of the elimination of late fees on credit cards we mentioned that our estimate of the potential effect of that was something around $9 million. The additional things that are being discussed now that were not on the table last quarter is a potential reduction in overdraft NFS fees. We don't have NFS fees for retail clients in either of our two banks. We do have some overdraft fees. But the effect of that is somewhat muted because our draft fees in Puerto Rico are already capped at $15 per [ currency ] and the proposal and the high end of the proposal is 14. So in that front, and of course, the proposals can change, our best guess is that the effect could be something between $500,000 and $2 million worth of lost fees. And then the last piece of the puzzle that is in discussion now is the potential changes in interchange fees for debit and our best guess right now and that could have an effect of up to $50 million or something in that ballpark. So those three pieces are -- again, all these are estimates. It will depend on how the final rule comes out and and the level that we end up setting and when it happens and everything else. But those are the best estimates we have a potential effect as far as lower fees.

Now when we talk about the fee for '23, I want to make sure that we don't lose context. We lost a significant amount of fees in 2022 as the year evolved because of changes in NFS and overdraft fees. So our guidance went down and not immaterial amount because of our recognition that we had lost stuff fees in 2022. Now we ended doing a pretty good job, and if you just look at how our fees have changed over time, you probably won't be able to tell that in 2022, we lost a significant amount of fees because we're pretty good at substituting them with other income in the fee category. The main contributors to that substitution are the two things that Ignacio mentioned. Number one, we have repriced our offering of cash management services in the corporate sector, and that brought in additional fees. And number two -- well, yes. The main driver was that the repricing of cash management services. So we ended up conceptually making up for the lost fee in 2022 and the year ended up pretty flat. We expect some of the transformation efforts we're doing to continue to add -- contribute to the fee income of the company. That, in part, is why we are increasing the guidance somewhat. It's not a big increase, but it's an increase that is not unimportant .

[Ignacio Alvarez, executive]

We also saw an increase in the interchange fees from our small commercial credit card. I think that's the second factor. I don't think I mentioned it, but that's the second factor.

[Kelly Motta, analyst]

Great. That's helpful. Last question for me. Do you have where new loans are being originated now just to get a sense of the power of redeploying those cash flows that are coming off?

[Carlos Vazquez, executive]

Yes. I mean we are -- as you know, we haven't provided that information in the past, and we are all done with adding guidance and emission.

[Kelly Motta, analyst]

Fair enough. I thought I could slip one by the [ goalie ].

[Carlos Vazquez, executive]

Now. But I mean obviously, this will vary, but you have the yields of our different books in our levels and yields in the press release, and you can work off of that as a guide, at least to start your work up front and back.

[Operator]

Our next question comes from Brody Preston of UBS.

[Broderick Preston, analyst]

Good morning, everyone. I just wanted to ask within the NII guidance. I think I heard you that you got two cuts in the back half of the year, but wanted to ask what you all are assuming for a retail and commercial deposit beta within that NII growth guidance.

[Carlos Vazquez, executive]

We have not discussed for looking betas, Brody. But I think it's not unreasonable to assume that the rate of increase in beta should subside with stable rates and more so if rates start to drop. But we have not given details on the forward-looking beta.

[Broderick Preston, analyst]

Got it. Okay. I wanted to circle back to the consumer credit discussion. I just want to make sure the consumer credit allowance is about 5.25%, right? So that looks relatively unchanged quarter-over-quarter. It actually came down just a little bit, just given the growth of the loan portfolio. I guess the first question there is what's the life of the life of loan assumption for the consumer book under CECL?

[Lidio Soriano, executive]

I would say a lot of our consumer books is pretty short dated in terms of duration. So we'll call it, let's call it, a year or 2 years thereabout.

[Broderick Preston, analyst]

Okay. And is this the 3% level that you had for annualized charge-offs in the consumer book when I just kind of quickly look back at my model, it looked like outside of a couple of quarters, they're in COVID, this is the highest period for consumer credit losses that you all have had either from a dollar amount or from an NCO rate perspective. And so is -- is this the kind of new level that we should expect to see here? And if it is, if it's 2 years, and we're talking about 3% of charge-offs, is there a case to be made that we need to walk the consumer reserve incrementally higher from here than where it actually is?

[Lidio Soriano, executive]

You're asking a lot of questions, but I will say this. I mean, we'll go back to what I mentioned in our prepared remarks, our outlook for -- in terms of losses is, we expect losses next year to be between 65, [ 25 ] basis points. A lot of the drivers in the losses are associated with our retail book. We expect normalization to continue in those portfolios. So we'll see, and we are growth in terms of the loss that we experienced prior to the anemic vis-a-vis the losses that we're experiencing today. As I also mentioned, we remain positive for the outlook of our consumer books, given the strength of the economy and the liquidity of our clients.

[Broderick Preston, analyst]

Got it. So is there anything specific going on that's causing the charge-off rate to move to a level that's kind of at the high end, I guess, of what you would consider normal just given the strength of the economy and given the fact that employment is so strong in the island?

[Lidio Soriano, executive]

I think as part of the conundrum that Carlos referred to, we have seen -- you have also seen banks in the U.S. experience the same in terms of even in the face of a very strong economy, you're seeing consumer portfolios deteriorate. If you want me to expect it, I could say, I mean there is potentially a couple of things. I would say played out of inflation on higher rates as having an impact in the cash flows of some of our customers that we might be leading to strategic defaults. And I mean, there is -- if you look at some of the analysis and started some by the credit bureaus, there is something that relates -- they call FICO inflation, in which after the pandemic, the FICO of a lot of the consumers went up, and that also created an environment in which now FICOs are behaving a little bit worse than they behave prior to the pandemic.

[Carlos Vazquez, executive]

Brody, you've heard Lidio before say that historically, our losses have gravitated in a range between 75 and 125 basis points. So the range of loans as we're talking about 65, 35 is sort of in the low end of that historic range. So I wouldn't characterize that range is a very high level of losses is the low end of our historic range.

[Broderick Preston, analyst]

No. The commercial book and then the [ resi ] mortgage has been great for you guys. I was speaking more specifically, Carlos, to the consumer book stand-alone by itself. So thank you. Thank you very much for taking my question.

[Operator]

[Operator Instructions]. Our next question comes from Gerard Cassidy of RBC.

[Thomas Leddy, analyst]

Good morning, everyone. This is Thomas Leddy calling on behalf of Gerard. The commercial relationship in the PR commercial portfolio that you guys called out is driving the NPL inflows in the quarter. I think you said it was in the renewable energy sector. Is there any further color you can give us there? Are you guys keeping a closer eye on similar relationships?

[Ignacio Alvarez, executive]

Yes. This is Ignacio. Lidio can answer in more detail, but really, that's -- that case is idiosyncratic. I mean the things that led to that problem have nothing to do with the industry in general. It's more internal to that client.

[Lidio Soriano, executive]

We don't have any significant exposure in that industry either.

[Thomas Leddy, analyst]

Okay. Got it. That's helpful. And then just high level, given the positioning of the balance sheet today, you guys mentioned pretty rate neutral over the short term. What kind of an interest rate environment would be ideal for Popular over the next 12 to 24 months, both on the short and long end of the curve.

[Carlos Vazquez, executive]

That's a better question. I -- a generic answer -- for us, a normal curve is the thing we wish for. Whether we're going to get a normal curve in 24 months, I don't know, Thomas. But generically, a normal curve will always make the business of banking easier.

[Operator]

Next question is a follow-up from Timur Braziler of Wells Fargo.

[Timur Braziler, analyst]

Just looking at capital repatriation, can you provide us an update or a reminder as to when capital plan submission conversation is with your regulators and what we could potentially expect from a timing standpoint in reengaging a buyback.

[Carlos Vazquez, executive]

Yes. I mentioned the second half of the year. Historically, we have done our stress test in the third quarter, and that has normally being an important part of our discussions. But I think we have also mentioned a number of times that we are rethinking how we manage our capital return activities. We've also mentioned that in all probability, we will gravitate to a format that's more similar to what other banks do, meaning that we will probably not be announcing a buyback in EMEA doing an ASR, but rather be announcing an authorization for a buyback to execute over a period of time. That's the kind of changes we're talking about. In conjunction with those changes, we may also change other parts of how we do capital planning. So while historically, the -- our stress test in the third quarter has been an important contributor even that is something that we may change depending on things along. So it's on [indiscernible] process, Timur. Our best guess right now is that we will, number one, get the clarity we're looking for in the three factors we mentioned, rate economy and regulator by the summer, and then that will allow us to reengage on that front.

[Operator]

With that, I'll hand back to Ignacio for closing remarks.

[Ignacio Alvarez, executive]

Thank you, everyone, for joining us and for your questions. We look forward to updating you on our first quarter results in April, and we'll have a hard day leading the pack there. So thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.