Popular - Q4 2023
January 25, 2024
Transcript
Operator (participant)
Hello, and welcome to today's Popular, Inc. 4Q earnings call. My name is Jordan, and I'll be coordinating your call today. If you're dialing in and like to register an audio question, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Paul Cardillo, the Investor Relations Officer at Popular, Inc. Paul, please go ahead.
Paul Cardillo (Investor Relations Officer)
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 statements regarding 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 webpage at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.
Ignacio Alvarez (CEO)
Good morning, and thank you for joining the call. In 2023, we delivered solid results in a challenging environment. O 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 2022. 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 7 cents to 62 cents per share. Credit quality remained solid throughout 2023, as evidenced by lower non-performing loans, even though our unsecured consumer portfolios 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, multi-year 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 streamlined processing of small business loans. Our technology and 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 four.
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. Non-interest income remained solid, increasing by $9 million. Excluding the FDIC assessment, operating expenses decreased by $6 million. Credit quality trends remained 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 attentive 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 five. 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 remains strong. Active users on our Mi Banco platform exceeded 1.1 million, or 54% of our customer base. In addition, we continued to capture more than 60% of our deposits through digital channels. Consumer spending remained 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 continued 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 reflected in the positive trends in total employment and other economic data. The tourism 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.
Both the hotel occupancy rate and the average daily rate reflected a 5%-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 García, our Comptroller 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 (CFO)
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 have greatly appreciated and value. 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 have contributed to this great company for 27 years. Please turn to slide six. We reported net income of $95 million in the fourth quarter. Excluding the effect of the FDIC 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 cost. 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%-13% from 2023 levels, driven by loan growth of 3%-6% and a continued improvement in our earning asset mix in a higher rate environment. Non-interest income was $169 million, an increase of $9 million versus Q3. In 2024, we expect non-interest income to be approximately $160 million-$165 million per quarter, an increase of $5 million from our prior guidance.
The provisional 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 FDIC 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 non-cash goodwill impairment in Q3 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 goodwill impairment taken in Q3, personnel cost, 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 original guidance of $1.87 billion. For 2024, we expect annual expenses in a range of $1.89-$1.95 billion. Approximately half of the projected 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 -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%-25%. In 2024, we expect the effective tax rate to be in a range from 19%-23%. Please turn to slide seven. Net interest margin increased by 1 basis point to 3.8% in Q4. On a taxable equivalent basis, NIM was 3.26%, an increase of two 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 public 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 public deposits to be in a range of $15 billion-$18 billion. As usual, seasonality should result in public deposit balances 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 PB. 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%-6%, driven primarily by the commercial loan segment in both banks. Our interest rate sensitivity 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. operations. 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 gathered primarily through our online channel. Puerto Rico government 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 public 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 remain strong.
Our Q4 Common Equity Tier 1 ratio of 16.3% decreased by 51 basis points from Q3, reflecting continued strong growth in our loan portfolio, which carries a higher regulatory risk rating. Tangible book value per share at quarter end was $59.74, an increase of $9.54 per share, up almost 19% from Q3. Over the past two 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 revisit 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 (CRO)
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 loan, 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, non-performing loans decreased from $439 million, or 1.4% of total loans, to $358 million or 1%. While net charge-off 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 borrower 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 corporate loan portfolios positions Popular to continue to operate successfully under the current environment. Turning to slide 10. Non-performing assets and non-performing 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 $80 million relationship in the renewable 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-off 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 were seen 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 loan, 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 65-85 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 built 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 coverage ratio of ACL to loans held in portfolio remained flat at 2.1%, while the ratio of ACL to NPL stood at 204%, compared to 197% in the previous quarter. The provision for credit 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 were third quarter events, such as recoveries in the Puerto Rico commercial portfolio and the recalibration 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 corporate, mortgage, and commercial portfolios continue to reflect strong credit quality trends with low net charge-offs and decreasing non-performing 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 (CEO)
... 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 its 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 in 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're now ready to answer your questions.
Operator (participant)
As a reminder, if you'd like to register an audio question, please press star one on your telephone keypad. If you change your mind, please press star two, and please ensure you're unmuted when speaking. Our first question comes from Timur Braziler of Wells Fargo. Timur, please go ahead.
Timur Braziler (VP and Equity Research Analyst)
Hi, good morning.
Carlos Vazquez (CFO)
Good morning.
Ignacio Alvarez (CEO)
Good morning.
Timur Braziler (VP and Equity Research Analyst)
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 (CFO)
All right. Yeah, Timur, the underlying rate assumptions that 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. And that changes every day, of course, today, after GDP is lower than it was yesterday. But we're at the low end of the consensus range and the second half of the year. And with regards to NII, I mean, the effect of the cost of government funds, if in fact rates are flat and 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 contributors 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 investment portfolio as well as it continues to mature.
Timur Braziler (VP and Equity Research Analyst)
Okay. Carlos, can you provide just how many rate cuts you are assuming in the back end of the year?
Carlos Vazquez (CFO)
Two.
Timur Braziler (VP and Equity Research Analyst)
Okay. Maybe one for Lidio. So last quarter, you called out the low FICO used car borrower. This quarter, you called out, you know, credit cards, personal loans, and some segments of high, 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 (CRO)
I think as generally, when you're looking at consumer and retail portfolios, the, the high-risk segments are always going to be driven by FICO. So your lower FICO is going to, are the ones that are going to be higher risk. We have seen, I think last quarter, I also mentioned normalization of personal loans and credit, and credit cards. And what we have seen this quarter is a continuous, along the spectrum. I think, and maybe a gradual increase also in delinquencies and charge-off in our auto lease, which was maybe I did not mention in the last, last quarter. But what's the last part of your question? I'm sorry, Tim.
Timur Braziler (VP and Equity Research Analyst)
Within 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 (CRO)
I mean, I think the normalization. I expect normalization to 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, 2%, 2.5, 2.1%. Excluding any changes in economic forecast or anything like that.
Timur Braziler (VP and Equity Research Analyst)
Okay. And can you provide balances of what are the lower FICO, more higher risk consumer, balances are?
Lidio Soriano (CRO)
That is not a disclosure that we provide. So no.
Carlos Vazquez (CFO)
What we do provide, as you know, in the appendix, Timur, is the different consumer portfolios and the vintages over time, at a very extended period of time. So from that, you know, you will not get the actual balances that you're requesting, but you'll get a sense of where the portfolio is. Because I think we have eight or nine years' worth of vintage, and most of these products have a life of two or three years.
Lidio Soriano (CRO)
I think maybe most important, Tim, 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 losses. I mean, we're seeing a trend of normalization, and thus our forecast and embedding the forecast and the guidance that we provided for losses next year.
Timur Braziler (VP and Equity Research Analyst)
Great. Thank you for the questions, and congrats, Carlos, on a well-deserved retirement.
Lidio Soriano (CRO)
Thanks, Tim.
Operator (participant)
Our next question comes from Ben Gerlinger of Citi. Ben, please go ahead.
Ben Gerlinger (VP and Senior Analyst)
Hey, good morning, guys.
Lidio Soriano (CRO)
Good morning, Ben. Welcome.
Ben Gerlinger (VP and Senior Analyst)
Yeah, thank you. 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 into loans from securities. How should we think about the overall balance sheet size? It should be obviously lower growth in loans, but is a static balance sheet size somewhat acceptable or, or something we should expect? Or should we see a little bit of growth in the balance sheet as well?
Carlos Vazquez (CFO)
You know, a lot. You've seen our balance sheet be pretty static actually this year, despite the loan, the big loan growth, because what ends up happening is that we have a big shift from securities and cash into the loan portfolio. So, I mean, balance sheet growth is not necessarily a target that we're pursuing. If it happens, it happens. You know, 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 a hell of a lot.
Ben Gerlinger (VP and Senior Analyst)
Got you. Yeah, that makes, that makes sense. And then it seems like you are reinvesting some, just given the amount of liquidity it spits 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 (CFO)
Yeah, we are having all those discussions and have not made those decisions.
Lidio Soriano (CRO)
No, no, but currently they're being invested in, in shorter-term instruments such as, U.S. Treasury bills.
Carlos Vazquez (CFO)
Yeah, so it's basically what maturity is staying in cash or cash-like instruments, they were. But we're having the discussions of potential extension in the investment portfolio. We have not executed on any of that. The extension we have achieved, and is significant obviously, is the move from cash to our loan book, which has much higher duration than cash.
Ben Gerlinger (VP and Senior Analyst)
Got you. If I can just sneak one more into... I know you gave the expense guidance. Is that if it's a high end of the range on revenue, should we expect high end of the range on expenses as well? And does that include some sort of a commission or bonus payment as well? Or is that potentially even higher if revenue does come in on the high end?
Carlos Vazquez (CFO)
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, 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 and the high end of the expenses, but that's not necessarily the case.
Ben Gerlinger (VP and Senior Analyst)
Gotcha. Appreciate the time, Carlos. It's been great working with you. Enjoy retirement. You've always been really helpful. Thank you.
Lidio Soriano (CRO)
Thank you.
Operator (participant)
Our next question comes from Alex Twerdahl of Piper Sandler. Alex, please go ahead.
Alex Twerdahl (Managing Director and Senior Research Analyst)
Hey, good morning, all.
Lidio Soriano (CRO)
Good morning, Alex.
Alex Twerdahl (Managing Director and Senior Research 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 each rate hike has a very specific impact on NII each quarter. Are you able to do that, or...?
Carlos Vazquez (CFO)
Well, I mean, I think the best way to think about that, Alex, is to go back to my comment that we are largely rate neutral in our balance sheet composition right now. So, a change in rates will not have a very material effect on that, in that range we provided, okay? Because our balance sheet is, to a large extent, neutral to moving rates in the short term.
Alex Twerdahl (Managing Director and Senior Research 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?
Carlos Vazquez (CFO)
Yes. That's the right number.
Alex Twerdahl (Managing Director and Senior Research Analyst)
Okay, great. And then, you know, it 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-- You know, 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 you know, pretty solid level where they've been?
Carlos Vazquez (CFO)
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 being two of the most important factors.
Alex Twerdahl (Managing Director and Senior Research Analyst)
Okay. So, I mean, I think in the past, Carlos, you've, I think, a comment that has stuck with me is that, you know, people, when they're employed, tend to pay their bills. And
Carlos Vazquez (CFO)
Right
Alex Twerdahl (Managing Director and Senior Research Analyst)
... you know, with unemployment being as strong as it has been, and employment growing and all the momentum behind the economy and potential tax, additional tax breaks coming, you know, early this year for sort of the low-income sector, I mean, it is, I mean, it feels like you should be able to do much better than that, or at least better than that 65-85 basis point range.
Carlos Vazquez (CFO)
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 this is happening when the underlying economy and employment situation is strong. But while we are seeking to understand it better, the connection better, you know, 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.
You know, the other thing, of course, the environment in the mainland is equally positive, and most banks in the 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.
Alex Twerdahl (Managing Director and Senior Research Analyst)
Okay. Thanks for taking my questions.
Carlos Vazquez (CFO)
Appreciate it.
Operator (participant)
Next question comes from Kelly Motta of KBW. Kelly, please go ahead.
Kelly Motta (Managing Director)
Hi, thanks for the question.
Carlos Vazquez (CFO)
Good morning, Kelly.
Kelly Motta (Managing Director)
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, you know, the increase that you're expecting may already be in your allowance.
Carlos Vazquez (CFO)
That portfolio change is a combination of things. It is portfolio growth, change in credit quality, it's replenishing the net charge-off for the period. It is all of that combined that leads to that 63 figure that you see in the slide.
Kelly Motta (Managing Director)
Got it. That's really helpful. And then I guess touching—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, you know, cause us to come in the high end versus low end of that range?
Carlos Vazquez (CFO)
Yeah. I mean, the drivers of the fourth quarter were the two I mentioned, Kelly, is we-
Kelly Motta (Managing Director)
Mm-hmm
Carlos Vazquez (CFO)
... 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 up ending the quarter with much higher proportion of exempt income versus non-exempt income. That obviously affects our tax rate. The other considering factor is that we finished our 2022 tax returns, and that resulting in a benefit that also lowered the taxes in the fourth quarter. So those are the two, the two effects. You know, I certainly hope not to see another FDIC assessment, and definitely not of the size of this one, moving forward. So that part of the condition should not repeat itself.... and we already filed the 2022 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 a former tax expert. I think the conditions that led to that variation are pretty idiosyncratic and pretty unique to last quarter.
Jorge García (Senior VP, Corporate Comptroller, and Chief Accounting Officer)
I would say, this is Jorge. As we go forward, I mean, certainly the composition of taxable versus tax-exempt income, and that mix is always going to impact that range that we're giving you. So if tax-exempt income 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 exist beyond any type of, you know, period adjustments that are more unique.
Carlos Vazquez (CFO)
That's why we give you a range.
Kelly Motta (Managing Director)
Okay. Thank you. 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 on how any of the proposed on interchange and overdrafts might impact your fee income?
Carlos Vazquez (CFO)
Yes. Let me take the second part of your question first, because it's the simplest to answer. Yeah, I think in the last webcast we were asked about the potential effect of the elimination of late fees on credit cards. And 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 the potential reduction in overdraft NSF fees. We don't have NSF 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 overdraft fees in Puerto Rico are already capped at $15 per occurrence, and the proposal is, and the high end of the proposal is at $14. So in that front, and of course, this, 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, you know, our best guess right now is 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 the levels 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 fees for 2023, 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 NSF and overdraft fees. So, our guidance went down, and not in material amount, because of our recognition that we had lost our fees in 2022.
Now, we ended up doing a pretty good job, and, if you just look at the, 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, can you say it again?
Jorge García (Senior VP, Corporate Comptroller, and Chief Accounting Officer)
Yeah, that was the main driver.
Carlos Vazquez (CFO)
Well, yeah, the main driver was that, the repricing of cash management services. So we ended up conceptually making up for the lost fees 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. And it's not a big increase, but it's an increase that is not unimportant though.
Jorge García (Senior VP, Corporate Comptroller, and Chief Accounting Officer)
Yeah. We also saw an increase in the interchange fees from our small commercial credit card. I think that's the other, that's the second factor. I don't think I mentioned it, but that's the second factor.
Carlos Vazquez (CFO)
Thank you.
Kelly Motta (Managing Director)
Great. That's helpful. Last question from 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 (CFO)
Yeah. I mean, we are—as you know, Kelly, we haven't. We are all done with adding guidance and information-
Kelly Motta (Managing Director)
Fair enough. I thought I could slip one by the goalie. Thank you. I'll step back.
Carlos Vazquez (CFO)
Now, but I mean, obviously, this will vary, but you have the yields of our different books, our levels and yields in the press release, and you can work off of that as a guide, at least to start your work of front and back books.
Kelly Motta (Managing Director)
Awesome. Thanks so much.
Carlos Vazquez (CFO)
You're welcome.
Operator (participant)
Our next question comes from Brody Preston of UBS. Brody, please go ahead.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone.
Carlos Vazquez (CFO)
Hey, Brody. How are you?
Brody Preston (Equity Research Analyst)
Good, good. How are you?
Carlos Vazquez (CFO)
Good. Thank you.
Brody Preston (Equity Research Analyst)
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 (CFO)
We have not discussed forward-looking betas, Brody. But I think it's not unreasonable to assume that the rate of increase in betas should subside with stable rates and more so if rates start to drop. But we have not given details on this forward-looking beta.
Brody Preston (Equity Research Analyst)
Got it. Okay. I wanted to circle back to the consumer credit discussion. I just wanted to make sure, the consumer credit allowance is about 5.25%, right? So, that looks relatively unchanged, quarter-over-quarter. Actually came down just a little bit, just given the growth of the loan portfolio. I guess I'm-- The first question there is, what's the life of, you know, the life of loan assumption, for the consumer book, under CECL?
Lidio Soriano (CRO)
I mean, I would say all of our consumer books is pretty short dated in terms of duration, so I will call it—let's call it a year, two years, thereabout.
Brody Preston (Equity Research Analyst)
Okay. And is this, is this, you know, the 3% level that you had for annualized charge-offs in the consumer book? When I just kind of quickly looked back at my model, it looked like, you know, outside of a couple quarters during COVID, this is the highest period for consumer credit losses that you all have had, either from a dollar amount or from a NCO rate perspective. And so is, is it—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 (CRO)
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 65-85 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 close in terms of the losses that we experienced prior to the pandemic vis-a-vis the losses that we're experiencing today. So as I also mentioned, we remain very positive for the outlook of our consumer books, given the strength of the economy and the liquidity of our clients.
Brody Preston (Equity Research Analyst)
Got it. So is there anything specific going on that's causing the charge-off rate to move to a level that's, you know, 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 on the island?
Lidio Soriano (CRO)
I think that's part of the conundrum that Carlos referred to. We have seen, and 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 wanted me to speculate, I could say, I mean, there is potentially a couple of things. I will say, the 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 studies done by some of the credit bureaus, there is something that relates, they call FICO inflation, in which after the pandemic, the FICOs of a lot of the consumers went up.
That also created an environment in which now FICOs are behaving a little bit worse than they behaved prior to the pandemic.
Carlos Vazquez (CFO)
Brody, one more thing-
Brody Preston (Equity Research Analyst)
All right, thank you. Yeah, go ahead.
Carlos Vazquez (CFO)
You've heard, 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 losses we're talking about 65-35 is sort of in the low end of that historic range. So I wouldn't characterize that range as a very high level of losses. It's a low end of our historic ranges.
Brody Preston (Equity Research Analyst)
... No, the commercial, the commercial, book and then the resi mortgage has been great for you guys. I was speaking more specifically, Carlos, to the consumer book, standalone by itself.
Carlos Vazquez (CFO)
Okay.
Brody Preston (Equity Research Analyst)
You know, thank you—thank you very much for taking my questions, guys.
Carlos Vazquez (CFO)
Thank you, Brody.
Ben Gerlinger (VP and Senior Analyst)
You're welcome.
Operator (participant)
As a reminder, if you'd like to register an audio question, please press star one. Our next question comes from Gerard Cassidy of RBC. Gerard, please go ahead.
Thomas Leddy (Senior Associate and Equity Research 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 as 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, you know, closer eye on similar relationships?
Ignacio Alvarez (CEO)
Yeah. This is Ignacio. Lidio can answer in more detail, but really that's a case that is idiosyncratic. I mean, the things that led to that problem had nothing to do with the industry in general. It's more internal to that client.
Lidio Soriano (CRO)
We don't have any significant exposure in that industry either, so.
Thomas Leddy (Senior Associate and Equity Research 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, you know, 12-24 months, both on the short and long end of the curve?
Carlos Vazquez (CFO)
That's a better question. The generic answer, for us, a normal curve is the thing we wish for. Whether we're gonna get a normal curve in the next 18-24 months, I don't know, Thomas, but generically, a normal curve will always make the business of banking easier.
Thomas Leddy (Senior Associate and Equity Research Analyst)
Okay, got it. Fair enough. Thank you for taking my questions, and, and congratulations, Carlos, on your retirement.
Carlos Vazquez (CFO)
Thanks, Thomas.
Operator (participant)
Our next question is a follow-up from Timur Braziler of Wells Fargo. Timur, please go ahead.
Timur Braziler (VP and Equity Research Analyst)
Hi, thanks for the follow-up. 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 (CFO)
Yeah. I mentioned that the second half of the year, historically, we have done our stress test in the third quarter, and that has normally been 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 and immediately doing an ASR, but rather be announcing an authorization for a buyback to be executed over a period of time. That, 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, you know, while historically, our stress test in the third quarter has been an important contributor, you know, there's even that is something that we may change depending on how things evolve. So, it's all in the same planning 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 would allow us to reengage on that front.
Timur Braziler (VP and Equity Research Analyst)
Great. Thanks for that color.
Carlos Vazquez (CFO)
Thank you.
Operator (participant)
With that, I'll hand back to Ignacio for closing remarks.
Ignacio Alvarez (CEO)
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 Jorge leading the pack then. So thank you very much.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.