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Analysts hail Popular auto lending deal as 'exactly' what the bank needed

Banco Popular de Puerto Rico's acquisition of Wells Fargo & Co.'s auto portfolio in the territory will help the bank deepen its market penetration and could provide better returns than initially modeled, according to analyst notes following the transaction.

The bank, a unit of Popular Inc., announced Feb. 14 that it is acquiring $1.5 billion in retail auto loans and $340 million in commercial loans from Wells Fargo's Reliable Financial Services Inc. and Reliable Finance Holding Co. The $1.7 billion cash deal involves other Reliable assets and liabilities, and reflects an aggregate 4.5% discount on the assets to be acquired. Shares of the bank jumped 6.43% to $43.85 in late-morning trading.

The deal is an "attractive" outlet for existing capital, and the bank expects to maintain strong capital ratios after the deal, according to an investor presentation. Reliable's management team will join Popular and the bank will offer employment to all of Reliable's approximately 400 employees.

Analysts praised the deployment of capital for a high-yielding book of assets, and they said integration and credit risk should be minimal. Sandler O'Neill analyst Alexander Twerdahl wrote in a Feb. 15 note that the deal is "exactly" what Popular needed. The transaction takes out its largest competitor in the space, he noted. Additionally, the bank still has a comfortable capital cushion and indicates regulators are comfortable with the operating environment in Puerto Rico.

"We don't think that [Popular] does anything without running it by its regulators, so while we'll stop short of saying this is an endorsement from the Fed that everything is alright in PR, we do consider this to be a good reflection on the company's strength," he said.

Piper Jaffray analyst Brett Rabatin wrote that the deal will give Popular a 2% return on assets but could perform even better, depending on expense management. The bank expects $34 million in earnings accretion in the first year, but Rabatin's modeling suggests $39 million for 2019. The deal also allows the bank to consolidate its dominant position in the Puerto Rico auto market, with competitor First BanCorp. following with 16% market share.

He added that Puerto Rico auto lending trends are "fairly unrelated" to trends on the mainland, which have seen numerous dealers exit the space over profitability concerns.

Other favorable aspects of the deal include minimal dilution and a tangible book value dilution earnback period of less than 2 years, wrote Compass Point analyst Jesus Bueno in a Feb. 15 report. He said it was a "positive" use of capital for the bank, especially given that Popular had pushed out some of its capital return plans slightly following Hurricane Maria.

Keefe Bruyette & Woods analyst Brian Kleinhanzl wrote in in a Feb. 14 note that from Wells Fargo's side, the deal is small in terms of its impact on earnings per share but will help simplify the bank's structure and minimize losses should credit quality turn in the territory.

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