Popular, Inc. BPOP $ month target $41.00 BUY. Equity Research September 18, Financials. Mark Palmer

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1 Buy 4 84 Reduce 0 5 Hold 2 40 IBC 6 Upsi de 37.2% 17-Mar-2014, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A, N/A Equity Research September 18, 2015 Mark Palmer (212) mpalmer@btig.com Giuliano Bologna (212) gbologna@btig.com BPOP $ month target $41.00 BUY 52 week range $ $35.58 Market Cap (m) $3,091 Price Performance Source: IDC Financials Popular, Inc. UPDATE - Takeaways from BTIG-Hosted Meetings with CFO Carlos Vazquez UPDATE 18-Sep: Popular, Inc. (BPOP) announced that its Board of Directors had approved a quarterly cash dividend of $0.15 per share payable on October 7. The dividend, which will be BPOP s first since April 2009, represents approximately $15.5mm per quarter. As described in the attached September 14 blog post reprint, BPOP CFO Carlos Vasquez made it clear in recent BTIG-hosted investor meetings that the company s goal for 2015 in terms of capital return was to have some amount approved by the Federal Reserve Bank of New York (FRBNY), which would then position it to potentially request a larger amount of capital return in BPOP has approximately $2bn in excess capital based on the minimum capital levels allowed under the Fed s Comprehensive Capital Analysis and Review (CCAR). Given the current uncertainty surrounding Puerto Rico s economic and fiscal situations, we believe BPOP s receipt of approval to pay a quarterly cash dividend is a positive. Moreover, the institution of a dividend now expands the potential universe of purchasers of BPOP shares to incomes funds whose mandate requires that they exclusively own dividend-paying stocks 14-Sep blog post: reprint The dichotomy between the dire headlines emerging from Puerto Rico and the reality of economic conditions on the island, management's take on the Commonwealth's efforts to restructure its debt, and the company s prospects for capital return and acquisitions were among the topics discussed when BTIG last week hosted investor meetings with Popular s CFO Carlos Vazquez and Investor Relations Officer Brett Scheiner. Resilience of Puerto Rico Economy and BPOP s Credit Metrics Vazquez said that while media reports about Puerto Rico's economy have created the impression that the island is in a depression, "the difference between the perception and reality is huge." He said that while the liquidity challenges faced by the Commonwealth's central government are very real, "the private sector continues to hold its ground." Vazquez pointed out that the use of BPOP's debit and credit cards as measured by swipes Please Read: Important disclosures and analyst s certification appear in Appendix

2 has not declined during the past year, and that while Puerto Rico's population has declined, the number of BPOP client accounts has not. In general, he said, BPOP has not seen a fundamental change in the behavior of its clients. Scheiner noted that while many perceive that Puerto Rico's economy has been contracting by 10% or more per annum like Greece s, the Commonwealth's GDP actually grew in nominal terms last year, while its real GDP declined by just 100bps. Moreover, he added, Puerto Rico's real GDP has declined by 15% during the past eight years while its nominal GDP has increased, a performance he described as "shockingly resilient" in the face of the difficulties it has experienced. Vazquez said that Puerto Rico's real economic lumps had been taken in the couple of years following the 2006 completion of the phase-out of Section 936 of the IRS Code, which had provided the Commonwealth with tax-haven status that had attracted industry such as pharmaceutical firms. During the more than eight years since, Puerto Rico citizens and businesses have adjusted to the lower level of economic activity, he said. Vazquez said the businesses with which BPOP interacts on the island now fall into two main categories: survivors that have figured out how to make money in a difficult environment, and newly formed firms. He said the company's largest clients are doing well and that in many cases they are looking to buy out their competitors, while others have been cautious and waiting to see how the government's fiscal and economic plans evolve. Vazquez said that BPOP's stable credit metrics, posted in spite of the challenging operating environment in Puerto Rico and the expectations among some investors that they would deteriorate, were not an accident. They were the result of its dominant position among banks on the island and the work management had done in years past to proactively reposition the company's portfolio, including the sale of suspect credits, he said. The CFO added that even with several Puerto Rico banks, such as Doral Bank, having been absorbed by their competitors during the past few years, room for additional consolidation remained such that the island may ultimately have five or six large banks rather than the eight it has currently. Puerto Rico s Debt Restructuring Efforts Vazquez said that while it was unlikely that Puerto Rico would get 100% of what it asked for in the five-year debt restructuring plan developed by a working group appointed by Governor Alejandro Garcia Padilla the plan called for restructuring about $47bn of the Commonwealth s $72bn in bond debt it would be progress for the government if it ultimately got two-thirds of what it requested. He said the plan was not crazy and not perfect, but that matters were better than they had been prior to its announcement. Vazquez added that he had been surprised to hear that no meetings between the central government and creditors had been scheduled since the plan had been announced last Wednesday. 2

3 However, Vazquez said the final form of the plan was not his primary concern. What I care about as a business person is reduced levels of uncertainty, he said, adding that if the Commonwealth and its creditors wind up in court, they likely will wind up with the same result, only three years later than they would otherwise. Capital Plan Request and Additional Capital Deployment Management in conjunction with the release of BPOP's 2Q15 results on July 24 said that it expected to be able to disclose to investors the response to the capital plan it submitted to the Federal Reserve Bank of New York (FRBNY) in April during September. With less than three weeks remaining in the month, Vazquez said he was not yet going to change that guidance. He reiterated his prior description of BPOP's capital return "ask" for 2015 as "cautious," as management would prefer to have a smaller amount approved and then build upon that result going forward, rather than make a more aggressive request and run a greater risk of a denial and a further delay in the company's resumption of capital return for the first time since before the financial crisis. That is particularly the case, he said, insofar as the March 2016 Dodd-Frank Act Stress Test (DFAST) is not that far off. Vazquez acknowledged that before BPOP can trade at a much fuller valuation it will need to deploy a significant amount of excess capital the company had a Common Equity Tier 1 Capital ratio of 15.6% as of June 30. While that deployment may take the form of share buyback and common stock dividends, it could also occur through acquisitions of assets in Puerto Rico and of institutions, lines of business and assets in the U.S. mainland, he said. Vazquez added that such acquisitions were not imminent, and that during the next 18 months it was likely than any of BPOP's acquisition activity would be focused on its core U.S. markets of New York and South Florida. Any transactions would be cash deals as it would not make sense for BPOP to use its stock to facilitate deals given that it trades at 0.72x the company s tangible book value per share of $41.75 as of June 30. Vazquez said that while many investors believed that BPOP's acquisition of a significant portion of Doral's assets in an FDICbrokered deal in early March was driven by management's interest in Doral's Puerto Rico assets, it was the bank's New York assets that had been most interesting to them. In addition to a commercial portfolio that provided a boost to BPOP's New York operations, the deal also brought with it Doral's Manhattan-focused commercial lending team that complemented the company's existing Queens- and Brooklynfocused team. 3

4 Appendix: Analyst Certification and Other Important Disclosures Analyst Certification I, Mark Palmer, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. I, Giuliano Bologna, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. Regulatory Disclosures Analyst Stock Ratings Definitions BTIG LLC s ( BTIG ) ratings, effective May 10, 2010, are defined as follows: BUY A stock that is expected at initiation to produce a positive total return of 15% or greater over the 12 months following the initial recommendation. The BUY rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return. SELL A stock that is expected at initiation to produce a negative total return of 15% or greater over the next 12 months following the initial recommendation. The SELL rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return. NEUTRAL A stock that is not expected to appreciate or depreciate meaningfully over the next 12 months. NOT RATED A stock that is not rated but that is covered by BTIG. Distribution of Ratings and Investment Banking Clients BTIG must disclose in each research report the percentage of all securities rated by the member to which the member would assign a buy, neutral or sell rating. The said ratings are updated on a quarterly basis. BTIG must also disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months. Stocks in coverage as of the end of the most recent calendar quarter (June 30, 2015): 129 Distribution of BTIG s Research Recommendations (as of June 30, 2015): BUY: 65% NEUTRAL: 31% SELL: 4% Distribution of BTIG s Investment Banking Services (as of June 30, 2015): BUY: 83% NEUTRAL: 17% SELL: 0%uy 4 84 Reduce 0 5 Hold 2 40 IBC 6 For purposes of FINRA ratings distribution rules, BTIG s stock ratings of Buy, Neutral and Sell fall into Buy, Hold and Sell categories, respectively. Company Specific Regulatory Disclosures BTIG LLC expects to receive or intends to seek compensation for investment banking services in the next 3 months from: Popular, Inc. (BPOP) Company Valuation and Risk Disclosures Popular, Inc. (BPOP, BUY) Valuation: Our $41 price target on BPOP is based on 0.85X the sum of the company s 2016E TBV per share and our estimate of the realizable value of its non-core equity investments, minus our estimate of its losses on Puerto 4

5 Rico direct government exposure. Risks: Primary risks to our recommendation include weakness in the economy within the company s geographic footprint that could negatively impact its operating results; deterioration in collateral values of properties securing the company s construction, commercial and mortgage loans that could result in credit losses; the potential negative affect on the value of company s loans to the Puerto Rico government and its portfolio of Puerto Rico government securities due to rating downgrades on the government s debt obligations; an increase in the cost of company s obligations and ability to enter into hedging agreements due to rating agency actions; and increased regulatory scrutiny and limitations on business due to participation in TARP. Other Disclosures Additional Information Available Upon Request General Disclosures Research reports produced by BTIG LLC ( BTIG ) are published for and intended to be distributed solely to BTIG institutional and corporate clients. Recipients of BTIG reports will not be considered clients of BTIG solely because they may have received such BTIG report. The equity research analyst(s) responsible for the preparation of this report receives compensation based upon a variety of factors, including the quality and accuracy of research, internal/client feedback, and overall Firm revenues. BTIG reports are based on public information and BTIG considers the same to be reliable, comprehensive information, but makes no representation or warranty that the reports are accurate or complete. BTIG opinions and information provided in this report are as of the date of the report and may change without notice. 5

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