S&P Revises Outlooks On Popular, First Bank and OFG Bancorp
SAN JUAN – Standard & Poor’s Ratings Services said Friday it revised its outlook on Popular Inc. to positive from negative and its outlooks on FirstBank Puerto Rico and OFG Bancorp to stable from negative. At the same time, it affirmed its ratings on those banks. It also affirmed its ‘BBB-/A-3’ ratings on Santander BanCorp., and its outlook remains negative.
“These commercial banks continue to face substantial challenges related to Puerto Rico’s deteriorating economy and the budgetary problems that are likely to cause the Commonwealth’s government to default. Our speculative-grade ratings on these banks–excluding Santander, whose rating benefits from our view of its moderately strategic importance to and ownership by Banco Santander SA, one of the world’s largest banks–reflect these challenges as well as the banks’ high nonperforming assets (NPAs),” S&P’s brief reads.
The following was extracted from the credit-rating agency’s report:
We continue to believe that a government default is virtually certain (see “Puerto Rico Debt Moratorium Could Lead To Default,” published April 6, 2016) and could lead to incremental deterioration in the banks’ asset quality. Yet, over the past year, all the rated Puerto Rican banks have continued to reduce their direct exposure to the government and its related entities and have added to their reserves to some extent. Moreover, given the banks’ high capital ratios, we believe they could absorb a very high level of losses before jeopardizing their compliance with regulatory capital requirements. Most of their remaining government loan exposures are lower-risk loans to municipalities, which independently generate a large proportion of their revenues from property taxes, which could fare better than other government exposures.
These banks also benefit from certain structural benefits, such as access to the Federal Home Loan Bank, the U.S. Federal Reserve’s discount window, and deposit insurance from the Federal Deposit Insurance Corp., that should help support their funding profiles and stabilize their deposits. Therefore, while a government default scenario could amplify the stress within the banks’ business and risk profiles, we expect their capital and funding metrics should remain fairly resilient.
We revised our outlook on Popular to positive from negative because the bank not only has improved its capital levels, but it also has strengthened its earnings. This allowed for a partial reversal of its allowance for deferred tax assets, as well as enabled the bank to repay government funds from the Troubled Asset Relief Program (TARP), exit two regulatory orders, restructure its U.S. operations, and add to its dominant market position in Puerto Rico through the Doral Bank transaction. We also expect the bank to remain profitable over the next year, in part because of its improved loan performance, which is somewhat better than its local peers.
We will upgrade the bank if we gain confidence that it will maintain a Standard & Poor’s risk-adjusted capital (RAC) ratio above 10% consistently. Although it had a RAC ratio close to 12% at year-end 2015, we believe potential losses on its high level of NPAs could hurt its capital base. We could revise the outlook to stable or negative if we see any outsize increase in its nonperforming loans and credit costs and if profitability does not measure up to our expectations.
FIRSTBANK PUERTO RICO
We affirmed our ratings on FirstBank Puerto Rico at ‘B+’ and revised the outlook to stable from negative. The rating action reflects our belief that its improved capitalization should give it an ability to absorb the high losses that could result from its poor asset quality. We continue to assess the bank’s risk position as weak, in part because of its persistently high nonperforming loan balances, despite large bulk loan sales in recent years. We also view the bank’s business position as weak, reflecting subdued growth potential given weaknesses in the Puerto Rican market. The bank’s very high, though declining, reliance on brokered deposits continues to weigh heavily on its funding profile as well. We could raise the rating if the company makes material progress in lowering NPAs and if our concerns abate further that weakness in Puerto Rico’s economy or a default of its government could result in a significant deterioration in the bank’s business or financial position. We could lower the rating if NPAs rise significantly, or if we expect the company’s RAC ratio to fall below 10%.
The outlook revision is largely based on OFG’s substantial reduction in its Puerto Rican government-related loan exposures over the past two years, coupled with its higher reserves for problem loan exposures. Specifically, the company’s loan and securities exposures to the Commonwealth of Puerto Rico, certain public entities, and municipalities totaled roughly $433 million as of Dec. 31, 2015, down from $842 million on Dec. 31, 2013. Based on the latest proposals pursuant to ongoing negotiations, we think additional losses on remaining government-related exposures will not be substantial after taking into consideration existing reserves. However, these positive developments are roughly offset by weak loan performance, net losses, and challenges in the local economy, in our opinion. We view favorably the company’s efforts to preserve capital levels and expect the company to return to profitability.
We could lower the rating on OFG within the next year if loan performance weakens substantially, or if the company does not return to profitability. Conversely, we could raise the rating within the next year if NPAs decline significantly, capital ratios rise materially, and government-related loan exposures continue to decline, or if the local economy shows meaningful improvement. We will also be closely monitoring OFG’s growing reliance on brokered deposits, which could limit any consideration for ratings upside if recent trends continue.
We affirmed our ratings on Santander at ‘BBB-/A-3’, with a negative outlook, as we continue to assess the bank’s business positon as weak. Our negative outlook on Santander reflects the bank’s very high geographic and business concentration in the weak Puerto Rican economy, sizable Puerto Rican government-related loan exposures relative to its capital, and persistently high NPAs. It also reflects the bank’s stagnant growth and its market share in the Puerto Rican market, which has diminished in recent years. We would lower the rating if credit costs rise steeply, or if we project that the RAC ratio will fall below 15%. We also continue to monitor the bank’s transition to a U.S. intermediate holding company and the challenges that may arise. We could revise the outlook to stable if loan performance improves substantially beyond our expectations, or if the local economy shows meaningful improvement.