Carrión: Uncertainty Behind Volatility in Puerto Rico Bank Stocks
B2B Tax to Cost Popular $20M to $25M in 2016
After reporting last week an adjusted net income of $98 million for the fourth quarter (4Q) and a net income of $895 million for full-year 2015, Richard Carrión, chairman & CEO of Popular Inc.—the bank holding company of Banco Popular—said the deep slide that Puerto Rico stocks have experienced since the beginning of this year is all related to Puerto Rico’s fiscal and liquidity crisis.
“The selloff of Puerto Rico stocks, banks’ especially, is totally related to the island’s situation—people’s perception of Puerto Rico and the prevailing uncertainty. Uncertainty is the biggest factor and the basis for this situation,” Carrión told Caribbean Business during a phone interview following the earnings call with investors. “I believe there will still be volatility in the price of Puerto Rico stocks until there’s more clarity on what the outcome will be.”
Regarding the recent 0.25% increase in interest rates by the Federal Reserve and future subsequent rate hikes expected for the remainder of this year, the top Popular executive said that given all the recent turbulence in the stock markets, he believes the Fed will be in no rush for other rate increases.
“Besides, we’re talking about one or two more 0.25% increases, which I believe won’t have a meaningful impact,” Carrión noted.
The cost of B2B tax
During the earnings call, it was revealed that Popular’s expenses during the year had increased as a result of the implementation of the new 4% business-to-business (B2B) tax.
Carrión said Popular estimated the B2B tax will cost the bank between $20 million and $25 million in 2016. When asked about the bank’s position on postponing the transition of the 11.5% sales & use tax into a value-added tax (VAT, or IVA by its Spanish acronym), slated for April 1, which includes increasing the B2B tax to 10.5%, the Popular Inc. chairman & CEO said there are already too many taxes in Puerto Rico.
In recent days, there have been calls from local politicians, namely the minority New Progressive Party, and trade organizations urging the VAT’s postponement, fearing it will further hurt the island’s already battered economy.
“The truth is, we don’t have an official stance, but we wouldn’t oppose the postponement of the VAT. Now, there are more pressing issues on the table the government needs to resolve,” Carrión pointed out.
Last week, La Fortaleza Public Affairs Secretary Jesús Manuel Ortiz reiterated that the VAT is the public policy of the administration. “Here, in the executive [branch], there is no intention of considering a measure to remove the IVA. It is necessary,” he said.
Efforts by political groups to solve fiscal woes promising
The fact that Puerto Rico’s multiple fiscal and liquidity challenges in the coming months are on the agendas of political groups in both the U.S. Congress and Puerto Rico is promising, Carrión said, but warned political processes are inherently unpredictable.
“It’s very hard to predict what could happen in Congress. I do believe there’s now more awareness due to the fact that, just a few days ago, 42 Democrat senators signed a letter and that [U.S. House] Speaker Paul Ryan stated he wanted to have something done in the first quarter of this year,” Carrión commented. “Now, if that translates into effective action, it is difficult to say.”
In his Dec. 1 testimony before the U.S. Senate Judiciary Committee, Carrión said he tried to convey the message that any successful solution would require three things: One, a legal framework for a debt restructuring; two, an effective fiscal control board; and three, a meaningful economic-stimulus plan.
“We still believe that. Otherwise, we will continue in a negative spiral,” the top Popular official warned.