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Report Shows Profitability in P.R. Banking Sector

By on April 6, 2017

A large banner draped over a building reads "This is your Bank" in the Hato Rey banking district in San Juan, Puerto Rico, Friday, April 6, 2000. Citing massive movements of cash, checks and postal orders, the federal government is casting a suspicious eye on this U.S. Caribbean outpost--which is also a key transit point for drugs and money in the Americas. On March 8, the U.S. Justice Department designated San Juan one of four U.S. areas to get task forces exclusively devoted to financial crimes. (APPhoto/Ricardo Figueroa)

A 2000 photo of the Hato Rey banking district in San Juan. (APPhoto/Ricardo Figueroa)

Despite a stagnating economy, an unrelenting fiscal and debt crisis, and a shrinking population, Puerto Rico’s banking sector has been able to maintain positive levels of profitability for three-consecutive years; however, a projected weakening of the economy may slow this trend.

The local banking industry recorded a pretax return on equity (ROE) of 4.3% in 2016, 5.7% in 2015 and 3.3% in 2014. ROE is the amount of net income returned as a percentage of shareholders’ equity.

The information is contained in the latest Banking Industry Report prepared by V2A, a company that analyzes data from the Federal Deposit Insurance Corp., the Securities & Exchange Commission and the local Financial Institutions Commissioner’s Office to shed light on the state of the banking sector.

Graphs in the report, which examined data from the past five years, show that the banking sector’s total assets went from $81.2 billion in 2011 to $66.2 billion in 2016. Total deposits went from $55.7 billion in 2011 to $51.5 billion in 2016, while total gross loans and leases went from $56.4 billion in 2011 to $42.7 billion in 2016. In general terms, however, Banco Popular, FirstBank and Oriental Bank, as well as the credit union sector, have increased their market share in assets, deposits, and loans & leases from 2011 to 2016 while Banco Santander and Scotiabank have either maintained or lost their market share, the report says.

The banking report noted that “revised economic-growth forecasts point to a prolonged economic contraction, which will keep local banks’ profitability levels subdued.” The Planning Board has projected a 1.7% decrease in real economic growth in fiscal 2017 and a 1.5% decrease in fiscal 2018.

Report findings

The report also says the following:
Oriental had the highest pretax ROE in 2016 at 9.2%, followed by FirstBank at 6.8% and Popular at 6.3%.

Santander and Scotiabank, whose Puerto Rico operations constitute a small portion of their global business, recorded the lowest profitability in 2016, with a pretax ROE of 3.8% and negative 12.1%, respectively. Scotiabank’s unusually high operating expense, driven by high goodwill impairment losses, dragged its profitability deep into negative territory.

The analysis of the banks’ performance from 2011 to 2016 suggests that while Popular, FirstBank and Oriental have taken bold steps to secure their position locally, Santander and Scotiabank have been comparatively less bold in solidifying their positions in Puerto Rico.

Despite individual gains, graphs in the report show that banks’ total assets went from $81.2 billion in 2011 to $66.2 billion in 2016. Total deposits went down from $55.7 billion in 2011 to $51.5 billion in 2016, while total gross loans and leases went from $56.4 billion in 2011 to $42.7 billion in 2016.

FirstBank has secured its market position as the island’s second-largest bank, managing $11.9 billion in assets as of Dec. 31, 2016. After acquiring 10 branches of Doral in 2015, selling nonperforming loans and reducing its dependence on brokered deposits, FirstBank increased its market share of total assets to 18% at the end of 2016, moving from 16% in 2011, and its gross loans and leases market share went from 19% to 21%.

After acquiring Eurobank in 2010 and Banco Bilbao Vizcaya Argentaria (BBVA) in 2012, Oriental Bank’s total assets in the market increased from 8% in 2011 to 10% in 2016, its market share of deposits from 4% to 9%, and its market share of gross loans and leases from 3% to 10%.

Total mortgage or residential-loan portfolios went from $18 billion in 2011 to $15.8 billion in 2016, while commercial-loan portfolios went from $23.3 billion in 2011 to $14.8 billion in 2016. Consumer loans have gone from $5.8 billion in 2011 up to $6.2 billion in 2016. Auto loans and leases also registered a hike from $6.4 billion in 2011 to $7.1 billion 2016.

Popular’s market share for residential mortgages increased from 20% in 2011 to 43% in 2016; FirstBank’s market share increased from 16% to 21%, while Oriental increased from 5% to 9%. Santander decreased its market share in residential mortgages from 12% in 2011 to 8% in 2016, while Scotiabank registered a decline from 15% to 12%. Credit unions, or cooperatives, maintained an 8% market share.

Popular’s market share for commercial loans increased from 36% to 45%; FirstBank’s went down from 24% to 23%; Scotiabank’s went up from 8% to 7%. Oriental’s market share went up from 3% to 11% while Santander went up from 12% to 14%.

Consumer loans, excluding auto loans, increased 6% from 2011 to 2016.

The auto loans market increased by $700 million, or 12%, from 2011 to 2016. Popular’s market share of this segment increased from 9% to 13%; FirstBank decreased from 17% to 13%. Oriental’s market share went from 1% in 2011 to 14% in 2016. Santander is not a player in the auto loans market while Scotiabank’s market share in this sector experienced a slight decline from 6% to 5%.

Banks manage less risky loan mixes, except Scotiabank, whose loan mix is heavily concentrated in mortgages. About 56% of Scotiabank’s loans are residential mortgages whereas for the rest of the banks, mortgages represent 33% to 39% of their total loans and leases. Commercial, construction and public-sector loans comprised 30% to 54% of the banks’ total loan mixture. Consumer and auto loans comprised 12% to 29% of the mix. For credit unions, or cooperatives, combined consumer and auto loans represented 65% of their loan mix.

Total loan originations during the past five years decreased 42%, from $12.4 billion to $7.2 billion.

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