Fitch Ratings announced Thursday it completed a peer review of three rated Puerto Rican banks, and affirmed the long-term “Issuer Default Ratings” for Doral Financial Corp. at ‘C’ and Popular Inc. at ‘BB-‘ and First BanCorp at ‘B-.’ Fitch gave stable rating outlooks to Popular and First BanCorp, but expressed concerns over Doral’s undercapitalized status.
In its review, Fitch concluded that the classifications for local banks incorporate limiting rating factors, and current rating levels are indicative of the significant challenges the institutions face. Their ratings “are significantly more sensitive to economic conditions within their main operating market, the Commonwealth of Puerto Rico and current rating levels incorporate the weak state of the local economy.”
“Although Fitch recognizes that First BanCorp and Popular Inc. have been operating under these conditions for a number of years, while continuing to improve performance and strengthen balance sheets, recent measures by the government, such as increases in taxes and utility costs in an environment of negative economic growth may prolong the recession further and could pressure consumers even more,” Fitch said.
Further, the agency said Puerto Rican banks’ funding profiles have “historically been weaker when compared to U.S. bank peers given stronger reliance on noncore funding sources.”
This is also considered a rating constraint and has long been the case for Puerto Rico banks.
In Fitch’s view, the local market does not have sufficient deposits to support funding needs of all the banks, particularly for a relatively small economy. It is a competitive environment, which includes six local banks, four foreign banks, 127 cooperative banks as well as competition from the Government Development Bank for municipal deposits.
Finally, although nonperforming assets on an absolute basis have declined from peak levels, they remain at much higher than all U.S. mainland banks, with a ratio of 12.28 percent for Fitch-rated Puerto Rico banks versus 2.07 percent for Fitch-rated Mid-Tier and 1.94 percent for Community Bank peer groups, Fitch said.
“Despite asset quality improvements at most banks, Fitch remains concerned with the high level of foreclosures on the island that will likely take a few years to balance out and may impact future credit performance,” it noted.
Fitch also noted that First BanCorp and Popular Inc. have large exposures, including direct and indirect, to the local government through investment securities, credit facilities to some of the public corporations, and loans to entities related to the government as well as municipalities, which may also have a negative impact on future credit performance.
However, Fitch believes “the local banks have sufficient capital position to absorb any potential losses from these exposures.”
With regards to Doral, Fitch said its current ratings reflect the bank’s “very weak financial condition” related to its low capital position and continued net losses.
Doral’s ratings were downgraded on May 5, 2014 when it announced that it would not meet the minimum capital requirements outlined in its current Consent Order and Written Agreement with its regulators. Other factors, such as a second corrective action by regulators and its ongoing battle with the Puerto Rico Treasury Department over an unpaid $229 million tax refund all weigh heavy on Fitch’s ratings decision.
“Given these circumstances, Fitch believes that it is unlikely that Doral would be able to address the capital shortfall in a timely manner. Moreover, the inability to access the brokered deposit market will further pressure Doral’s weak funding profile,” Fitch said.