Fitch Ratings announced Thursday it had completed its review of four rated Puerto Rican Banks — Doral Financial Corp., First BanCorp, Popular Inc. and Santander Bancorp — adjusting and affirming its ratings and outlook for each financial institution.
In its report, Fitch said it has affirmed Doral’s and First BanCorp’s Long-term Issuer Default Ratings (IDR) of ‘B-‘, upgraded Popular’s Long-term IDR to ‘BB-‘ from ‘B+’, which is now the same as its subsidiary ratings. The Outlook for BPOP and FBP is “Stable,” Fitch confirmed.
As for Santander, Fitch has affirmed its “viability rating” at ‘bb+’, while noting that it’s IDRs and rating outlook are tied to its Spanish parent company, Banco Santander, “and changes in the parent company’s ratings result in changes to [Santander Bancorp].”
Santander BanCorp’s long-term IDRs is ‘BBB’ with a negative outlook.
In its rationale, Fitch explained that the viability ratings and IDRs of local banks are strongly tied to the local economy, which has been in a downward spiral for the better part of the past seven years.
“Given the peer group’s concentration in Puerto Rico and the pressures on the local economy, Fitch believes prospects for earnings growth is difficult in the near term. Additionally, this group’s funding profiles have generally been weaker compared to its U.S. bank peers,” Fitch said.
Local banks have relied heavily on non-core deposits, such as brokered certificates of deposit, time deposits, and wholesale borrowings with a higher cost of funds, which does not paint a favorable picture for the stateside ratings agency.
“Further, non-performing loans are stubbornly high and are reflected in current ratings levels. In Fitch’s view, the banks will likely continue to operate with elevated levels of non-performing assets, absent loan sales, given pressures in the real estate sector, which has a glut of housing inventory that will likely take a few years to balance out,” the agency said.
Another factor in Fitch’s equation is the island’s high unemployment rate, which currently hovers at about 13.5 percent and uncertainty related to the path that will be followed to address the fiscal and structural issues hurting the local economy.
“Given the challenges noted above, in Fitch’s opinion, future consolidation in Puerto Rico may take place as management teams may have more of an incentive to consider [mergers and acquisitions] as a way to strengthen franchises, improve product diversity, and enhance funding profile to help offset the challenging operating environment,” the company said.
To read the full report, click here.