The heads of the island’s two largest banks took turns in recent days expressing their concerns about the current fiscal scenario and whether political leaders are willing to make the right decisions to put Puerto Rico’s economy back on track.
During separate calls with stateside analysts to discuss quarterly results, Popular Inc. CEO Richard Carrión and Oriental Financial Group CEO José Rafael Fernández agreed the success of their operations is directly tied into the island’s economic outlook.
“Over the next few weeks, comprehensive tax reform, the ongoing restructuring of the Puerto Rico Electric Power Authority and the government budget will be the critical events impacting the fiscal and economic outlook,” said Carrión.
“We hope that the political leadership will arrive at solutions that will achieve fiscal balance and put the economy back on a growth track. And we will do everything in our power to support this result,” he said.
On Monday, Popular Inc. reported net income of $74.8 million and adjusted net income of $90.3 million for the first quarter ended Mar. 31, 2015, compared to $48.9 million and $76.8 million, respectively for the quarter ended Dec. 31, 2014. During the first quarter of 2014, the bank reported $86.4 million in net income.
In his comments to analysts, Carrión said that, as it has done in the past, Popular Inc. will continue to manage through other potential scenarios.
“Our story is to a large extent linked to Puerto Rico, its economy and future. We are aware of that and remain committed to working to improve the island’s prospects,” he said.
At present, Popular Inc. has $995 million in direct exposure to public corporations and the Puerto Rico government, of which approximately $813 million outstanding remained flat in comparison to the previous quarter, said Lidio Soriano, the financial institutions’ executive vice president and corporate risk management officer.
“Our largest direct exposures for the central government and public corporations are $100 million exposure to tax revenue anticipation notes for which we receive the first schedule payment $11 million till the close of the quarter,” he said, noting the bank is has an outstanding loan to PREPA for $85 million.Oriental President José Rafael Fernández
‘Not fun being a banker’
Meanwhile, Fernández spoke candidly to analysts about Puerto Rico’s “very challenging environment” and nine years of economic contraction.
“What is going on locally these days regarding the VAT and all these liquidity issues regarding the Government Development Bank, I think has a lot to do with political posturing and that is certainly increasing the anxiety of the people of Puerto Rico, the businesses in Puerto Rico and certainly investors in general,” he said.
“So it is unfortunate that political posturing is occurring. Clearly, politicians are not accustomed to operating a liquidity-strapped economy, where higher government revenues and lower government expenses are required to stabilize the patient. So for them, it’s a very hard pill to swallow and that’s why you are seeing all this screaming and yelling across the different parts of the government,” Fernández said, adding his belief is be that there will ultimately be a consensus on the tax bill.
“It will eventually be reached. GDB will eventually be able to cap the markets and gain some liquidity. And I think from Oriental’s perspective, the landscape will continue to be an extremely challenging environment to operate in. It’s not fun to be a banker in Puerto Rico these days,” he said.
Several weeks ago, Oriental also felt the brunt of the government’s fiscal mess, announcing that it was taking a $24 million provision against a $200 million fuel purchase credit line granted to PREPA. The 7.5 percent nontaxable amount is part of a syndicated $550 million line Oriental took over in late 2012 through its purchase of BBVA’s Puerto Rico operations.
“Our credit analysis shows PREPA has the financial capability to pay its creditors. We also saw that PREPA’s cash flows were improving or improving. However, after a more than an eight month forbearance period previously granted by its creditors, PREPA clearly demonstrated an unwillingness to commit to pay as contracted,” Fernández said.
“We are disappointed with the provision that we took from, recently announced, on PREPA. We are disappointed on how the government and their consultants are treating banks and treating creditors in general,” he said.
“I think to a large extent, the government of Puerto Rico is managed by consultants and there has got to be some level of leadership at the government level to act when you have liquidity and timing issues to address,” Fernández said.
“So it’s really frustrating, but we have a very strong management team. Our Board is very committed and our employees are totally committed to continue to grow our franchise as we have done for the last three years. We are very excited on what we see here on the ground from our customer’s side. It’s just challenging on the things that we can control regarding the economy,” the executive concluded.