Kroll Bond Rating Agency has assigned senior unsecured debt and deposit ratings of BBB- and short-term debt and deposit ratings of K3 to Oriental Bank, with a stable outlook for the long-term debt and deposit ratings.
“The ratings for the bank are underpinned by its sustained level of profitability, including the ability to accrue equity capital, in the face of a protracted economic downturn and severe fiscal crisis in Puerto Rico, culminating with the commonwealth’s default on its general obligation debt in 2016,” KRBA said in its announcement.
“Profitability has been buoyed by resilient risk-adjusted margins; loan losses, while elevated compared to mainland peers and generally on upward trajectory (not to be unexpected given the sharp deterioration in the local economy and the adverse consequences of Hurricane María), have been well absorbed by the company’s effective loan-risk pricing strategy,” it added.
Capital protection, while historically strong in relation to both the bank’s own risk profile and the peer group, is sharply lower following the all-cash acquisition of the Scotiabank de Puerto Rico, which was completed on Dec. 31, 2019.
However, KBRA estimates that the bank can accrete capital at a considerable rate going forward, with earnings retention of about 1% annually in relation to total pro forma assets of approximately $10 billion.
“Management has communicated a plan that returns regulatory capital to levels that are well above its peer group within three years,” KRBA added.
A key ratings factor is the anticipated near- to intermediate-term stability in the Puerto Rican economy, due largely from the influx of federal funds and private insurance payments along with an expected much lower debt burden, although the commonwealth will continue to face long-term challenges especially surrounding population growth and economic competitiveness, it said.
KBRA recognizes that Oriental Bank has a strategy to diversify beyond Puerto Rico. With the Scotiabank acquistion, Oriental will make its debut in the U.S. Virgin Islands.
Total loans to U.S.-mainland based borrowers currently comprise 6% of total loans. Over time, management anticipates that these loans will grow to 20% of the total, KRBA stated.
“Even so, that vast majority of operations and loans will remain centered in Puerto Rico and this includes a concentration in residential loans collateralized by properties located in Puerto Rico. KBRA, therefore, agrees with management’s plan to rebuild capital to levels in excess of its mainland peers,” the agency stated, adding a ratings report will be published soon.