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Liquidity of Puerto Rico’s banks up $16B in 1Q21, Financial Stability Index says

The Financial Stability Index of commercial banks in Puerto Rico, prepared by Estudios Técnicos Inc., shows a strengthening in the banking industry this year, mainly due to an improvement in its liquidity and increases of $16 billion in deposits in the first quarter of 2021.

“The index increased from 0.52 in the first quarter of 2020 to 0.55 in the fourth quarter of 2020 and now to 0.61 in the first quarter of 2021. The index increased for the third consecutive quarter driven by sequential improvements in the liquidity position of Puerto Rico’s banking industry,” said economist Leslie Adames, director of the Economic Policy and Analysis Division of Estudios Técnicos Inc. (ETI).

ETI developed the index to measure the financial health of banks, based on four indicators: liquidity (total loans/deposits), solvency (capital to assets totals), asset quality (delinquent loans/total loans) and profitability (return on assets or ROA), ETI CEO Graham Castillo said.

The index fluctuates between 0 and 1, with values close to zero indicating financial fragility and values close to one showing strength.

The Financial Stability Index showed that total deposits for the 12 months ending in the first quarter of 2021 reached $75.7 billion, an increase of $16 billion compared to the same period last year.

“The total loan and lease portfolio increased by $3.6 billion, driven primarily by the residential mortgage and commercial loan portfolio, which accounted for 88% of the total annual increase in the industry portfolio balance,” Adames said.

“The higher growth in deposits relative to loans and the balance of the lease portfolio led to further improvements in the loan-to-deposit (LtD) ratio from 64.61% to 52.13% between the first quarter of 2020 and the first quarter of 2021,” he added.

The profitability of the banking industry also improved during the first quarter of this year with the ROA increasing for the fifth consecutive quarter from 0.49% in the first quarter of 2020 to 1.42% in the first quarter of 2021.

The improvement in profitability was influenced by the release of $283 million in provisions for losses on loans and leases for the 12-month period ending in the first quarter of 2021, the index showed.

The industry’s net interest margin (NIM) decreased from 4.31% in the first quarter of 2020 to 3.45% in the first quarter of 2021. Non-performing loans over total loans (NPL) show a sequential improvement of 6.57% in the third quarter of 2020 to 5.47% in the first quarter of 2021.

However, individually, some local banks experienced a moderate deterioration in specific segments of commercial loans, such as commercial and industrial portfolios, credit cards and financial leasing.

“Finally, the solvency of the industry remains strong with the share capital over total assets at 8.81% in the first quarter of 2021, although lower than the 11.74% in the first quarter of 2020. The common equity Tier 1 of the industry improved sequentially from 15.81% in the fourth quarter of 2020 to 15.94% in the first quarter of 2021 and the proportion remained well above the minimum regulatory requirement of 6.5% to be considered well capitalized,” said Adames.

ETI’s consulting team is made up of experts in several disciplines, who, in conjunction with the firm’s Data Analytics division, will continue to develop indexes for different sectors of the economy, said Castillo, adding that the firm will continue to offer free access to this data and its implications for the benefit of the business community.

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This story was written by our staff based on a press release.

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