Three of Puerto Rico’s main banks — Banco Santander Puerto Rico, Popular Inc. and FirstBank Puerto Rico — banks can absorb further asset quality stress resulting from Puerto Rico’s recession for at least two more years, Moody’s Investors Service said in a report released Thursday.
The island’s economic contraction and 11.2 percent unemployment rate “present significant operating challenges for Banco Santander Puerto Rico (BSPR, A2/Baa2 stable, ba31 ), Banco Popular de Puerto Rico (Popular, Ba2/B2 negative, b1) and FirstBank (B1/Caa1 negative, b3), despite their substantial efforts to de-risk and reduce costs.”
“Although we expect lower unemployment and a slowdown in economic contraction in 2017, the banks’ high levels of problem assets will persist and prospects for asset and earnings growth will remain poor,” the agency noted.
“Nonetheless, a stress test of the banks’ capital levels under our assumed economic scenario indicates that they can absorb the estimated incremental credit costs while maintaining their current standalone credit strength,” it said, adding that Puerto Rico’s economic and jobs outlook should remain weak for at least two more years.
As the Commonwealth works through restructuring its $68 billion public debt through the Fiscal Control Board, Moody’s stress test suggests that the banks’ current capitalization levels can absorb further asset quality and earnings stresses.
“Although reduced, the banks’ exposures to the Puerto Rico public sector remain significant. Direct and indirect exposures, including loans and securities linked to non-government entities, may lead to higher losses for the banks. Non-performing assets are likely to persist as long as the economy continues to contract, keeping credit costs high as more companies exhaust their cash resources,” Moody’s said.
Moody’s forecast economic contraction in Puerto Rico to be -2.4 percent for 2016 and -0.9 percent in 2017, continuing a downturn that began in 2004.
“The lesser contraction expected for 2017 reflects our view that the creation of a control board and legal framework for restructuring Puerto Rico’s debt will increase legal and economic certainty and help stem investment outflows from the island,” Moody’s said.