Following a year during which Puerto Rico’s banking sector has been mindful of its operating costs and some have specialized in areas where they believe to be most competitive, 2014 is expected to continue posing “serious challenges,” especially since the island’s economy is facing challenges of its own, Office of the Financial Institutions Commissioner Rafael Blanco predicted during a recent interview.
“This year has been a good transition year for the banking sector. However, there are serious challenges ahead for 2014, with the biggest being the economic circumstances that surround each business,” said Blanco, who heads the government regulator known as OCIF by its initials in Spanish.
“The environment is not the best in the sense that inasmuch as the economy doesn’t show signs of recovery, banks will not generate new activity,” he said. “If there are no new projects or investments, it limits their ability to grab new business and there are many banks pursuing few new assets.”
The first six months of 2014 will be crucial. Government revenue collections must be closely monitored, as well as economic activity, he said.
“Depending on that, we’ll see if the banking sector will have enough business on hand to continue expanding or if they’ll be cutting back on their activities,” he said. “Right now, bank assets have been shrinking, as have deposits. Brokered deposits are at their lowest points in history.”
Around the corner, he said, is the possibility of an interest rate hike by the U.S. Federal Reserve, which is currently reviewing its fiscal policy. An increase of such rates would negatively impact Puerto Rico because the island is not showing the same economic improvement as the U.S. mainland.
“So an interest rate hike could represent an additional burden on good loans and create problems for debtors who may be unable to meet higher interest rate charges,” he said. “There is a possibility that loans that are good now could turn delinquent. Asset quality is still a big challenge for Puerto Rican banks.”
Another challenge for the sector is the expiration of the first phase of the loss-share agreement that certain entities entered into with the Federal Deposit Insurance Corp., which is due April 2015.
“We’re nearing that date and banks who have an inherited portfolio must either get rid of it or finish rebuilding it because when the term us up, the FDIC will no longer cover 80 percent of that loss,” he said, noting that the three banks that must deal with that issue are Scotiabank, Oriental Bank and Popular, which took over troubled loans through their respective acquisitions of former R-G Bank, Eurobank and Westernbank in 2010.
Betting on high-worth investors
During the interview, Blanco expressed hope that Gov. Alejandro García-Padilla administration’s efforts to attract high-worth investors to the island will help boost the economy and generate much-needed positive activity.
“Everything rests on re-establishing some sort of trust in the belief that Puerto Rico is a good destination to invest in, and that will require not only attracting those people, but also making Puerto Rico more competitive,” he said. “This means reviewing labor laws, reducing electricity costs and making the permitting process more efficient.”
“The priority is to sell Puerto Rico as an ideal destination to do business, and often, the actions we take are not directed toward that. For example, I believe that at times lawmakers have good intentions, but they often don’t calculate the cost behind what they’re proposing through legislation, which may sound attractive to the common person, but often cannot be afforded,” he said.
Foreclosures at record highs
As part of its duties as industry regulator, the OCIF has been closely monitoring the changes in mortgage loan parameters that are due to take effect in January following a policy change by the Consumer Financial Protection Bureau. As this media outlet reported, the federal agency is expected to tighten up mortgage loan requirements, which may make it more difficult for lower-income consumers to buy a home.
“We’ve sent two letters to the Consumer Financial Protection Bureau outlining our concerns and supporting the lobbying being done by the Bankers Association, the Mortgage Bankers Association and the Homebuilders Association. However, none have been answered,” he said.
“I believe there’s little possibility that Puerto Rico will be treated differently from the rest of the states. They are rules that are difficult to segment and I don’t see a will to do that,” Blanco noted.
As a result, banks will have to get used to approving loans that don’t comply with qualified mortgage safe harbor parameters, which means risks will be greater and loans will become more expensive.
As it is, Puerto Rico’s home foreclosure rates at record highs, with 3,814 such cases on record for last year and some 3,773 filed so far through October.
“At this rate, we believe we’ll wrap up the year with 4,528 cases, or 19 percent higher than last year, a new record,” he said.
Cumulatively, over the past two or three years, there have been 18,288 foreclosure cases filed, representing $2.5 billion in losses.
That scenario, coupled with the looming federal changes, leads Blanco to believe that a shift into a rental market is imminent for Puerto Rico.
“The amount of inventory that we’ll have will lead to that. The way the market is right now, those who have money to buy, should do so right away. If they don’t, they’re making a bad decision,” he concluded.