Several days after downgrading Puerto Rico’s general obligation bond rating to Ba2, or junk, Moody’s Investors Service placed on review for downgrade certain ratings of three local banks: Banco Santander Puerto Rico, Popular Inc. and FirstBank Puerto Rico.
Moody’s said the reviews for downgrade will focus on the potential effect of further deterioration in the Puerto Rican economy and/or the commonwealth’s fiscal condition on the credit profiles of the three banking institutions.
“Puerto Rico’s economy is in the midst of a protracted recession that began in 2006, and it continues to be challenged by high unemployment, low workforce participation, high poverty levels compared to the U.S. mainland, a declining population, and weakness in its key pharmaceutical sector,” Moody’s said.
“This economic weakness, combined with years of deficit financing, pension underfunding and budgetary imbalance, have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained,” he agency said.
During the review, Moody’s will re-evaluate the potential credit losses in the banks’ loan and securities portfolios, including direct and indirect exposures to the commonwealth, under more adverse scenarios.
The rating agency is concerned that the banks’ high levels of non-performing assets could lead to significant losses if conditions do not improve. Moody’s will also consider the banks’ willingness to take on additional exposure to the commonwealth.
Moody’s added that it will assess the impact of ongoing market volatility on the banks’ funding positions. Although the banks’ deposit flows have remained steady during this period of heightened volatility, Moody’s will assess each bank’s contingency funding plans in light of further prolonged market uncertainties.
Moody’s decision drew immediate reaction from the local banks, with Popular and Santander saying separately that their assets and liquidity are strong.
“Moody’s action today does not affect Popular or its day-to-day business at all,” Popular said in a statement. “We are in an extremely strong position and we have capital and liquidity to continue meeting the needs of our customers. We have already been evaluated by Fitch and Standard & Poor’s and in both cases their classifications were confirmed unchanged.”
Meanwhile, Juan Manuel Díaz-Soultaire, Santander’s director of administration and finance, said “Banco Santander Puerto Rico’s credit rating remains investment grade because of its capital strength, asset quality, and high liquidity.”
“The most relevant aspect of Moody’s reiew for Santander and our customers is the classification related to debt and deposits, in which Banco Santander Puerto Rico has remained unchanged as the only bank on the island in investment grade (Baa1) with a stable outlook,” he added.
FirstBank did not issue or make any comment related to Moody’s action Tuesday.