Puerto Rico’s banking industry continues to strengthen in past year
The Puerto Rican banking industry has continued to strengthen over the past year, supported by an increase in liquidity and the strengthening of asset quality.
The Financial Stability Index for Commercial Banks in Puerto Rico, prepared by Estudios Técnicos, Inc., increased to 0.60 in the third quarter of 2021, compared to 0.47 in the same period in 2020.
“The banking financial stability index continued to improve from 0.46 in the third quarter of 2020 to 0.57 in the second quarter of 2021, and more recently, 0.60 in the third quarter. The strengthening in the industry’s liquidity and the decline in the nonperforming loan ratio continued influencing the index’s positive performance so far in 2021,” said economist Leslie Adames, director of economic analysis and Policy at Estudios Técnicos.
Estudios Técnicos Inc. officials confirmed that they developed the Index to measure the financial health of banks, based on four indicators: liquidity (total loans/total deposits), solvency (capital equity to total assets), asset quality (nonperforming loans/total loans) and profitability (return on assets or ROA).
The index fluctuates between 0 and 1, with values close to zero indicating financial fragility and values close to one showing strength.
The banking industry’s liquidity continued improving, supported by total deposits that increased by $1.3 billion quarter-over-quarter to $85.9 billion in the third quarter of 2021, while loans decreased by $198.8 million to $37.6 billion, said Adames.
Asset quality of local banks also improved with the nonperforming loan ratio declining from 6.57% in the third quarter of 2020 to 4.83% in the second quarter of 2021, and subsequently, to 4.32% in the third quarter of 2021.
Asset quality figures released by the Federal Deposit Insurance Corporation (FDIC) do not yet reflect material deterioration in asset quality at the individual loan portfolio level industrywide, Adames said.
In terms of profitability, the industry reflected a sequential increase of $318 million in net income for a total of $923 million in the third quarter. The release of provisions for loans and leases losses and increases in interest income and other non-interest income, for example, charges to deposit accounts and trust activities, contributed to maintaining the industry’s profitability in the quarter, said Adames.
Finally, although equity capital to total assets fell from 9.05% in the third quarter of 2020 to 7.77% in the third quarter of 2021, it remained stable compared to 7.70% in the previous quarter.
The Common Equity Tier 1 ratio rose sequentially from 15.65% in the second quarter of 2021 to 16.22% in the third quarter of 2021, remaining well above the 6.5% minimum regulatory requirement to be considered well-capitalized.