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Puerto Rico’s credit unions maintain asset quality despite economic uncertainty

Estudios Técnicos’ report highlights increased capital and growth in loans and deposits.

Puerto Rico’s credit union industry has maintained good financial performance in 2024, according to the Financial Stability Index prepared by Estudios Técnicos Inc. (ETI). One notable point is that cooperatives have managed to keep asset quality stable despite economic uncertainty. 

“The value of the Credit Union Financial Stability Index stood at 0.65 in the first quarter of 2024 compared to 0.51 in the first quarter of 2023,” said economist Leslie Adames, director of ETI’s Economic Policy and Analysis Division. “The industry has maintained good financial performance. However, there are indications that suggest a need for a lot of caution, especially considering the currently prevailing economic and financial uncertainty.”

The value of the ETI Financial Stability Index for the credit union industry in Puerto Rico ranges from 0 to 1. The closer it is to 1, the more financially strengthened the industry is, and vice versa.

Adames highlighted a low default rate among the financial results published by the Public Corporation for the Supervision and Insurance of Cooperatives (Cossec, in Spanish) for the first quarter of 2024. 

“The default rate increased from 1.91% in the first quarter of 2023 to 2.27% in the first quarter of 2024,” he said. “However, it remains below the historical average of 4.56% between 2014 and 2019. However, cracks have appeared in the financial position of consumers and companies that pose a significant credit risk, and for the profitability of the industry.”

Additionally, capital adjusted for the shares of the partners (total capital minus shares of partners) increased from $668 million in the first quarter of 2023 to $920 million in the first quarter of 2024, supported by an increase in other reserves and surpluses and a reduction in the Investment Valuation Reserve.

“The balance of total deposits increased by $224 million annually to [nearly $8.42 billion] in the first quarter of 2024,” Adames added. “This was mainly due to the increase in certificates of deposit (CDs) ($577 million), while deposits in checking and savings accounts decreased by $285 million in that period. Rotating funds from transactional and savings accounts to certificates of deposit (as well as opening new partner accounts on CDs) adds an additional cost to the industry. On the other hand, the change in the composition of deposits in the last year contributes to liquidity risk.”

The industry’s net profit was estimated to increase from $129.9 million in the first quarter of 2023 to about $209.2 million in the first quarter of 2024. However, the quarterly variation reflects a slowdown during the last three quarters. The decrease in profitability is accompanied by increases in operating costs, as suggested by the increase in the expense ratio from 68.5% in the third quarter of 2023 to 76.7% in the first quarter of 2024.

“Cost containment, control of provisions and cost of funds, technological transformation, and diversification of recurring revenue streams will be fundamental elements to improve profitability, promote capital generation, and strengthen the industry’s solvency,” Adames said.

The economist added that liquidity continues to be a challenge. The growth in loans exceeded that experienced in deposits, resulting in the loan-to-deposit ratio increasing from 79.87% in the first quarter of 2023 to 84.77% in the first quarter of 2024. 

The ratio of total loans to stakeholders’ shares increased from 258% to 289%, while the ratio of cash and investments in marketable securities to total assets decreased from 26.1% to 25.2% during the period.

“In the short term, there are several risks that the credit union industry must look out for. Among those that should be highlighted are the continued volatility in interest rates on long-term Treasury notes, the competitive pressure of nontraditional savings alternatives (fintech) offering higher interest rates, the rotation in deposits towards CDs, the increase in consumer indebtedness, and the pressure on operating expenses amid the inflationary environment that persists in services,” Adames concluded.

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