January 9, 2013 / 3:52 PM / 5 years ago

TEXT - Fitch comments on Puerto Rican banks

(The following statement was released by the rating agency)

Jan 9 - Fitch Ratings expects Puerto Rican banks to face continuing operating challenges in 2013, despite recent efforts by those institutions to build capital and derisk their balance sheets. Weak economic fundamentals in Puerto Rico will likely persist this year, and banks will face ongoing risks of rising asset quality pressure. The Puerto Rican economy has been in recession since 2006, and a newly elected governor (who took office last week) must confront continuing budget deficits, very high debt levels, and substantial unfunded pension liabilities. These issues threaten to restrain GDP growth in coming years, potentially delaying a recovery in the island’s weak labor market and a rebound in real estate prices. The Puerto Rican unemployment rate, while down from post-financial crisis highs, remains above 13%. In light of the weak macro backdrop, as well as commercial and residential real estate markets that remain stressed, Puerto Rican banks will be forced to maintain high capital levels to absorb shocks that could drive net charge-off (NCO) and nonperforming loan (NPL) levels higher in 2013. Although growth in problem assets slowed in 2011 and 2012, NPLs remain stubbornly high, and NCOs could increase if the island’s economic growth falters and financial pressure on borrowers builds. We believe reserve levels will remain higher than comparable figures for U.S. mainland banks. The overwhelming majority of problem loans in the local market are related to commercial real estate and construction lending. While non-accrual loans in residential home lending remain high at 7% for total residential mortgages for all banks, NCOs have not risen significantly. This reflects the fact that the Puerto Rican housing market has limited rental properties on the island. Borrowers have few housing options and generally are committed to remain in their homes despite financial pressures. Most banks have stated an average self-cure rate of 70% for residential nonperforming loans. In addition, conventional mortgages account for 85% of home loans on the island as Alt-A loan products were not used as extensively as they were on the U.S. mainland. Nonetheless, the prolonged recession and weak economic prospects may have negative implications for future trends regarding net losses from residential mortgages. Consumer and commercial lending performance, in contrast to real estate, has held up reasonably well through the economic downturn. Excluding residential mortgages, consumer nonaccruals (NALs) for all commercial banks in Puerto Rico remain low at roughly 1.0% of total loans in third-quarter 2012. Commercial and industrial loans are also holding up with NAL estimated at 2.5% for third-quarter 2012. None of the three Puerto Rican banks rated by Fitch -- Popular, Inc., First Bancorp, and Doral Financial Corp. -- currently have an investment-grade rating. Fitch also rates Santander Bancorp, which has a Viability Rating of ‘bb+'. This reflects the impact of the prolonged recession and high unemployment on asset quality in the real estate sector, as well as the still-elevated levels of nonperforming assets. (Caryn Trokie, New York Ratings Unit)

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