Finance

Highlights

  • On October 2012 the Government Development Bank publishes a rise of 0.5% in the Economic Activity Index (GDB-EAI) in comparison with the same month (July) in 2011. The index has remained on positive ground since December 2011, its first return to growth since Puerto Rico’s recession began in 2006.
  • Puerto Rico tax collections rose in August 2012 as net revenue to the general fund reached $511.6 million, up from $465.4 million during the same month last year. Gross revenue topped $560 million, but $49 million was set aside for increased refunds under tax reform.
  • On September 30, 2012 (3rd quarter reports) First BanCorp posted net income of $19.1 million, or 9¢ a share, as it slashed the amount of cash it set aside for bad loans. The San Juan-based holding company for FirstBank Puerto Rico, the island’s second-largest lender by assets, reported a net loss of $24 million, or $1.46 a share, for the same quarter last year (2011).
  • According to the Puerto Rico Boletín, Bankruptcy filings in Puerto Rico were down across the board in September 2012 and remain slightly lower for the first nine months of 2012. A total of 840 bankruptcies were filed on the island last month, down 17% from September 2011.
  • Doral Financial Corp., the bank holding company of Doral Bank, posted a net loss of $32.5 million in the third quarter (3Q) 2012, which was wider than the $1.6 million loss reported in 2Q and narrowly bigger than the $30.2 million it lost in 3Q 2011. For the nine months through September 2012, Doral has posted total losses of $31.6 million, compared with a net loss of $22.4 million for the same period of 2011.
  • On December 2012 it was announced that Oriental Financial Group Inc. received all regulatory approvals necessary to consummate its previously announced acquisition of the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria Puerto Rico (BBVA-P.R.). The $500 million acquisition has received approvals from the Federal Reserve Bank of New York, Federal Deposit Insurance Corp., Puerto Rico Financial Institutions Commissioner’s Office and the Financial Industry Regulatory Authority, and it is set to close by the end of the year (2012). With BBVA’s acquisition, Oriental becomes the No. 2 bank in assets (after BPPR) and No. 3 in deposits in Puerto Rico.
  • On December 13, 2012, Moody's Investors Service has downgraded the general obligation rating of the Commonwealth of Puerto Rico to Baa3 from Baa1. The downgrade also applies to those ratings that are based on or capped at the G.O. rating of the commonwealth. The outlook is negative. The downgrade to Baa3 and the assignment of a negative outlook was due to: low economic growth prospects, very high debt levels and growing, financial performance has been weak and a lack of meaningful pension reform. The rating of Baa3 is the lowest possible rating given by Moody's Investors Service, just above junk bonds.

The logistics of the Puerto Rican financial sector operates similar to the one of a state in the United States of America. In Puerto Rico there is no Central Bank and the US Federal Reserve Bank acts as the Central Bank, determining the receivable interest over loans and regulating Monetary and Credit policies. As a part of the US Federal Banking system, Puerto Rico adheres to all U.S. international financial regulations. The banking institutions in Puerto Rico are insured and regulated by the Federal Deposit Insurance Corporation (FDIC) which insures deposits for up to $100,000. The local financial regulatory entity, The Office of the Commissioner of Financial Institutions (OCIF), works closely with the FDIC and other federal regulatory agencies such as COSSEC, which regulates de Credit Unions in Puerto Rico. Commercial banks capture the biggest role in the financial sector of Puerto Rico, with 42% of all financial assets in Puerto Rico, which equals to approximately $66.7 billion dollars in Q3-2012. Other components of the financial sector include International Bank Entities, Investment Companies and Government Banks, as described and segregated in the pie chart below.

Commercial Banks

As of September 30, 2012 there were ten commercial banks in the island, and of those ten, five are international institutions: Citibank, Scotiabank, Santander, BBVA and Banesco International Bank. Puerto Rico’s oldest (established in 1893 in Puerto Rico) and largest bank, Banco Popular de Puerto Rico, still leads the industry in commercial and individual lending, and private banking business. Banco Popular has expanded outside of Puerto Rico with branches in many US states such as Florida, California, Texas and New York. As per the third quarter figures of 2012, Banco Popular has 41% of all bank deposits in the island and 37% of all loans in Puerto Rico, by far the highest market share of all the banking institutions. Other top local financial institutions in Puerto Rico include Firstbank of Puerto Rico, Scotiabank of PR, Banco Santander Puerto Rico, Oriental Financial and Doral Bank. In late 2010 Banesco International Bank Corp (also known as BBU) entered the financial sector in Puerto Rico, which was significant since over the past 30 years a new banking institution has not entered the financial sector in Puerto Rico.

From 2007 to 2011 total assets, deposits and loans have decreased in commercial banks of Puerto Rico. This trend continued in 2012 for total loans and assets in commercial banks. Differently, deposits have started to increase in 2012, and are expected to increase 3% by the end of the year.

After decreasing net income amounts in Commercial Banks for 2009 and 2010, in 2011 and 2012 the banks show positive net incomes. As per OCIF data in the third quarter of 2012, total net income amounts in commercial banks has increased approximately 15.8% over this past year (2011) and is estimated to be $233 million. This positive net income represents a continued growth in banking as a whole since 2005 and a slight recovery in this financial sector.

In addition to private commercial banks, the commonwealth of Puerto Rico operates two commercial banking institutions, The Government Development bank, which is the Commonwealth’s fiscal agent, and The Economic Development Bank for Puerto Rico, which provides financing for small businesses and first time entrepreneurs. These banks are treated separately due to their specialized public help nature.

Financial Performance

As of the third quarter report of 2012 the total financial sector is expected to decrease 7% over the past year’s assets. This contraction is primarily attributed to the decrease in assets of the International Banking Entities, which have decreased 20%, and Brokerage Companies, which have decreased more than 50% over the past year. Financial sectors that are expected to grow this year (2012) are: Mortgage loan Companies (5.7%), Leasing Companies (4.3%), Credit Unions (3.3%), and Investment Companies (3.1%). Even though Government Banks are expected to decrease this year, the same companies had the biggest yearly growth of 8.3% each year for the past five years. The most stable sector in the Financial Industry in Puerto Rico is Credit Unions, with a stable growth since 2005. In recent years mortgage loan companies as well as Credit Unions and Investment Companies have gained a bit of popularity, due to the commercial bank mergers and bankruptcies.

Puerto Rico’s largest investment and brokerage companies are: UBS Financial Services, with 47% of the market share, followed by Santander securities (16.5%) and Popular securities (13.2%). Companies with rapid growth from 2009 to 2012 in the Investment Company sector include Merrill Lynch, Pierce, Fenner with an annual growth of 68% each year and a market share of 11% of the sector, and Consultiva Securities Inc. with an annual growth rate of 46% each year and a market share of 1.4% of the sector.

Consumer Debt

In Puerto Rico debt of consumers is slowly declining due to the recent problems faced by the commercial banking sector, which represents 25% of the total debt of consumers. This past year, the debt of consumers declined 2%, primarily attributed to the decrease in commercial bank loans. Student loans and Small personal loans have also decreased, but the total amounts are small and not as significant as commercial loans. More than 75% of consumer’s debt is created in 3 types of institutions: Commercial Banks, Installment Sale Companies and Local Credit Unions.

Over the past year (2011) debt created by Federal Credit Unions has grown the most in Puerto Rico. Following Federal Credit Unions, Revolving Credit Cards have also increased, as well as Pension Public Funds. The sectors that have contracted this past year are PR Employees Associations, Commercial Banks, Small Personal Loans, and Student Loans. As a whole, the lending sector will continue to suffer if the production in commercial banks does not increase in Puerto Rico.

Mortgage & Loan Sector

Bank operations in the island have remained stable, but this past year (2011 to 2012) total loan originations in the island have decreased 11%, while since 2008 the have decreased 7% each year. Some of the factors that indirectly have contributed to the decrease in lending are: the elimination of the secondary mortgage market, the low liquidity of local banks, the high number of foreclosed properties, and the high requirements needed to obtain regular conventional loans on first properties. These tough restrictions have hindered the loan production rates in the island in all types of institutions.

The production of loans for International Banking Entities has been the most affected institutions with a contraction of 36% each year since 2008. In 2012 the loan portfolio for an international banking institution was transferred to its holding company outside of Puerto Rico, which decreased the total loan portfolio for International Banking Entities 78% (or to $1.5 million) from what it was at the end of 2011. Small & Personal Loan Companies have also contracted with an annual decrease of 9% since 2007. From 2008 to 2012 Small loan Companies have reduced their portfolio 30%. Commercial Banks and Financing Companies have also contracted since 2008, but not as drastic as the before mentioned. Even though the economic recession has affected the loan production in Puerto Rico, Credit Unions and Mortgage Loan Companies have managed to have a positive loan production over this past year.

The distribution of loans in Puerto Rico is dominated by Commercial Banks with 78% of the total balance of loans. As per the third Quarter of 2012, 34% of the values of all loans in Commercial Banks in Puerto Rico are residential property loans, making this type of loan the biggest in Puerto Rico.

For the past four years all types of loans originated by Commercial Banks have decreased 6.6% each year in Puerto Rico. This year (2012) the types of loans that are expected to increase are Credit Cards (16%), Auto loans (11%), Land development and Construction loans (6%), and Family Residential Property Loans (1%). All other types of loans are projected to decrease. The type of loan most affected were the loans to individuals, “personal” loans, with a contraction of 29% in the past year. Overall, the total lending activity in commercial banks for the past year has decreased 2.9%.

Another factor that has influenced the financial sector is the continuous decrease of the mortgage yield curve, with short-term interest rates higher than the long-term rates. This has a negative impact on profits and a particularly significant impact on banks with greater dependences on brokered deposits. As a result, local banks have experienced a significant drop in fixed interest profits and market capitalization, which has fallen close to $20 billion since 2005.

Prime Rates and Primary Credit Rates dropped significantly from 2007 to 2009. Currently, effective loan rates (prime) and Mortgage yields are still decreasing and are at the lowest point they have ever been. This current decline (2012) in rates continues to be the biggest drop since 2001. Since Puerto Rico’s interest rates and economy are consequent of the mainland’s changes, the variation in interest, discount and prime rates for Puerto Rico will be the same as in the US and defined by the US Fed. As of December 2012, effective loan rates/prime rate and mortgage yields are at an all-time low of 3.35% and 3.25%.

Financing & Mortgage Institutions

Mortgage and Financing institutions have recently increased in popularity due to the problems the commercial banks have experienced in Puerto Rico with mergers, bankruptcies, strict lending regulations, and other lending related problems. All these factors have leaned people into acquiring loans with financing and mortgage companies, but still commercial banks have the bulk (78%) of loans produced in Puerto Rico.

Currently the Puerto Rican population is still hesitant of purchasing new homes and creating new mortgages. Incentives such as government credits, low interests, and falling real estate prices are still falling short and are not sufficient to compensate for a high-risk real estate investment market. After 2004, the assets for the mortgage company’s sub-sector decreased severely, to almost half of what they were. In 2010 these companies experienced their first positive growth in assets, mainly attributed to the originations in loans and the problems with commercial banks. Mortgage Companies continue to grow in 2012, while Financing Companies show their first contraction since 2010.

Small Loan Companies

The small loan companies (SLC’s), locally known as “Financieras”, have traditionally offered financing to individuals with a low credit profile, which made them very unattractive to larger banks. The SLC’s offer loans with very flexible payment plans, at a high cost, in view of the high-risk profiles of the clients that request the loans. A number of the local banks started to consider this market creating their own small loans divisions and absorbing some SLC business from 2004 to 2007. Currently this sub-sector is disappearing due to the recent sub-prime loans given by these companies. The sub-prime loan problem that was being suffered in the United States was only suffered in Puerto Rico by the SLC’s, which were the only companies offering such loans. This financial sector has contracted for the past 5 years, and this past year (2012) their loan portfolio decreased 5.1%.

Credit Unions

The credit unions or savings and loans cooperatives have been active in the island for many years. Cooperatives are a major component of Puerto Rico’s financial sector even though they only represent 5% of the financial sector. After the approval of Law 255 in 2002, cooperatives are now in the position of offering most of the services and products which commercial banks offer, including personal loans, mortgage loans, commercial loans with collateral, and perhaps of greater significance, they can now lend to non-members.

Since 2006 Credit Unions have increase their assets an average of $300 million dollars per year, having a total of $8.15 billion dollars in assets on 2012, as per the COSSEC & OCIF third quarter report. This is a significant financial sector in the island, which gets number five in the rank of those with more assets. Although most institutions are small, consolidations in this sub-sector and the entrance of federal credit unions into the Puerto Rican market will make it a stronger competitor for commercial banks. Assets in credit unions are evenly distributed since the highest market share by one institution is of 7.3%. The market of Credit Unions in Puerto Rico is composed by 115 institutions.

International Bank Entities

International Banking Entities (IBE’s) are mostly divisions of commercial banks that have operations that are exclusively off the island. The entities invest and lend abroad and receive funds only from external sources. They are tax exempt in Puerto Rico and because of this have become a very attractive entity. The local IBE’s have been used by banks that are established in Puerto Rico to carry out bank acquisitions and expansions abroad. International Bank Entities rank number two as highest on assets in the financial sector, but have had a contraction of assets of 17% per year from 2008 to 2012. For this year (2012) it is expected that the assets of the international banks keep decreasing even more, considering 78% of their loan portfolio was transferred to holding companies outside of Puerto Rico. Currently As of September 2012, International Bank Entities have $36.4 billion dollars in assets or 21% less than they did on 2011. Even with these reductions they remain the second largest asset holder in the financial sector of Puerto Rico.

The future of Puerto Rico’s Financial Sector

For the past five years Puerto Rico’s financial sector has decreased 5.7% each year. It is expected to keep decreasing in 2012, but it is set to slightly improve and grow in 2013. The financial sector will eventually grow as factors such as employment, mortgage production and consumption increase in Puerto Rico. The stagnant financial growth since 2006 can be better reflected with the GNP growth by decade in Puerto Rico. GNP in Puerto Rico usually has an average growth of 2.6% every five years. This past five years (2005 to 2010) the accumulated GNP contracted 1.6%, which reflected the first contraction in the GNP in the past 30 years. In comparison to the three previous decades, this past decade was basically financially and economically null. It is expected that the current decade (2010 to 2019) will be financially better than the one just passed.

Part of the reason Puerto Rico’s financial sector’s have contracted is because it is closely linked to the economic growth in the island, as well as changes in the global financial situation. The local economy will not experience rapid growth near the future. Although the financial sector, as a whole, will continue to grow at a rate above those for the economy, no stimulus will be forthcoming for macro-economic growth.

By 2015 it is expected that the economy of Puerto Rico would have grown an accumulated 0.3%, which is low but a signal of economic recuperation. The global financial situation has changed drastically in recent years and is reasonable to expect that commercial banks, particularly, will remain changing and undergoing a major transformation in the medium and long terms. Puerto Rico’s financial sector is linked to the global economy and will feel the impact of global developments. In addition, given the commonwealth’s link to the United States, output in Puerto Rico is likely to grow with output on the mainland.

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