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The local banking industry’s profitability on a consolidated basis has rebounded strongly in the wake of Hurricanes Irma and Maria, reaching a Pre-Tax ROE of 17.4% in Q2 2018, making it the highest quarterly profitability level in a decade. The liquidity position of local banks, particularly of Popular, has experienced a material improvement, with total deposits reaching $54.1 billion as of the end of Q2 2018 from $48.8 billion in Q3 2017, a $5.3 billion or 10.9% increase. Hurricane-related private insurance claims paid out to policyholders and post-disaster federal assistance funds deposited in private banks have largely driven this surge in deposits. This newfound liquidity will need to be put to productive use, either through increased lending or investments. The unadjusted nonperforming loans ratio showed some improvement in Q2 2018, decreasing from 9.2% to 8.8%, temporarily appeasing concerns of a spike in delinquencies. Capital positions of banks continue exceedingly strong, reporting an industry-wide Tier 1 Risk-Based Capital Ratio of 21.5%. The deployment of excess capital through organic and inorganic growth opportunities (e.g. Popular’s Reliable purchase), stock repurchases or dividend payments to shareholders must be strategically pondered. Moreover, in this revamped issue we analyze Post-Hurricane Maria foreclosure relief efforts and their impact on banks and the housing market.

The local banking industry as a whole registered a Pre-Tax ROE of 8.3% in Q1 2018, rebounding back to pre-hurricane levels, after dipping down to -0.6% in Q3 2017 and 1.6% in Q4 2017. All banks except Scotia posted positive Pre-Tax ROEs fluctuating from 7.6% to 11.1%. Other key banking indicators have also returned to pre-hurricane levels. The industry cost to income ratio reached 61.6% in Q1 2018 after a spike in Q4 2017 due to non-recurring, storm-related expenses. Capital adequacy metrics returned to an upward trajectory, reaching a Tier 1 Risk-Based Capital Ratio of 21.8%, providing a robust cushion for potential future losses and excess capital to acquire promising portfolios of assets for sale. On the other hand, concerns over the potential deterioration of asset quality have returned given the uptick in delinquency ratios. Moreover, in this issue, we provide a brief overview of the latest trends concerning International Banking and Financial Entities (IBEs/ IFEs). As of the end of Q1 2018, IBEs managed $50.6 billion in assets while IFEs managed 4.1 billion, jointly representing 39% of the total assets of Puerto Rico’s financial sector, making them the 2nd largest player on the island’s financial sector. Profitability and productivity of these entities have been on a healthy path since 2011.

The local banking industry’s profitability stayed in positive territory in year-end 2017, reaching an industry-wide Pre-Tax ROE of 4.6%, notwithstanding the challenging operating market conditions, characterized by an economy mired in a prolonged and deep contraction, a bankrupt government under Puerto Rico Oversight, Management and Economic Stability Act Title III court proceedings, and more recently, the devastation and ensuing cascading effects of Hurricanes Irma and María which severely disrupted the island’s normal social and economic life. During the first half of 2017 local banks on a consolidated level posted Pre-Tax ROEs above 8.5%, dipping to -0.6% in Q3 2017 and 1.6% in Q4 2017. All banks, with the exception of Scotia which took the hit in Q4, incurred in high provision expenses in Q3 2017 due to anticipated hurricane-related losses, materially decreasing in Q4 2017. Despite this panorama, bank executives remain optimistic of the short-term outlook, pointing to the influx of funds from the federal government, insurance claims, and other sources propping up deposits, favorable trends in loan payment moratoriums, and construction sector lending op- portunities when rebuilding efforts pick up. Nevertheless, downside risks to economic and bank activity still loom large.

The local banking industry’s profitability dove into negative territory in Q3 2017, posting a Pre-Tax ROE of -0.6%, after a modestly strong first half of the year. Most local banks, anticipating asset quality deterioration and loan losses in the aftermath of the historic 2017 Atlantic hurricane season, materially increased their loan loss provi-sions. Industry-wide credit provision expenses reached close to $300 million in Q3 2017, a roughly three-fold increase with respect to Q3 2016. Pre-hurricane asset quality had been showing improvement, but after Superstorms Irma and María, it is under threat given the adverse impact on economic activity, borrower’s financial standing, and labor market conditions. Since the hurricanes hit in the latter part of Q3 2017, the quarter’s cost to income ratio was not materially impacted. However, in Q4 2017, with the expected decrease in loan originations, missed loan payments, and subdued – Point of Sale – activity, income generating capacity will be restrained. On the upside, the exceedingly strong capital levels of local banks will help absorb potential post-disaster losses. This issue reviews the potential macro-impacts of the hyperactive 2017 hurricane season, as well as examines bank performance and financial condition in impacted areas post-Hurricane Katrina.

The local banking industry has done a formidable job managing its operations in a historically challenging environment, posting positive levels of profitability since 2014, and registering a Pre-Tax ROE of 8.7% during the first half of 2017. While it has been able to weather the economic and fiscal headwinds which have been fiercely and relentlessly blowing through the Island since more than a decade ago, local banks are now faced with the catastrophic aftermath brought about by the passage of Hurricanes Irma (Sep. 6) and María (Sep. 20). Moody’s has estimated economic losses could amount to $95 billion. Large capital buffers of local banks will help mitigate the potential losses due to the myriad disruptions engendered by the hurricanes. Although banks have been able to gradually improve their asset quality, registering a 90+ days past due-non accruing ratio of 5.9%, loan quality issues could reemerge due to the negative impact on business and household income and expenses. The next issue will focus further on the macro-impacts of the 2017 hurricanes, leveraging what was learned from the effects of Hurricane Katrina on the U.S. Gulf Coast’s banking sector.

The local banking industry maintained a positive trajectory in the first quarter of 2017, registering a Pre-Tax ROE of 8.6% on an annualized basis, despite ongoing severe economic and fiscal hardships being faced by Puerto Rico. Economic growth forecasts pointing to continued contraction, uncertainties regarding the impact of imminent austerity measures, and tepid loan demand, among other downside risks, will likely continue to temper the performance of banks. Banks are advised to continue cost optimizing their operations, exploiting opportunities to enhance customer and shareholder value by leveraging emerging technologies, and strengthening their digital competencies to achieve greater productivity. The strong capital levels of banks, with the Tier 1 Risk Based Capital Ratio reaching 20.5% in YTD 2017, provide a robust capital cushion in the event that adverse risks materialize. The delinquency ratios have continued to decrease, with the 90+ days past due non accruing ratio reaching 6.3% in YTD 2017. In this issue we examined the historical and possible future trends of total loan originations and total loan portfolios, and their implications for banks.