Are local banks penalized for operating in Puerto Rico?

The economic uncertainty that Puerto Rico has experienced in recent years has had a negative effect on the market value of banks that have their main operations located in the Island. However, the solid performance of local banks in terms of profitability and capital adequacy has translated into important increases in market capitalization, eliminating or significantly reducing their market risk premium.

Informe de V2A sobre la banca de RD – Enero a Septiembre 2019

El primer semestre del año 2019 se caracterizó por una ralentización de la economía en República Dominicana con un crecimiento del Índice Mensual de Actividad Económica (IMAE) de 4.7% contra el primer semestre de 2018, inferior al 7.0% registrado en el año 2018 contra el 2017. Los meses de septiembre y octubre de 2019 mostraron un aumento interanual del IMAE de 5.2% indicando un nuevo repunte de la actividad económica después de las políticas monetarias expansivas del banco central (reducción de la tasa de intercambio y de la tasa de encaje legal). Estas medidas están a tono con el nivel de inflación acumulada de enero a noviembre que se situó en 3.45% y que se encuentra dentro de la meta de inflación del Banco Central de la República Dominicana. La mejora de la actividad económica vino acompañada de un aumento de 1.7 puntos porcentuales de la rentabilidad de la banca múltiple representada por el TOP 5 en el periodo de enero a septiembre de 2019 con respecto al 2018.

PR Banking Industry Report Q3 2019

The local banking industry registered another strong quarter in Q3 2019, posting an industry-wide YTD 2019 annualized Pre-Tax ROE of 14.6%. All banks achieved double-digit profitability levels when looking at YTD Pre-Tax ROE, with Popular leading the way with 19.1%, followed by Scotia with 11.9%, FirstBank with 11.1%, Santander with 10.7%, and Oriental with 10.4%. The surviving banks have been able to perform well despite a challenging operating market and a still sluggish economic recovery. The slow pace of disbursements of post-disaster federal funds has thwarted a more robust recovery from materializing. While there have been some positive developments, like a historically low unemployment rate (7.7% in Oct. 2019), Puerto Rico is still very far from being on a sustainable growth path, and questions remain about growth drivers once post-disaster funds are depleted. In this issue, we analyze expected market share distributions in the wake of the latest wave of consolidations. In June 2019 Oriental announced the acquisition of Scotia’s Puerto Rico operations, while in October 2019 FirstBank reported the purchase of Santander’s Puerto Rico operations. With these latest acquisitions, local commercial banks will come to dominate the local market.

FirstBank acquires Banco Santander Puerto Rico

On October 21st First BanCorp., the bank holding company of FirstBank Puerto Rico (FirstBank), announced the acquisition of Banco Santander Puerto Rico (BSPR) for a $63M premium to BSPR’s core tangible common equity ($362M) in an all cash transaction. In this insight we will analyze the expected new market shares in the Puerto Rico banking sector after this acquisition and the recently announced purchase of Scotiabank operations by Oriental Bank.

Informe de V2A sobre la banca de RD – Enero a Junio 2019

Durante el primer semestre del año 2019 la economía dominicana mantuvo su crecimiento, reportando un aumento del Índice Mensual de Actividad Económica (IMAE) de 4.7%, una inflación de 0.92%, y una depreciación de la moneda de 1.04%. Por otro lado, la rentabilidad de la industria bancaria cerró el semestre en 21.28%, una disminución de -2.32pts respecto a Junio de 2018, impulsada principalmente por un aumento generalizado en los gastos financieros de las instituciones. La unión de Scotia Bank y Banco del Progreso se materializó el 1 de abril de este año, y aunque todavía no reportan resultados de manera unificada, ya es una realidad que son cuatro las instituciones que dominan el 78% de los activos de la Banca Múltiple y las Asociaciones de Ahorro y Préstamo: Banreservas, Banco Popular, BHD-León y Scotia-Progreso. En esta edición se presenta un análisis extensivo de los bancos fuera de ese Top 4: Cuotas de mercado, crecimiento, rentabilidad y carteras de crédito, con una mención especial a Banco Santa Cruz y los factores de crecimiento que lo posicionan como la institución con mejor desempeño de los últimos cinco años.

The Puerto Rico Banking Sector Continues to Consolidate

The announced acquisition of Scotiabank’s operations in Puerto Rico by Oriental Bank comes after a long period of consolidation in the island’s banking sector. Through this acquisition, Oriental Bank will increase its assets and deposits market shares from 10% and 9% to 16% and 14%, respectively, and will significantly strengthen its position in the mortgage origination and servicing businesses.

PR Banking Industry Report Q2 2019

The local banking industry showed strong profitability in Q2 2019, closing the first half of the year with an annualized Pre-Tax ROE of 14.7%. The second quarter of 2019 is the fifth consecutive quarter that local banks report double digit profitability levels on a consolidated basis. This level of profitability had not been seen since prior to the onset of the 2006 economic downturn. Local banks have been reporting robust earnings growth despite operating in a challenging market. Notwithstanding year-over-year improvements in some economic indicators, others remain weak. The Economic Activity Index increased by 5.8% in FY 2019 after six consecutive years of decline, but as of June 2019 it remained below pre-hurricane (August 2017) levels. In this issue we examine total deposits trends and banks’ branch footprint. Total industrywide deposits reached $60.0 billion in 2009, falling by $14.9 billion or 25% to $45.1 billion by 2016. However, 2016 marks a reversal of this downward trend, with total deposits reaching $57.7 billion by the end of Q2 2019, an increase of $12.6 billion or 28%. On the other hand, the number of branches has declined steadily from 493 in 2009 to 296 at the end of Q2 2019, a decrease of 40% or 197 in the 10-year period. As a result, average deposits of branches have increased significantly in the past three years, from $141.0 million in 2016 to $194.9 million in YTD 2019. Given that physical coverage still plays a strategic role, banks will need to continue identifying opportunities to increase coverage and/or further reduce their footprint.

Significant Footprint Reduction in the Puerto Rico Banking Sector

The PR banking sector footprint has reduced significantly in the past years. Despite having fewer branches, banks have managed to increase deposits by 28% since 2016. As we will explain in this insight there is opportunity for footprint expansion in some areas as well as further consolidation in others. In the short term the footprint reduction is likely to continue driven by the Scotiabank acquisition by Oriental.

Informe de V2A sobre la banca de RD – Enero a Marzo 2019

En el primer trimestre de 2019 la economía dominicana se mantuvo en crecimiento, reflejando un aumento del Índice Mensual de Actividad Económica (IMAE) de 5.7%, una inflación de 2.91% y una depreciación del peso dominicano de 2.95% respecto al mismo período de 2018. Alineado a esto, la rentabilidad de la industria bancaria se mantiene positiva con un ROE promedio de 19.7% en el top 5 de la banca, con Banco del Progreso siendo el único banco con una disminución significativa respecto al año anterior, presumiblemente relacionado al proceso de fusión con Scotia Bank. En medio del crecimiento de la economía dominicana, el Banco Central anunció en mayo la liberación de $29 mil millones de encaje legal, aumentando así la liquidez de los bancos y fomentando aún más el crecimiento de la cartera crediticia de la industria. En esta edición repasaremos en detalle el estado de la liquidez actual, y los que creemos que serán factores claves de éxito para la capitalización del aumento en la capacidad de préstamo.

PR Banking Industry Report Q1 2019

The local banking industry kicked off the year with a strong performance in the first quarter of 2019, posting an industry-wide Pre-Tax ROE of 14.9%, the highest level of profitability since 2005. Popular led the way with the highest level of profitability, achieving a Pre-Tax ROE of 21.0%, followed by Oriental (14.6%), FirstBank (10.9%), Santander (8.9%), and Scotia (6.3%). Furthermore, the capital position of the industry is exceedingly strong, posting a Tier 1 Risk-Based Capital Ratio of 21.8%, credit quality metrics continue to improve, registering a nonperforming loans ratio of 6.3%, deposits continue to surge, and the industry-wide credit portfolio is stable. Local banks, which have learned to effectively navigate through turbulent economic waters, are well positioned to seize opportunities during the post-disaster reconstruction period. The pace of disbursements of the $45 – $50 billion in federal disaster relief funds which have been allocated thus far has been very slow, resulting in a lackluster effect on the local economy. In this issue, we review the latest trends of loan originations and outstanding credit portfolio, both in terms of growth and loan type mix. The mortgage lending business has reduced significantly and is likely to continue this downward trend given demographic changes, lower rates of household formation, and higher interest rates. As a result, banks may have to rethink their mortgage business going forward, including their mortgage servicing business. On the other hand, the consumer and commercial loan segments may help compensate for the drop in mortgage activity given the most recent consumption and economic activity indicators.

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