Financial Services

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 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.

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.

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.

La rentabilidad de los bancos múltiples (Top 5 consolidado) en la República Dominicana se mantuvo en ascenso durante el 2018, logrando un 22.4% de ROE antes de impuestos frente a un 20.5% en el 2017. De igual forma, la tasa de eficiencia (productividad) del Top 5 de la banca múltiple mejoró de 67.2% en 2017 a 66.1% en 2018, alineado con el aumento de la rentabilidad. La solvencia de los bancos se situó en 15.9% registrando una reducción continuada con respecto a años anteriores (17.1% en 2016 y 16.9% en 2017). El sector de las Asociaciones de Ahorros y Préstamos (AA&P) sigue manteniendo una participación de mercado en cartera crediticia relevante, aunque por debajo de la banca múltiple (86.95% de la banca múltiple vs 10.21% de las AA&P). Si bien existe una diferencia sustancial en ROE entre los dos tipos de entidades (21.76% en la banca múltiple vs 9.91% en las AA&P), la brecha es más ajustada en ROA (2.27% en la banca múltiple vs 1.94% en las AA&P).

The Puerto Rico banking industry closed the year 2018 on a high note, registering a Pre-Tax ROE of 14%, the highest level of profitability since 2005. The divergence between the profitability of local banks and US commercial banks narrowed significantly in 2018 with US commercial banks reporting a Pre-Tax ROE of 15.1%. The local banking industry has become increasingly concentrated with Popular holding $37.9 billion (58%) in assets of an industry total of $65.9 billion, and the three largest banks, i.e. Popular, FirstBank and Oriental, accounting for 84% of the total. The industry-wide cost to income reached 55.9% in 2018, the lowest level since prior to the onset of the economic downturn of 2006. With few opportunities to deploy excess capital, capital levels continue to strengthen with an industry level Tier 1 Risk-Based Capital Ratio of 21.7% in 2018, compared to less than 10% in 2008. Asset quality has also been moving in the right direction, with the industry closing 2018 with a nonperforming loans ratio of 6.8%. Concerns over post-hurricane asset quality deterioration have largely dissipated. The strong profitability performance of banks in 2018 was accompanied by a strengthening of their balance sheets with total assets increasing by 5.7%, deposits by 7.9% and the industry credit portfolio by 2.8%. Given the latest trends in profitability levers, upcoming recovery funds and economic forecasts, we expect a similar or even stronger performance in 2019.