Insights

The positive momentum in the local banking industry continued to build in the third quarter of 2018, following the historic and highly disruptive 2017 Atlantic hurricane season. The industry-wide Pre-Tax ROE in Q3 2018 reached 13.7%, following a strong first half of 2018 (Pre-Tax ROE of 8.3% in Q1 2018 and 17.4% in Q2 2018), yielding a YTD 2018 Pre-Tax ROE of 13.1%. These profitability levels have not been seen since 2005, prior to the onset of the prolonged and deep economic downturn. Concerns over the deterioration of asset quality have further abated given the latest quarterly delinquency levels. The Q3 2018 industry-wide nonperforming loans ratio stood at 7.6% from a peak of 9.2% in the wake of the hurricanes. Furthermore, after the temporal and non-recurring impact of Hurricanes Irma and Maria on the banks’ income and expenses, banking productivity levels improved materially, reaching a cost to income ratio of 56.5% in YTD 2018 from 63.8% in 2017. Capital buffers remain exceedingly strong, with a consolidated Tier 1 Risk-Based Capital ratio of 20.9%. Going forward, strong banking performance is expected to continue given the billions of dollars in public and private post-disaster reconstruction funds that will be increasingly flowing through the economy and financial system. Lastly, in this issue, we benchmarked the profitability performance of local banks against that of similar-sized United States peer banks since 2015, also breaking down profitability by income and expense levers to help explain what drove the differences in YTD 2018.

Los cinco principales bancos múltiples de la República Dominicana (Top 5) siguen mostrando un alto nivel de rentabilidad en la primera mitad del 2018 (ROE antes de impuestos del 23.8%). Les acompaña un crecimiento económico superior al 6% que podría peligrar si los precios del petróleo siguen subiendo y el Banco Central Dominicano tiene que seguir aumentando la tasa de intermediación bancaria. El semestre cierra con la noticia de la compra de Banco del Pro-greso Dominicano por parte de ScotiaBank. Esta compra deja a tan solo 4 bancos con el 86% de los activos de la banca múltiple (75% de los activos del sistema financiero dominicano) y a otros 13 bancos con el 14% restante. Por tanto, las oportunidades de seguir creciendo inorgánicamente por parte de los cuatro grandes se reducen considerablemente, dada la limitada cuota de mercado de los demás bancos múltiples. Como veremos en el informe, Scotia se afianza en la cuarta posición aunque lejos todavía de BHDLeón y tendrá oportunidades de consolidación de sucursales dada la ubicación de las del Banco del Progreso.

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.