Hospitals play a key role in the provision of health services to Puerto Rico citizens. In recent years they have been operating in a complicated environment where several industry trends have been hurting their profitability. That situation has only been aggravated by Hurricane María. Consolidation, both across the hospital sector but also vertically along the health system may help turn these trends around.

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.

El Portal de indicadores de la banca de V2A ya está actualizado con los resultados del primer trimestre del 2019 de los bancos de Puerto Rico (http://prbankindicators.v2aconsulting.com/). En líneas generales estos resultados muestran la dificultad por aumentar la actividad crediticia en el difícil contexto económico de Puerto Rico, al tiempo que siguen indicando un desempeño financiero extraordinario.

Con la temporada de huracanes a la vuelta de la esquina, hay que recordar que las personas con problemas cardíacos y respiratorios, diabéticos y enfermos de Alzheimer son los más vulnerables, y que los accidentes, los suicidios y las septicemias se multiplican tras un huracán. Aparte de ver las causas del aumento de muertes por María, en este Insight nos preguntamos qué se ha hecho para mitigar el impacto de futuros huracanes.

Much has transpired since Hurricanes Irma and Maria swept through Puerto Rico 18 months ago resulting in over $80 billion in damages and more than $25 billion in lost output, decimating the Island's vulnerable electric grid and other critical infrastructure systems, disrupting normal economic and social life, and inducing tens of thousands of Puerto Ricans to flee the Island. While the progress made should not be understated, given the noble, and at times heroic, work of those individuals and organizations (public and private) committed to the Island's recovery and reconstruction, the pace of the process has been painstakingly slow and the impact of the incoming Federal funds on the local economy has been limited. Many saw the billions of dollars in post-disaster relief funds flowing into the Island as a silver lining and as a source of a much-needed boost in economic activity. However, the pace of disbursements has been slow and, consequently, the impact on the local economy has been limited thus far. Furthermore, as commonly occurs in post-disaster efforts, nonlocal entities, mostly US mainland contractors, have greatly benefited from the inflow of billions of dollars for disaster recovery and reconstruction, while local contractors have been awarded a small fraction of contracts.

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.

2018 was an excellent year for the profitability of banks in Puerto Rico. At the industry level, Pre-Tax ROE reached 14%, aligned with the US banking industry profitability levels for the first time in ten years. We expect this trend to continue in 2019 since most of the profitability levers seem to be moving in the right direction.