The first quarter of 2012 started with positive profitability for the Puerto Rico banking sector despite showing a decrease in the Pre-Tax ROE from 6.3% in 2011 to 3.4% in Q1 2012. The fact that the total pre-tax income for the industry remained positive is another sign that the banking crisis is over and that the banking industry in general is in a much better position compared to previous years.

La banca múltiple se encuentra en un periodo de menor actividad crediticia en comparación con años anteriores después de las medidas restrictivas realizadas por las autoridades monetarias en el 2010 y el 2011. Además, el nivel de rentabilidad viene disminuyendo progresivamente si bien los niveles de ROE son todavía elevados. Por el lado más positivo, no se observa un deterioro de la calidad de los activos a pesar del menor nivel de actividad crediticia y los niveles de liquidez y de adecuación patrimonial continúan muy saludables. Para revertir la tendencia en los niveles de rentabilidad en un entorno de crecimiento moderado, los bancos deberán contener sus gastos y optimizar sus inversiones especialmente en un año eleccionario donde el nivel de volatilidad puede ser mayor.

"There is light at the end of the tunnel" The year 2011 marked a turning point for the local banking industry. After two years of losses and a 7 year trend of steady reduction in profitability, the banking sector returned to the path of positive returns in 2011.

Nuevos retos no impiden que la banca continúe siendo altamente rentable. El desempeño de la banca múltiple dominicana en el año 2011 estuvo fuertemente marcado por dos factores de política pública: 1. La subida de las tasas de interés de referencia para frenar las presiones inflacionarias causadas por el aumento en los precios de las materias primas. El banco central incrementó la tasa de política monetaria de 4% a 6.75% entre agosto del 2010 y abril del 2011 y mantuvo dicha tasa inalterada hasta diciembre del 2011. 2. La imposición del impuesto del 1% sobre los activos productivos de los bancos comenzando el 15 de agosto del 2011.

The economic downturn, coupled with, among other factors, the overdevelopment of mid- to high-end properties, has led to a sustained decline in local residential real estate prices that continues to be a matter of major concern for Puerto Rico's leading financial institutions.

The Puerto Rico banking industry achieved a Pre-Tax ROE of 7.9% in the first nine months of 2011 after two years of negative bottom line. The improvement in the banking system profitability coincides with a period of weak economic activity and decreasing total assets. As a result, banks are facing the need to rationalize their expense structure locally to cope with increasing fixed costs relative to productive assets. Additionally, they are finding themselves with excess capital after a period when they had to strengthen their capital levels to face large credit losses. With limited opportunities to invest in the local market, banks are looking at alternatives to use their spare capital, like investing in existing outside operations, repaying debt or returning capital to their shareholders.

"Nuevos retos no impiden que la banca continúe siendo altamente rentable". El desempeño de la banca múltiple dominicana en el año 2011 estuvo fuertemente marcado por dos factores de política pública: 1. La subida de las tasas de interés de referencia para frenar las presiones inflacionarias causadas por el aumento en los precios de las materias primas. El banco central incrementó la tasa de política monetaria de 4% a 6.75% entre agosto del 2010 y abril del 2011 y mantuvo dicha tasa inalterada hasta diciembre del 2011. 2. La imposición del impuesto del 1% sobre los activos productivos de los bancos comenzando el 15 de agosto del 2011.

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The Q2 2011 results confirm the success of the measures taken in the past years to reduce nonperforming assets and maintain appropriate capital levels. With banks ready to grow their core businesses in a challenging economic scenario with limited organic growth opportunities, a new competitive landscape has emerged. In this new landscape, stealing share through superior service and innovative marketing ideas while protecting margins will be the name of the game. So far, some banks have fared better than others under this new landscape, particularly in the commercial credit business where competition is most fierce. While we are optimistic that the banking sector credit performance will continue to improve and the market will slowly recover, it is still possible that the economy deteriorates further and that banks will need to refocus on loss mitigation.