Reduction in profitability in the first half of 2020 (7.0% Pre-Tax ROE) vs 2018 and 2019 due to lower interest margin and fee income, and higher loan loss provision, mostly driven by the Covid pandemic and its impact on the local and US economies. Despite the magnitude of the pandemic impact, no bank had negative net income, with Popular reaching the highest pre-tax ROA (0.97%), followed by Oriental (0.68%), Santander (0.58%), and FirstBank (0.40%).

The impact of Covid-19 has been partially absorbed by local banks in their Q1 2020 results through a significant increase in loan loss provision. However, the reduction in fees and transactional income was small (last two weeks of March 2020) and will be felt mostly in Q2 2020 and in subsequent quarters depending on the pace of return to normal economic activity. In this Q1 2020 Banking Industry Report we present a brand new format where the user will be able to select particular periods of time and banks to review key metrics trends and make bank comparisons.

The local banking industry has gone through a profound and long-lasting consolidation process since 2010, with only three remaining banks surviving, Popular, FirstBank, and Oriental. With this consolidation came a steep decline in assets, deposits, and loans. From 2009 to 2016, total banking assets decreased by 38% or $34.9 billion, deposits by 24% or $14.4 billion, and loan portfolios by 38% or $23.5 billion. However, 2016 seems to be a turning point in the financial condition of local banks with assets increasing by 21%, deposits by 33%, and loans by 8% during the 2016-2019 period. The banks that have survived the latest wave of consolidations exhibited a strong financial performance in 2019, posting a consolidated Pre-Tax ROE of 13.7%. Their productivity, credit quality, and capital position in 2019 were solid and moving in the right direction, posting a cost-to-income ratio of 57.9%, a nonperforming loans ratio of 5.0%, and a Tier 1 Risk-Based Capital Ratio of 21.0%. Looking into the rest of 2020, the banking sector will likely benefit greatly from the imminent inflow of $8.285 billion in Community Development Block Grant Mitigation (CDBG-MIT) funds which have been made available by the Department of Housing and Urban Development (HUD), after months of delay. Additionally, new Current Expected Credit Losses (CECL) regulations will likely have material operational implications as well as financial ones.

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.