Elvis Torres Delgado
Xavier Diví
Main Highlights:
• The banking sector reached a Pre-Tax ROE of 20.81% in 2024, in line with the 2023 profitability (20.60%). This is the fourth consecutive year with Pre-Tax ROE above 20%. In the previous 20 years, only in 2004 did the banking industry profitability reach above 20% levels.
• Measured on a return on assets basis (before taxes), Oriental Bank and FirstBank showed very high profitability levels (2.08% and 2.05%, respectively), significantly above the US peers average (1.42%). These banks achieved healthy efficiency levels in 2024 and in 2023 with Cost to Income ratios below 55%.
• The large public deposits portfolio, which has to be invested in liquid assets, explains, in part, the different asset composition of Banco Popular compared to Oriental Bank and FirstBank. The loan portfolio represented 45% of total assets for Banco Popular in 2024 compared to 68% for Oriental Bank and 66% for FirstBank.
• The banking sector continued to be very well capitalized with the Tier 1 Risk Based Capital Ratio at 15.73% in December 2024. Banks are likely to continue returning capital to shareholders through share buy backs and dividends.
• Loan delinquency remained at historically low levels. The Non-Performing Loans Ratio was 1.75% in 2024, the second lowest in the past 25 years (1.63% in 2004). As we will explain in the next section, the reduction in delinquency levels was driven by the commercial and mortgage portfolios.
• Loan balances grew by 5.8% in 2024, below the 8.2% increase achieved in 2023. The commercial (CRE +6.5% and C&I +7.1%) and auto (+6.8%) businesses drove the loan portfolio increase, together with the mortgage (+3.4%) and credit card (+4.7%) businesses which showed more modest increases. The personal unsecured portfolio remained slightly above the 2023 level (+0.7%).
Loan Delinquency Trends
The Puerto Rico banking industry has consistently demonstrated robust profitability in recent years, with a pre-tax return on equity (ROE) exceeding 20% for the past four years. This marks a significant improvement compared to previous periods, where the pre-tax ROE did not surpass 15% during 2015-2020 and remained below 10% throughout 2007-2014, including several years of net losses.
One of the primary drivers behind this enhanced profitability has been the notable improvement in delinquency rates among both commercial and individual loan customers. The non-performing loans ratio declined to 1.75% in 2024, the lowest level since 2005. This improvement can be attributed to improved underwriting standards by banks and a gradual economic recovery in recent years.
However, despite the overall decline in delinquency rates across significant loan portfolios, there are signs of deterioration in certain consumer segments. For instance, the non-performing loans ratio for credit card portfolios nearly doubled between December 2020 and December 2024, reaching 2.47%—the highest in the past decade. Similarly, delinquency rates for auto loans increased from 0.73% in 2020 to 1.03% in 2024, albeit remaining below the 1.3% and 1.46% levels observed in 2015 and 2016, respectively. Meanwhile, the delinquency rate for personal installment loans saw a modest rise from 0.65% to 0.74% during the same period, still significantly lower than historical levels.
In contrast, the non-performing ratio for mortgage loans continued its downward trajectory, decreasing to 4.40% in 2024 from a peak of 17.32% in 2016. Additionally, commercial and construction loan portfolios maintained healthy trends with very low delinquency rates compared to previous years. Notably, these portfolios significantly outweigh the credit card portfolio in size, as depicted in Figure 1.
Figure 1: Non-Performing Loans Ratio by Portfolio (%)
The increase in credit card delinquency levels can be attributed to several factors, including higher interest rates following substantial increases by the Federal Reserve in 2022 and 2023, as well as the expiration of federal and local incentives designed to mitigate the impact of hurricanes in 2017 and the pandemic in 2020.
On a positive note, liquidity remains abundant among consumers and businesses in Puerto Rico, as illustrated in Figure 2. Total deposits in commercial banks by individuals and businesses saw a significant increase of $17.4 billion between 2019 and 2021, driven by substantial federal and local government transfers aimed at pandemic relief. Although liquidity has decreased since its peak, it remains historically high, enhancing consumers' ability to manage credit card debt during economic uncertainties.
Figure 2: Total Deposits in Puerto Rico Commercial Banks from Individuals and Businesses (USB$)
In the mortgage sector, low delinquency levels have also led to a continued decline in residential foreclosures. Figure 3 shows that the monthly average of residential foreclosures in Puerto Rico dropped to 4,172 in the first nine months of 2024, down from 5,749 in 2023 and well below the peak of 19,322 in 2015.
Figure 3: Number of Residential Foreclosures in Puerto Rico
In summary, the Puerto Rico banking industry has shown robust profitability, with a pre-tax return on equity consistently exceeding 20%. This improvement is partially attributed to significant reductions in delinquency rates across various loan portfolios, notably reaching a 1.75% non-performing loans ratio in 2024—the lowest since 2005. However, there are emerging concerns, particularly in consumer credit segments such as credit cards and auto loans, which have seen increased delinquency rates. Despite these challenges, ample liquidity remains in the market, bolstering consumer resilience in managing debt.
For more information on our economic dashboards please write to xavierdivi@v2aconsulting.com or visit www.v2aconsulting.com.
