As we have commented in previous reports, the Puerto Rico banking industry maintains its slow but solid recovery with its pre-tax ROE in 2012 (Jan.-Sep.) at 4%, approximately 14 percentage points above the 2009 and 2010 levels. Furthermore, the Q3 2012 pre-tax ROE reached 6.7%, the highest profitability level since Q2 2011.
The banking sector showed a positive Pre-Tax ROE in the first half of 2012 but the profitability level was still far from the levels achieved before the local banking crisis. All banks except Doral showed positive net income, with Scotia presenting the highest profitability despite being one of the smallest banks in terms of total assets.
Many sales reps spend very little time actually selling. Instead, they allocate significant chunks of time to operational or administrative tasks. They follow up on stalled deals, pull together reams of paperwork for even the most straight-forward RFPs, or spend untold hours on myriad other back-office functions.
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.
"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.
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.
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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.
