PR Banking Industry Report – January to June 2015

The local banking industry on a consolidated basis has been able to maintain positive returns in the first half of 2015, reaching a Pre-Tax ROE of 5.9%, highlighting the resilience of this sector despite steep challenges in Puerto Rico’s operating market. The Island is undoubtedly traversing one of the most challenging economic and fiscal periods of its post-World War II history, as has been consistently chronicled in past issues. Real economic output has decreased by close to 15% since FY 2006, the liquidity drought that ails the government could ultimately lead to a partial government shutdown and population decline continues unabated reaching historic proportions in 2014 with a net migration of -64,000. Furthermore, on Aug. 1 the government made an incomplete payment to cover the Public Finance Corporation’s (PFC) debt which has been seen by Wall Street and the investor community as the Commonwealth’s first-ever default. Given current elevated capital ratios, the industry will be able to withstand additional economic deterioration in the short-term. However, a worsening of economic and fiscal conditions may lead to higher non-performing loans, higher credit provisions and a depletion of capital levels. This issue will briefly examine local credit unions exposure to $1.1 billion in PR government debt, sector which might be dealt a hard blow if public sector defaults continue.