S&P | Various Rating Actions Taken On Six Puerto Rico-Based Banks | Americas

1/24/14 9:44 PM

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Various Rating Actions Taken On Six Puerto Rico-Based Banks

Publication date: 24-Jan-2014 19:14:41 EST

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OVERVIEW
The Commonwealth of Puerto Rico's economy has become more challenging and could result in weakening loan performance and profitability for certain local banks, in our opinion. Several banks in Puerto Rico have substantial loan exposures to the Commonwealth of Puerto Rico and certain public municipalities, which we view unfavorably. We are placing our 'BBB-/A-3' ratings on the Government Development Bank for Puerto Rico on CreditWatch with negative implications, reflecting our view of heightened market access and liquidity risks. In a related action, we placed the Commonwealth of Puerto Rico's general obligation (GO) and appropriation debt ratings on CreditWatch with negative implications (see "Puerto Rico GO, Appropriation Debt Ratings On Watch Negative On Government Development Bank of Puerto Rico CreditWatch," published Jan. 24, 2014). In addition, we are taking various rating actions on five other Puerto Rico-based banks.

RATING ACTION On Jan. 24, 2014, Standard & Poor's Ratings Services placed its 'BBB-/A-3' long- and short-term issuer credit ratings on the Government Development Bank for Puerto Rico (GDB) and its 'BB+' long-term issuer credit rating on OFG Bancorp on CreditWatch with negative implications. We also revised our outlook on FirstBank Puerto Rico to negative from stable and affirmed the 'B+' long-term issuer credit rating, and we revised our outlook on Santander BanCorp to negative from stable and affirmed the 'BBB-/A-3' ratings. In addition, we affirmed our 'B+/C' long- and short-term ratings on Popular Inc., and the outlook remains stable. And we affirmed our 'CCC-' long-term rating on Doral Financial Corp., and the outlook remains negative. In a related action, we placed the Commonwealth of Puerto Rico's general obligation (GO) and appropriation debt ratings on CreditWatch negative. RATIONALE The Commonwealth of Puerto Rico has experienced prolonged economic weakness with very high unemployment, a continued decline in population, and high levels of debt and retirement liabilities. The economy has contracted every year since 2006 (except for 2012), and despite the efforts of new leadership, we expect economic challenges to persist over the next two years. The unemployment rate is double the national average, at 14.7% as of November 2013, and there has been a departure of residents, particularly young professionals, in recent years. We believe the decline in the population could shrink the Commonwealth's tax base, lower demand for goods and services, and reduce capital investment. In addition, we believe funding challenges for the Commonwealth of Puerto Rico and GDB could hurt the local banking sector
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through increased loan exposures and reduced deposits from public agencies and local municipalities. The island's weak economy makes it more difficult for Puerto Rico to manage its budget deficit, in our view, as well as its high debt load and retirement liabilities. In our opinion, GDB's ability to provide debt market access and liquidity to the Commonwealth has become constrained. The Commonwealth relies heavily on GDB for its liquidity needs, in our view. We believe that GDB could have a limited ability to cover its liquidity needs over the next 12 months without accessing the debt markets. Currently available funding options are limited and will likely be significantly more expensive than what GDB has been able to obtain in the past. GDB's currently limited access to funding sources and the pressure from Puerto Rico's weak economy weigh on the ratings. We anticipate GDB's potential liquidity required to, in turn, support the liquidity needs of both the Commonwealth and various public agencies could be as high as $1 billion over the next six months, depending on the size of the operating deficit in fiscal 2014, GDB's ability to sell bonds externally, variable-rate demand obligations liquidity renegotiations, and potential interest rate swap agreement collateral postings or termination costs. We will be reviewing GDB's funding plans and contingent liquidity in the context of such liquidity needs, as well as its overall liquidity profile over the next 12-24 months. We placed our rating on OFG Bancorp on CreditWatch negative because of the weak local economy, the potential for deterioration in loan portfolio quality, and capital levels that we currently view as only marginally strong. We expect that OFG will remain profitable over the next two years, benefiting from cost savings, but we think the weak Puerto Rican economy and the fiscal deficit of the Commonwealth present some risk, especially given the substantial increase in loan and credit exposures in Puerto Rico. We could lower the rating if we expect asset quality to weaken materially, if we no longer view capital as strong, or if we lower our rating on the Commonwealth of Puerto Rico. We view favorably management's strategy of limiting loan growth in Puerto Rico in previous years and avoiding commercial real estate and construction loans. However, the acquisition of Banco Bilbao Vizcaya Argentaria Puerto Rico (BBVA PR) in late 2012 substantially increased loan exposures in Puerto Rico amid difficult local economic conditions. Furthermore, the company's commercial, corporate, and other loans include nearly $1 billion in exposure to the Commonwealth of Puerto Rico and certain public municipalities as of Sept. 30, 2013. We view these exposures as very large relative to the size of the company's total loan portfolio. Finally, the common dividend was increased substantially in late 2013, and the potential for the resumption of share buybacks could hamper capital growth. As a result, we will be reviewing the developing risks of OFG's exposures in the context of the company's capitalization. The outlook revision on Santander BanCorp largely reflects the potential for deterioration in loan performance resulting from the company's exposures to the Commonwealth of Puerto Rico and certain public municipalities, which we think could be substantial. We view Santander BanCorp's strategic importance to its parent company, Banco Santander S.A., as moderate under our bank criteria and group methodology. We currently do not add any notches of uplift to arrive at the issuer credit rating on Santander BanCorp, which is one notch below the parent's group credit profile and equal to the subsidiary's stand-alone credit profile (SACP). If we lower the company's SACP by one notch, it's unlikely we would change the issuer credit rating given that we

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would then likely ascribe one notch of support owing to its strategic importance to its parent. The outlook revision on FirstBank Puerto Rico to negative from stable largely reflects the poor economic conditions in Puerto Rico, which we believe could cause further deterioration in its asset quality. Despite bulk loan sales over the past few years, nonperforming assets remain high, at 13.52%, as of Sept. 30, 2013. The bank has been reporting net losses for three consecutive years (2009-2011), with the most recent being a year-to-date loss of $175 million, as of Sept. 30, 2013, mainly because of increased provisions for loan losses due to additional bulk sales. Charge-offs rose to 5.01% as of Sept. 30, 2013, from 1.67% at year-end 2012. As a result, we believe that FirstBank is in a vulnerable position because the potentially deteriorating operating conditions in Puerto Rico are likely to make any meaningful and sustainable improvement difficult. We are affirming our 'B+/C' ratings on Popular Inc., the largest bank in Puerto Rico, and maintaining the stable outlook. We think Popular's outstanding exposures to the Commonwealth and certain public municipalities are substantial but are not excessive relative to the size of the bank's total loan portfolio and capital base. Furthermore, we expect the company to remain profitable over the next two years and view favorably the improvement in loan performance in recent quarters and the potential for a redemption of its outstanding perpetual preferred stock sold to the U.S. Treasury. However, we think ongoing regulatory issues are a rating constraint. Specifically, we would view favorably a lifting by regulators of the Memorandum of Understanding the bank entered into in July 2011. We are affirming our 'CCC-' rating on Doral Financial and maintaining the negative outlook. We believe the current rating is appropriate given our view of the loan portfolio's weak credit quality, the bank's restrained core profitability, the poor local economic conditions, and capital that is only slightly higher than the regulatory minimum. CREDITWATCH The current pressures on funding access that the Commonwealth is experiencing heighten our concerns about GDB's liquidity profile. We will be reviewing GDB's funding plans and contingent liquidity in the context of such liquidity needs, as well as its overall liquidity profile over the next 12-24 months. We expect to resolve the CreditWatch on GDB in the next several weeks and anticipate up to a two-notch downgrade. We could lower the rating on OFG Bancorp if we expect loan performance to weaken materially, if we no longer view capital as strong, or if we lower our rating on the Commonwealth of Puerto Rico. We anticipate no more than a one-notch downgrade at the bank and a two-notch downgrade at the holding company. OUTLOOK Our outlooks on FirstBank Puerto Rico, Santander BanCorp, and Doral Financial are negative. Based on our criteria, a negative outlook reflects a one-third chance of a downgrade over a two-year period. We could downgrade these banks if capital or asset quality deteriorates such that they would exceed our current expectations.

RELATED CRITERIA AND RESEARCH Related Criteria

Group Rating Methodology, Nov. 19, 2013

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Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Bank Capital Methodology And Assumptions, Dec. 6, 2010

Related Research
Puerto Rico GO, Appropriation Debt Ratings On Watch Negative On Government Development Bank of Puerto Rico CreditWatch, Jan. 24, 2014 Credit FAQ: What Are The Credit Implications Of Puerto Rico's Debt Reduction Measures?, Oct. 24, 2013 Commonwealth of Puerto Rico Affirmed At BBB-, On Deficit Reduction Measures, Oct. 23, 2013 Banking Industry Country Risk Assessment: U.S., Sept. 26, 2013 Puerto Ricos 2014 Budget Makes Progress, But Full Structural Balance Remains Elusive, Aug. 14, 2013

RATINGS LIST CreditWatch Action To From Government Development Bank for Puerto Rico Issuer Credit Rating BBB-/Watch Neg/A-3 BBB-/Negative/A-3 Ratings Affirmed Government Development Bank for Puerto Rico Senior Unsecured A Senior Unsecured BBB-

CreditWatch Action To OFG Bancorp Issuer Credit Rating Preferred Stock BB+/Watch Neg/-B+/Watch Neg From BB+/Negative/-B+

Ratings Affirmed; Outlook Action To FirstBank Puerto Rico Issuer Credit Rating B+/Negative/-From B+/Stable/--

Ratings Affirmed; Outlook Action To Santander BanCorp. Issuer Credit Rating Ratings Affirmed Santander BanCorp. Subordinated BBB-/Negative/A-3 From BBB-/Stable/A-3

BB+

Ratings Affirmed Popular Inc.

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Issuer Credit Rating Preferred Stock Commercial Paper

B+/Stable/C CCC+ C

Ratings Affirmed Doral Financial Corp. Issuer Credit Rating Senior Unsecured Preferred Stock

CCC-/Negative/-CCCD

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst: Secondary Contacts:

Sunsierre Newsome, New York (1) 212-438-2421; sunsierre.newsome@standardandpoors.com E.Robert R Hansen, CFA, New York (1) 212-438-7402; robert.hansen@standardandpoors.com Carmen Y Manoyan, New York (1) 212-438-6162; carmen.manoyan@standardandpoors.com

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