Puerto Rico's banks are in difficult straits, according to analysts from Standard & Poor's and Fitch Ratings.
S&P has five of the six Puerto Rico banks it rates on negative watch or on negative outlook, while Fitch has a negative outlook on one of its four banks, Doral Financial Corp. Fitch has lower ratings than S&P on three of the four banks both agencies rate.
Released less than 20 minutes apart on Tuesday, reports from the two rating agencies both focused on concern over Puerto Rico's economy and its impact on loan quality.
The Fitch analysts noted that Puerto Rico's economy has been in recession since 2006. "Although some recent information suggests nascent improvement, results are mixed," Fitch analysts Doriana Gamboa, Jaymin Berg, and Christopher Wolfe wrote.
S&P analyst E. Robert Hansen was more negative, saying that Puerto Rico's economy is weakening and the government's efforts to balance the budget may cause further damage to the economy.
Both agencies' analysts say the banks' have weak loan performance. The rate of adjusted nonperforming assets to total loans plus other real estate was more than 10% at the end of 2013, more than double the level of U.S. mainland rated regional banks, Hansen wrote.
Most of Puerto Rico banks' problem loans are connected to real estate assets, the Fitch analysts wrote.
Both the Fitch and S&P authors raise concerns about the banks' relatively large exposures to Puerto Rican government loans and securities. Both agencies downgraded the government's obligations to speculative grades in February.
The authors of both reports wrote that the banks increase their risk levels by using brokered certificates of deposit and repurchase agreements. These instruments are both of fairly short duration and sensitive to investor concerns, Hansen wrote.
Both agency authors note that the banks' capital ratios have improved in the last two years.
The Fitch analysts say that net interest margins, a measure of bank profitability, were solid at an average of 4.33% in the fourth quarter of 2013 for the group.
Hansen wrote that intense competition between the banks is likely to tighten net interest margins.
S&P's ratings of the Puerto Rico banks are "under pressure," Hansen said. "We could lower the ratings on local banks if profitability or loan performance weakens materially from current levels or if we again lower our rating of the Commonwealth of Puerto Rico."
For issuer credit ratings of the Puerto Rico banks, S&P rates FirstBank Puerto Rico at B-plus, Government Development of Puerto Rico at BB, OFG Bancorp at BB-plus, Popular Inc. at BB, and Santander BanCorp at BBB-minus. Popular has a stable outlook and all the other banks have negative outlooks. S&P rates the Doral Financial Corp. holding company CC and has it on credit watch negative.
Fitch's gives issuer default ratings to Doral of C, to First BanCorp of B-minus, to Popular Inc. of BB-minus, and to Santander Bancorp of BBB. Fitch gives Doral a negative outlook and the other three banks stable outlooks.
For Doral, "Fitch believes the likelihood of default and/or failure is imminent," the analysts wrote.
