Puerto Rico banking firm OFG Bancorp said its subsidiary, Oriental Bank, was placing a $200 million line of credit with the Puerto Rico Electric Power Authority on non-accrual status and taking a $24 million provision.
Oriental is one of several banks in in a group of creditors that have entered a forbearance agreement to give PREPA time to restructure its business. On Wednesday it, the other banks, the Government Development Bank for Puerto Rico and the majority of the bond holders agreed to continue their forbearance at least until April 30. OFG announced the provision Friday afternoon.
Oriental's $200 million is part of a $550 million fuel purchase line of credit held by several Puerto Rico banks. It is possible that some of the other Puerto Rico banks providing the line of credit, like Banco Popular de Puerto Rico and FirstBank Puerto Rico, may follow in taking a provision, said Taylor Brodarick, equity research analyst with Guggenheim Securities.
Since OFG Bancorp had total earnings per share of $1.50 in 2014 and OFG Bancorp is projecting a $0.35 impact on earnings per share net of tax in the first quarter of this year, the provision is a "material charge," Brodarick said.
Keefe, Bruyette & Woods analysts Brian Klock and Glen Manna said that they expect the provision to reduce the bank's earnings per share by $0.57 this year and $0.28 next year.
While Scotia Bank has as large an exposure as OFG, Scotia is a larger bank and should not be as affected by the nonperforming line of credit, Brodarick said.
José Rafael Fernández, president of OFG and Oriental, said, "Our credit analysis, based principally on data provided by PREPA and its advisors, shows the utility has the financial capability to pay its creditors. However, in the recent negotiation for extending the more than 8-month forbearance period previously granted by its creditors, PREPA clearly demonstrated a reluctance to commit to do so, despite the utility's improved cash flows."
Fernández added that its regulatory capital ratios remain significantly above requirements for a well-capitalized institution.
"We are not saying [the line of credit] will never be repaid," an OFG spokesman said in an email.
As for legal action to recoup the line of credit, "It is premature to comment on this. Our preference is to work with PREPA constructively," the spokesman said.
