Puerto Rico's weak economy and the commonwealth's government are continuing to pressure Puerto Rico banks, Moody's Investors Service said Tuesday.
Because of this, Moody's downgraded Banco Popular de Puerto Rico along with some of the ratings of Banco Santander Puerto Rico, and affirmed the ratings for FirstBank Puerto Rico.
Puerto Rico's economy has been weak since 2006 and "it continues to be challenged by high unemployment, low workforce participation, high poverty levels compared to the U.S. mainland, a declining population, and weakness in its key pharmaceutical sector," Moody's vice president Joseph Pucella and managing director Robert Young wrote in a report.
The struggling economy and years of deficit financing and pension underfunding have "put the commonwealth in a position where its debt and fixed costs are high and rising, its liquidity is narrow, and its market access is constrained."
Puerto Rico's actions to address these issues are likely to put additional stress on Puerto Rico's already weak economy and banks' asset quality, the analysts said.
Moody's dropped the Puerto Rico government's general obligation rating to Ba2 in February.
Moody's on Tuesday downgraded Banco Popular de Puerto Rico's baseline credit assessment rating to ba3 from ba2. It downgraded the bank's long-term deposit rating to Ba3 from Ba2. Moody's has negative outlooks on the ratings.
The baseline credit assessment rating rates represents Moody's opinion of a bank's intrinsic safety without certain external credit risks and credit supports. The deposit rating measures expected loss, which is a combination of default risk and loss severity for bank bondholders. In incorporates external support that may be available in times of distress, Moody's professionals said.
Popular's exposure to Puerto Rico's public sector was a manageable 29% of its Tier 1 capital at the end of the first quarter. Popular's exposure to further economic contraction is a bigger concern, the analysts said.
Banco Popular is by far the largest bank in Puerto Rico.
Banco Santander Puerto Rico had its bank credit assessment rating lowered to ba2 from ba1. However, Moody's affirmed the bank's long-term supported deposit rating at Baa1. Moody's has a stable outlook on the ratings.
Moody's has a higher deposit rating on this bank than the others because of its connection with Santander Bank, N.A., which operates in the continental United States.
The ba2 rating already incorporates economic risk to the bank, the analysts wrote, and thus did not need to be downgraded.
Moody's has a stable outlook on Banco Santander because of its strong capital and funding positions.
Moody's affirmed FirstBank Puerto Rico's baseline credit assessment rating at b2 and its long-term deposit rating at B2.
Moody's affirmed the ratings, albeit with negative outlooks, because they already incorporate vulnerability to continued economic weakness, the analysts said.
