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Business News Americas

Moody's Upbeat On Puerto Rico’s Banking System

June 10, 2002
Copyright © 2002
Business News Americas. All rights reserved.

Puerto Rico's banks operate with solid franchises in an insulated market, respectable efficiency ratios, and decent net interest margins, according to a report by international rating agency Moody's Investors Service, titled "Banking System Outlook: Puerto Rico".

These all support the firm outlook for the "C" average of the banks' financial strength ratings. Moody's also said the ratings also incorporate the modest growth opportunities available to the banks and their high credit costs.

"Indigenous banks - even those owned by foreigners - do appear to have somewhat of an advantage over outside competitors from the US mainland," report author and senior Moody's VP Rosemarie Conforte said in a statement.

"The bank franchises are quite sturdy, even though growth prospects in Puerto Rico itself are rather limited," she said, adding that it is a plus that the island economy is diverse and is largely integrated with that of the United States.

However, as has been the case historically the earnings of most Puerto Rican banks lag those of US peers. "Credit costs, reflected in the high level of provisioning expenses, continue to be a drag on the bottom line," Conforte said, adding "thereby preventing most banks in the market from reporting results comparable with US mainland banks."

"Despite the medium-term stability of the average financial strength ratings.....we cannot completely rule out the potential for selective rating actions, both positive or negative." Conforte said. Over the past 12 months, the financial strength rating of Banco Santander Puerto Rico was lowered (the deposit rating was affirmed) and the ratings of Doral Financial Corporation were raised. Additionally, Moody's assigned first-time ratings to Banco Bilbao Vizcaya Argentaria Puerto Rico.

Of the independent banks based on the island, Conforte notes that Banco Popular, Puerto Rico's long-time leader in deposit and loan market share, has the highest financial strength rating, thanks to its market position and consistent earnings profile.

Off-island expansion opportunities, particularly the growing Hispanic market on the US mainland, also form an increasingly larger component of many Puerto Rican banks' strategies, Conforte said. However, just like the Puerto Rican banks, big US entities such as Bank of America, Citibank and Bank One are also pursuing the Hispanic market.

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