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Local Bankers Agree Mergers Will Happen Within Three Years

Some international banking players might leave island


October 23, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Most of the bankers recently interviewed by CARIBBEAN BUSINESS predicted there will be mergers among Puerto Rico’s financial institutions within the next two or three years, following the global trend. R&G Financial Corp. Chairman Victor Galan, however, says they won’t be mergers of equals.

"Because I have such a high stake in R&G—41% of the shares and 61% of the votes—everybody talks about buying R&G," said Galan. "The first thing people propose is that I lower my share ownership so that the buyers can gain equal footing." He said the other oft-heard proposal is that once the hypothetical deal is done, Galan and his group take charge of the mortgage business while leaving the new players to run the bank.

Galan explained that there is a formula, used in Florida and in most U.S. states, for determining a bank’s value for the purposes of mergers and acquisitions (M&A). "Payment is based on two to three times capital or 15% of the value of the core deposits," he said. Core deposits are regular bank deposits; alternatively, bank deposits could be combined with certificates of deposit.

Following this formula, R&G Financial Corp.’s selling price would be $2 billion. "It would be interesting to look at such an offer," Galan said. He noted that such a deal would take at least a year to work out, including the time needed to obtain the required approvals from regulatory agencies.

"In Puerto Rico, there will be as many bank mergers as there are institutions willing to pay according to this formula," said Galan, who believes that only those with the money to deal should be discussing mergers. "If I am the only one in Puerto Rico with such high control, then I should be the only one to talk about mergers, because the rest are employees of their institutions."

Galan said he prefers to remain alone than to accept offers that don’t comply with the formula. He added that Puerto Rico is much more attractive than stateside jurisdictions, and this will hold even more true if there is less competition.

Like Galan, Frank C. Stipes, chairman of W Holding and president & CEO of subsidiary Westernbank, has predicted M&A activity in Puerto Rico starting next year (CB Sept. 25). Stipes believes Puerto Rico should have five or six world-class megabanks instead of close to a dozen midsize banks. Stipes’ family controls close to 33% of W Holding.

Banco Santander de Puerto Rico President Jose Ramon Gonzalez agrees that mergers are in order and are likely within the next three years. "I don’t see anyone in the selling mood, wanting to be in the subordinate position," he said. "When the market is good, everyone wants to be the consolidator."

Gonzalez added that any deal would also have to make financial sense to shareholders. He wouldn’t speculate about which players would make attractive matches, because all are public corporations and the matter is too delicate to discuss publicly.

"One can think of any number of consolidations, because there are a number of players with interesting market shares," said Gonzalez, who added that some players might seize the opportunity to sell if they see they will make a nice profit. According to his timeframe for such a deal, it would take three to six months for the chairmen to agree and another 12 months to address regulatory concerns such as undue market concentration.

Gonzalez noted that global decisions sometimes adversely affect markets where institutions are doing well. He cited Chase Manhattan Bank’s decision to pull out of Puerto Rico after more than 70 years.

Similarly, some foreign players might exit Puerto Rico, or local institutions might follow a global strategy of mergers. Rejecting Stipes’ scenario (CB Sept. 25), Gonzalez said he doesn’t envision Santander merging with Banco Bilbao Vizcaya Argentaria (BBVA) de Puerto Rico. "The banks are rivals in all strategic markets, including Spain," he said.

In Spain, Gonzalez noted, there were seven large banks during the mid-’90s, whereas there are just two today, both the result of mergers. Santander was formed through the merger or acquisition of Banesto, Banco Central, and Banco Hispano Americano. BBVA came from the merger of Banco Bilbao with Banco Vizcaya and Banco Argentaria.

R&G Financial Corp. President Ramon Prats agrees that mergers will occur, but he disagrees that it will make the participating institutions more efficient or more competitive. The banks in Puerto Rico already are solid and competitive, offer clients good service, and for the most part are well-managed, he said.

Like the other bankers interviewed, Galan said that Banco Popular de Puerto Rico’s (BPPR) enormity makes others talk about growing through mergers. He noted that BPPR has a 50% share of the local banking activity and 33% of island banking deposits. By comparison, Bank of America, the largest bank on the U.S. mainland, controls only 5% of the stateside market.

This Caribbean Business article appears courtesy of Casiano Communications.
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