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Financial Industry Looking Forward To 2005

Optimism reigns in all sectors, but fear factors reveal potential vulnerabilities


January 27, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

While 2004 ended with a sigh of relief from most sectors of the financial industry, many experts and analysts expect 2005 to be more of a so-called normal year. One issue in particular is highlighted as a potential dealmaker or breaker for the year’s eventual outcome; interest rates could be the year’s wild card. The Fed Funds rate is expected to rise to 3.5% by the end of 2005, while the 10-year note should range around 5.5%. However, what concerns industry insiders is the flat curve that will result from the possible imparity between the fluctuations, as short-term rates rise faster than long-term rates. This could edge off the flexibility and margin that spurred the growth of many financial institutions.


Banco Popular’s president, David H. Chafey Jr., isn’t too concerned about interest rates’ impact on the banking sector’s performance. In his view, the percentage increase of interest rates won’t be a surprise to anyone because most financial institutions already have accounted for what they expect to be moderate and gradual increments.

Other than continuing on the profitable path it is already on and expanding its credit-card operations, Banco Popular will be concentrating on two very important points this year. According to Chafey, "Quality of service and customer satisfaction are key topics for us in 2005." So important, in fact, that they will keep a close eye on monitoring these two factors throughout the year, using detailed studies and surveys.

Customer loyalty is something all banks are looking for in 2005 in an effort to facilitate their cross-selling strategies for the year, a task that is sometimes difficult due to the proven fragmentation of local banking clients who use various banks for different services.

With that in mind, R&G plans to expand all operations, from insurance and banking services to securities and mortgage lending. Víctor Galán, CEO & chairman, explains, "This year, we are ready to see much more growth than we did in 2004. In the U.S., we have ensured growth without a problem. In Puerto Rico, we will concentrate on expansion in all our divisions." On the U.S. mainland, R&G expects to open five more branches to fill what Galán modestly describes as loopholes in the Florida region where they currently have 33 branches, the same number as on the island. However, R&G’s local expansion plans apparently don’t include any consolidations. "We always tell investors we maintain operations prepared to absorb other institutions, in case it were to happen, but we have no possibility of consolidating with anyone at this point," assured Galán.

Ángel Álvarez, president, chairman & CEO of First Bancorp, believes local consolidations are likely in the long term, but probably not this year. "I don’t see it happening in the short term, maybe by 2006 or 2007," he explained calmly. That calmness was perhaps born of his expectations for the year. "Tranquil and profitable, that’s what we expect 2005 to be." The profitable part will come in part with the anticipated approval of the Unibank purchase in Florida, which will be FirstBank’s introduction into the retail sector in the state. "We hope this purchase will allow us to continue to grow in a market that is enormous compared to Puerto Rico. Here, we expect to continue growing, but not at the rate we grew during the past 10 years because we can’t make our operation seven times larger than it already is." From 2005 on, FirstBank’s hope will live most of the time in Florida, as will those of many other banks.

BBVA, however, is concentrating its U.S. mainland expansion in Texas, where it expects the purchase of Laredo National Bank to be approved during the first quarter of 2005. California is the other state where the bank is hoping to expand operations this year with its earlier purchase of Valley Bank. With these purchases, the bank hopes to secure a wide part of the growing Hispanic market in the area.

Locally, BBVA president in Puerto Rico, Javier Flores, announced the bank will be basing its expansion on the island in three specific areas. Primarily, it will be fostering its mortgage-lending operations, which Flores believes will remain very strong this year. The bank also will be offering more diversified and specialized products for businesses, and will be expanding the operations of BBVA Auto. In terms of interest rates, Flores believes the good news is that the increments will be gradual; the not-so-good news, in his view, is the bank’s economists anticipate the increases being more than are generally expected. However, Flores was very optimistic and excited about the year’s prospects, including goals to give more back to the community. In that respect, Flores said that in the coming weeks they will be announcing new, more concentrated strategies on how to best serve that purpose in 2005.

W Holding Co. (WHI), Westernbank’s parent company, is in very good standing for 2005, according to UBS Investment Research reports. They expect WHI to generate 20%-25% growth in earnings per share in 2005. They also believe WHI has had the largest organic loan market share gain in Puerto Rico over the past four years, and its cost-conscious and customer-service-oriented strategy will help it keep gaining strength. The report also credits WHI’s use of technology with the bank’s advancement, citing as an example the use of biometric technology, which allows customers to access their accounts even if they have no form of government identification. The cost-efficiency and practicality born of the megabranch concept employed by the bank also plays favorably into the forecast.

Oriental Financial Group announced it will be opening several new large branches. "As part of our strategy, and to better serve our target customer base, we have signed a lease to open a new, full-service financial center in San Juan by June 30, 2005, and we plan to open two more in the next fiscal year," explained José Rafael Fernández, president & CEO of Oriental Financial Group. Although Oriental is in the second half of its fiscal year, it has high hopes for what is left of the year. "In the second half of fiscal 2005, we will continue to implement our Oriental Way plan for growth and asset-management strategies in this rising rate environment, along with our determination to maintain effective cost controls. Our principal goal is to continue enhancing our shareholder value, backed by the commitment of our management team to achieving sustained operating performances," Fernández concluded.

Mortgage sector

The U.S. Mortgage Bankers Association predicts mortgage lending on the U.S. mainland will drop by 18% this year, to $2.3 trillion. Yet, despite this estimate and concerns over interest rates, the mortgage sector in Puerto Rico seems poised for another big year.

Salomón Levis, chairman & CEO of Doral Financial Corp., anticipates a strong year for loan production based on the continued strength of the demand for loans to finance homes in the growing government-sponsored housing sector and the strong demand for refinancing loans for debt-consolidation purposes. Levis also expects strong increases in secured commercial real-estate loans and other loan products at the company’s two banking subsidiaries.

The expected strength of the construction sector translates into good news for the mortgage industry as new projects continue to ensure financial opportunities. In estimates presented by Juan Lara, an economist at Estudios Técnicos, the construction industry will grow 6.6% in the current fiscal year, and both private and public construction permits should show respectable activity as well.

Flores is confident the increased demand for housing will offset any potential effect of increased interest rates on mortgage lending. That is why during 2005 BBVA Mortgage is planning to open seven new branches–three during the first half of the year and four more later on. Flores did, however, express concern in terms of refinancing, which he believes will be more vulnerable to the effect of interest rates.

Chafey expects the ones who will be really excited about the mortgage sector this year are the consumers. Due to what is expected to be even more competition in the sector this year, many companies are forced to go the extra mile, or the extra low, in order to win over customers.

That may very well be the case with smaller mortgage companies such as New York Mortgage. The company already has inaugurated a new branch in Levittown, and is programmed to open more branches in Ponce, Caguas, and Carolina in the coming months. New York Mortgage President Nancy Hernández emphasizes its strength isn’t only the quality of customer service, but the speed of loan approvals. Hernández offered an example a jumbo loan of $3 million that was approved in less than 24 hours. Creative loans may be the solution that many mortgage companies will have to turn to this year to keep ahead of the crowd.


The Puerto Rico Stock Index is expected to continue a healthy growth trend for the time being, although some analysts warn the margin of growth may not be as wide as in recent years. Industry sources commented on the fact that the impressive growth trend of the index will be hard to sustain for an extended period.

In Smith Barney’s Equity Strategy report, analyst Tobias Levkovich projects some equity-market pullback is likely in the first quarter of 2005 but, at the same time, this situation will present a buying opportunity for investors. Furthermore, he believes weaker energy prices should bolster consumer spending capacity and global GDP growth potential, which is good news for the securities sector. The report also estimates the S&P 500 target rate will be 1,300, an increase from a previous estimate of 1,225. Smith Barney highlights certain risk factors for 2005, such as higher interest rates, slower earnings growth, the weak dollar, and recent substantial insider selling which registered at $7 billion in November 2004.

Rafael Colón Ascar, senior vice president & resident manager of Smith Barney in Puerto Rico, believes despite those risks, 2005 should be a healthy year for the industry. In his view, people already have taken into consideration the factors that have rocked the market in recent years, such as the Iraq war, large deficits, the burst of the technology bubble, industry fraud, and a weak dollar, just to mention a few and, consequently, they won’t scare as easily because they already have digested these headlines. In the past year, market volatility was considerably less, and Colón expects it will be even steadier in 2005 as the market initiates more definitively the traditional cycle that was broken off after the Sept. 11 terrorist attacks of 2001. "Those negative factors are already there, investors understand them, they have been repeated and analyzed. What is more probable is that those factors will improve. Unless something of the magnitude of Sept. 11 happens this year, I believe investors will be confident in the market," he explained. Smith Barney will continue to recommend diversification as the smart way to go this year, recommending local investors should consider putting money in foreign stocks, such as China.

UBS believes 2005 will bring no doom, but no boom either. Its expectations for stocks are modest because of weakened earnings momentum. As the dollar continues to weaken vs. the yen and the euro, UBS Head of Global Asset Allocation Larry Hatheway expects European and Japanese equities will outperform the U.S. market.

However, Miguel Ferrer, CEO & president of UBS Financial Services Inc. of P.R, is very optimistic about the local market. Ferrer says UBS plans to expand all of its local businesses, including lending, which was its newest effort, and expects its strong momentum to carry it to another record year in 2005.

Carlos Capacete, managing director & chief operating officer for Santander Securities, also believes there is reason to be excited about 2005. "We expect next year to be a spectacular year for us. We are very bullish with how things are looking, both for Santander Securities and for our clients," explained Capacete. This year, the company anticipates passing the $5 billion mark in assets under management, which would be a significant milestone for it.

However, it is important to point out that not everyone is excited about 2005. Richard Burnstein, chief U.S. strategist at Merrill Lynch, commented in USA Today that in his opinion the combination of increasing interest rates and slow earnings growth don’t offer much promise for a continuing bull market. Meanwhile, Mary Lisanti, president of AH Lisanti Capital Growth, is more optimistic about small stocks in the Russell Index, which she predicts will grow between 26% and 27%. Lisanti warned that the fact President Bush will have to replace Alan Greenspan at the end of 2005 also may shake the market in the latter part of the year. On the more positive side, Kim Goodwin, chief investment officer at State Street Research, pointed out the presidential election resolved a lot of uncertainty. In her view, companies weren’t spending and, this year, they can afford to be a little less conservative, whether by paying out higher dividends or increasing spending and boosting the economy by creating new jobs.


That is what 2005 should be all about, according to Manuel Maldonado from Quality for Business Success Inc. In his view, the sector did a great job in the past months building up the dialogues that in turn could help to build up the financial institutions this year. He believes it will be clear communication that will allow the financial industry to provide the needed transformation of the island’s economy. Maldonado also hopes the commitment of banks to the communities that support their growth will intensify this year.

Although number-wise the financial industry expects a modestly healthy year, sitting down and initiating those dialogues in light of the tight competition pressuring all sectors could be the key to true progress in 2005.

This Caribbean Business article appears courtesy of Casiano Communications.
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