Fitch Takes Rating Action on Puerto Rico Banks Following Peer Review

NEW YORK--()--Fitch Ratings has completed a peer review of four rated Puerto Rican banks, affirming the Long-term Issuer Default Ratings (IDR) of Doral Financial Corp. (DRL) at 'CCC', First BanCorp (FBP), Popular Inc. (BPOP) at 'BB-'. The Outlook is Stable for BPOP and FBP.

Fitch has also affirmed the Long-term IDR at 'BBB' and Viability Rating at 'bb+' for Santander Bancorp (SBP). The Outlook has been revised to Stable from Negative. Fitch notes that SBP's IDRs and Outlook are correlated with its ultimate parent, Banco Santander (based in Spain), and changes in the parent company's IDRs result in changes to SBP's. The IDR rating action was a result of Fitch's affirmation of the long-term IDR of Banco Santander, on Nov. 8, 2013. For additional details, please see "Fitch Affirms 8 Spanish Banks Following Sovereign Review" dated Nov. 8, 2013, available on the Fitch web site at www.fitchratings.com.

A full list of rating actions follows at the end of this press release.

RATING ACTION RATIONALE AND RATING DRIVERS AND SENSITIVITIES - VRs and IDRs (applicable to all banks in the peer group):

Fitch-rated Puerto Rican bank VRs and IDRs incorporate limiting rating factors, and current rating levels are indicative of the significant challenges facing Puerto Rican banks. The company's VRs and IDRs are significantly more sensitive to economic conditions within their main operating market, the Commonwealth of Puerto Rico (PR). Fitch believes the prospect for stable earnings growth is difficult given significant challenges and pressures on the local economy. Further, PR banks' funding profiles have historically been weaker when compared to U.S. bank peers given stronger reliance on noncore funding sources. Finally, although non-performing loans (NPLs) have come down from peak levels, they remain much higher than U.S. peers. Despite asset quality improvements at most banks, Fitch remains concerned with the high level of foreclosures on the island that will likely take a few years to balance out and may impact future credit performance. Additionally, Fitch has noted that some of the local banks have large exposures to the local government through investment securities, credit facilities, and loans, which may also have a negative impact on the local banks. More recently, market events are pressuring PR even more, affecting the bond spreads and raising concerns regarding execution of future market access at reasonable costs. For additional details, please see "Fitch Places Puerto GO and Related Debt Ratings on Rating Watch Negative", dated 14 Nov 2013, available on the Fitch web site at www.fitchratings.com.

At this time, Fitch believes that the local banks have sufficient capital position to absorb any potential losses from these exposures. Further, the local banks' tangible common equity (TCE) ratios remain solid and incorporate the changes in the market value of bond holdings. However, should the fiscal situation of the local government negatively impact the banking sector or local banks' exposure to Puerto Rico government materially increase, Fitch would likely review ratings for negative action, particularly those with sizeable exposures to PR.

Current rating levels incorporate the weak state of the local economy, which is expected to limit improvements to financial and credit performance. The island has been in a recession for six years with unemployment at 14.7% for 3Q'13, and negative GNP is forecast for 2014 of 0.8%. Recent economic trends have reversed some of the modest improvements experienced during 2012, perhaps due to the election-year spending in 2012. However, much uncertainty remains as to future strategies to address long-term structural issues. Although Fitch recognizes that the local banks have been operating under these conditions while continuing to improve performance and strengthen balance sheets, recent fiscal austerity measures by the government, such as increases in taxes and utility costs, may prolong the recession further and could pressure consumers even more.

In Fitch's view, credit indicators reflect continued stress from the real estate market, particularly commercial real estate (CRE), construction, and residential mortgage loans. Fitch notes that Puerto Rican banks' (including those not rated by Fitch) loan mix is heavily weighted towards real estate lending. For 3Q'13, Fitch-rated Puerto Rico banks non-performing assets (NPA) ratio (which includes 90 days past due and accruing TDRs) was 11.91% compared to an average of 2.51% for Fitch-rated Mid-Tier and Community bank peer groups combined. For the group, average net charge-offs (NCOs) totaled 0.95% for 3Q'13, despite the elevated levels of nonperformers. In Fitch's view, NCOs may begin to increase from residential mortgages given the rising delinquency rates in this product and the high level of foreclosures.

Puerto Rican bank funding profiles are also considered weaker when compared to the U.S. mainland, given the higher reliance on noncore funding sources. It includes a larger reliance on non-core deposits, such as brokered certificate of deposits (CDs), time deposits and wholesale borrowings, leading typically to a higher cost of funds. This is also considered a rating constraint and has long been the case for Puerto Rico banks. In Fitch's view, the local market does not have sufficient deposits to support funding needs of all the banks, particularly for a relatively small economy. It is a competitive environment, which includes six local banks, four foreign banks, 127 cooperative banks as well as competition from the Government Development Bank for municipal deposits.

The Stable Outlook reflects the view that impact from future negative economic weakness would be manageable given the increased capital position across most of the banks, deleveraging of the balance sheet, and modest improvements to liquidity profiles. Fitch believes that current ratings reflect many of the challenges noted above.

RATING DRIVERS AND SENSITIVITIES FOR THE IDRS AND VRS:

DRL (Long-term IDR/VR 'CCC/ccc')

DRL's affirmation reflects the company's ongoing challenges such as longer-term strategic plans, geographic and product concentration in Puerto Rico with a limited franchise, high levels of non-performers and weak liquidity profile. The company's high level of NPAs and credit costs continue to adversely impact earnings and capital. Given DRL's concentration in Puerto Rico and the pressures on the local economy, Fitch believes prospects for earnings growth is difficult in the near term. Fitch also notes that DRL's exposure to Puerto Rico is largely to the economy with no exposure to the government or its subsidiaries directly or indirectly. More recently, DRL has ramped up its commercial loan originations in the U.S. with outstandings now accounting for 40% of total loans ($2.63 billion) up 70% from year-end 2011. Although the company is diversifying its loan portfolio, Fitch is concerned with the rapid rate of growth in a short-time frame. Additionally, banks industry-wide are targeting C&I, which may lead to loosened underwriting. DRL's commercial and industrial (C&I) growth has been aided mainly by syndicated loan participations accounting for roughly 60% of total loans originated. The company's mortgage concentration continues to present challenges and Fitch believes provisions will likely continue to be volatile. Fitch recognizes that NCOs have not increased as dramatically as NPAs, given characteristics of DRL's mortgage portfolio as well as unique residential market dynamics. However, in Fitch's view, the continued weak economy may put increased pressure on DRL's customer base and lead to a rise in NCOs from historical performance.

Further, the company continues to operate under a Consent Order and Written Agreements with regulators, which requires Doral Bank to maintain a minimum Leverage Ratio of 8%, Tier 1 RBC of 10% and Total RBC of 12%. As of Sept. 30, 2013, Doral Bank reported 8.3%, 11.0% and 12.3%, respectively.

Although positive momentum in ratings is considered unlikely, asset quality improvements such as a significant decline in NPAs would need to be sustainable to build positive ratings momentum. Further, solid capital build would be viewed favorably.

DRL's ratings could move lower if regulatory capital ratios are expected to fall into 'undercapitalized' status or should the company not comply with minimum capital requirements outlined in the regulatory orders. Additionally, deteriorating liquidity or inability to access the funding markets could also place negative ratings pressure on the institution. Further, credit deterioration in its U.S. portfolio would also lead to a ratings review for possible downgrade.

In accordance with Fitch's "Recovery Ratings for Financial Institutions" criteria, DRL's bank-level deposit ratings have been upgraded one notch solely reflecting Fitch's Recovery Rating analysis. Thus, DRL's senior unsecured ratings have been downgrade to 'C' from 'CCC' solely reflecting Fitch's recovery rating analysis.

First Bancorp (Long-term IDR/VR 'B-/b-', Outlook Stable)

FBP's affirmation and Stable Outlook reflect the company's improvements in earnings, capital position, and credit performance. However, despite modest positive credit trends, FBP is operating with a high level of NPLs (13.4% at 3Q'13) Further, some volatility is expected in NCOs given that 60% of its loan book is tied to real estate in the local market. In Fitch's view, the loss content in CRE and construction loan portfolios tends to be higher (which is about 34% of total loans). Nonetheless, Fitch does not expect NCOs to return to the peak level experienced in 2010.

Fitch recognizes the company's core fundamentals have been strengthen such as de-risking the balance sheet, increased capital position, and improved funding profile. However, earning and asset quality metrics remain in-line with similarly rated peers. During 2013, earnings were impacted by one-time charges related to bulk loan sales and write-down of securities stemming from legacy Lehman case. Positively, the company's financial performance has improved year-over-year. PPNR has increased by 11% and the NIM continues to improve despite the rate environment. The company has benefited from continued reduction in funding costs. Overall, loan growth was down about 6% from a year-ago, which is not surprising as the CRE and construction portfolios continue to decline. Notably, FBP experienced 4% growth in consumer assets, which was also driven by the recently acquired credit card portfolio.

Similar to most peers, FBP has improved its capital position following the peak of the crisis. For 3Q'13, FBP's TCE stood at 8.65% and Tier 1 Common of 12.6%. The company also remains in compliance by a wide margin with its regulatory order minimum capital ratios. Fitch believes as the company's core earnings improve, its capital position will continue to be maintained at current levels.

Although credit measures remain elevated (for 3Q'13, NPAs totaled 13.1% and NCOs totaled 1.41%). However, on an absolute basis, FBP's NPAs were down by 34% totaling $1.26 billion. The company has addressed problem and/or higher risk loans by completing bulk sales, charge-offs and some through pay-downs. NCOs have also improved although down 16% compared to 3Q'12. Nonetheless, Fitch is concerned with the company's direct and indirect exposure to the local government, which totaled $597 million. Although the exposure appears to be well-secured, should the fiscal situation in Puerto Rico worsen, it may have an impact on future credit performance. Offsetting, FBP's improved capital position should provide a cushion to potential write-downs.

Given uncertainty regarding Puerto Rico's fiscal situation and potential impacts to the banking sector, upside may be limited in the near term. Ratings could be positively affected should the absolute level of FBP's NPAs materially decline coupled with a sustainable improvement in earnings and prudent capital measures.

The Outlook could be revised to Negative should the company's exposure to the Puerto Rican government materially increase. Further, a downward trend in FBP's recent improvement in asset quality would be viewed negatively.

In accordance with Fitch's "Recovery Ratings for Financial Institutions" criteria, FBP's bank-level deposit ratings have been upgraded one notch solely reflecting Fitch's Recovery Rating analysis.

Popular Inc. (Long-term IDR/VR at 'BB-/bb- ', Outlook Stable)

BPOP's VR and IDRs have been affirmed and the Outlook remains Stable supported by Fitch's view that the bank's operating performance will remain sustainable during this difficult operating environment. Although Fitch recognizes the improvements to core fundamentals such as solid capital, sustainable earnings, and positive trends in asset quality, Fitch believes that current and expected challenges in Puerto Rico's operating environment limit positive rating momentum at this time.

Profitability measures and credit performance have continued to trend better from the peak of the crisis. Despite the weak local economy, BPOP has been able to deliver improving results. Core earnings (excluding one-time gains from the EVERTEC sale) continue on a positive trend with an expectation that ROA, NIM and Pre-provision net revenue / Average Assets PPNR/Avg will remain at current levels. Nonetheless, BPOP is not immune to the challenging environment should the recession become more pronounced given recent austerity measures.

Fitch also notes that BPOP has taken significant steps to reduce its problem assets including the successful execution of loan sales, which has helped reduced NPAs by $1.4 billion since 2011. Nonetheless, on a comparative basis, credit quality remains in line with the current rating as the NPA ratio (which includes 90+ days and accruing restructured loans) still remains elevated at 8.61%, and NCOs at 1.06% for 3Q'13 are much higher than similarly rated peers.

Fitch is also concerned with the company's outsized direct and indirect exposure to the local government, which totaled $1.2 billion in outstandings. Although the bond holdings, credit facilities and loan agreements appear to be well-structured with BPOP in senior positions, should the fiscal situation in Puerto Rico worsen, it may have an impact on future credit performance.

Given uncertainty regarding the Puerto Rico's fiscal situation and potential impacts from current exposure, upside may be limited in the near term. However, a continued positive earnings trend, prudent liquidity management and solid capital position would be viewed favorably. Additionally, resolution of TARP debt outstanding and the removal of the MOU would also improve financial flexibility.

The Outlook could be revised to Negative should the company's exposure to the Puerto Rican government materially increase. Further, a downward trend in BPOP's recent improvement in asset quality would be viewed negatively.

Santander Bancorp (Long-term IDR/VR 'BBB/bb+', Outlook Stable)

SBP's IDRs and VR ratings have been affirmed with the Outlook revised to Stable from Negative. As mentioned earlier, SBP's IDRs are correlated with Banco Santander's; therefore, changes in Banco Santander's IDRs and/or Outlook result in changes to SBP's. SBP's IDRs would also be affected should Fitch's view of support change.

Fitch has affirmed SBP's standalone rating, the VR, at 'bb+'. The affirmation is supported by the company's sound operating performance and solid capital position while operating in the challenging Puerto Rico market. Similarly to local peers, asset quality remains a challenge.

SBP's standalone performance has been better than peers, evidenced in profitability, capital and credit metrics. Fitch is concerned with SBP's elevated levels of NPAs at 7.7%, although it compares well to local peers with an average NPA of 11.91% at 3Q'13. SBP's loan portfolio exhibits better credit performance due to more conservative underwriting and overall risk management practices (including a relatively low concentration in construction lending). Additionally, given good profitability, the company's capital position has remained solid with a TCE ratio at 11.98% and Tier 1 Common of 18.18% for 3Q'13. More recently, the company has experienced a decline in profitability measures, although in-line with current ratings level.

Fitch believes there is limited upside to SBP's VR given the concentration in its loan book by product and geography and relatively small franchise. Fitch also notes that SBP's VR is more sensitive to negative changes in the operating environment given the current rating level. Although not expected, the VR could be negatively affected if loan portfolio quality deteriorates or should the company materially increase its exposure to the Puerto Rican government, particularly if significant operating losses emerge and the company's capital position is eroded.

Fitch considers SBP to be strategically important to, but not a core subsidiary of, Banco Santander. This is reflected in the support-driven IDR, which is notched one notch below the parent company's IDRs at 'BBB'. See Support Ratings and Support Floor Ratings for further discussion.

RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT FLOOR RATING

DRL, FBP and BPOP have Support Ratings of '5' and Support Floor Rating of 'NF'. In Fitch's view, the Puerto Rico banks are not systemically important and, therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any support.

SBP's Support Rating is '2', which reflects Fitch's view that there is still a high probability of support for SBP by its parent in the event of need. Since SBP's support reflects institutional support, no Support Rating Floor is assigned. In the event Fitch's views of support changes, its Support Rating could be downgraded, which could impact SBP's current IDRs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation.

HOLDING COMPANY RATING DRIVERS AND SENSITIVITIES

All of the entities reviewed in the Puerto Rican Banks Peer Review Group have a bank holding company (BHC) structures with the bank as the main subsidiary. All subsidiaries are considered core to the parent holding company supporting equalized ratings between bank subsidiaries and BHCs. IDRs and VRs are equalized with those of the operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Double leverage is below 120% for all the parent companies reviewed in this peer group.

SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES

All of the entities reviewed in the Puerto Rican Banks Peer Review factor in a high probability of support from parent institutions to subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

Fitch has affirmed the following ratings.

Doral Financial Corporation

--Long-term (IDR at 'CCC';

--Viability rating at 'ccc';

--Preferred stock at 'C/RR6';

--Short-term IDR at 'C';

--Support '5';

--Support Floor 'NF';

Doral Bank

--Long-term IDR at 'CCC';

--Viability rating at 'ccc';

--Short-term IDR at 'C';

--Short-term deposit at 'C'.

--Support at '5';

--Support Floor at 'NF'.

Fitch has upgraded the following ratings:

Doral Bank

--Long-term deposits to 'B-/RR3' from 'CCC/RR4';

FirstBank Puerto Rico

--Long-term deposit to 'B/RR3' from 'B-/RR3'.

Fitch has downgraded the following ratings:

Doral Financial Corporation

--Senior debt to 'C/RR6' from 'CCC/RR6'.

Fitch has affirmed the following ratings. The Outlook is revised to Stable from Negative.

Santander Bancorp

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Viability Rating at 'bb+';

--Support Rating at '2';

--Subordinated debt at 'BBB-'.

Banco Santander Puerto Rico

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Viability Rating at 'bb+';

--Support Rating at '2';

--Long-term deposit rating at 'BBB+';

--Short-term deposit rating at 'F2'.

Fitch has affirmed the following ratings. The Outlook is Stable:

First BanCorp

--Long-term IDR at 'B-';

--Short-term IDR at 'B';

--Viability at 'b-'

--Support at '5'.

--Support floor at 'NF'.

FirstBank Puerto Rico

--Long-term IDR at 'B-';

--Short-term IDR at 'B';

--Short-term Deposits at 'B'.

--Viability to 'b-'.

--Support at '5'.

--Support floor at 'NF'.

Popular,Inc.

--Long-term IDR at 'BB-';

--Senior unsecured at 'BB-';

--Short-term IDR at 'B';

--Short-term Debt at 'B'.

--Viability at 'bb-';

--Preferred stock at 'B-';

--Support at '5'

--Support floor at 'NF'.

Popular North America, Inc.

--Long-term IDR at 'BB-';

--Senior unsecured at 'BB-';

--Short-term IDR at 'B';

--Short-term Debt at B

--Viability rating at 'bb-';

--Support at '5'

--Support floor at 'NF'.

Banco Popular North America

--Long-term IDR at 'BB-';

--Long-term deposits at 'BB';

--Short-term IDR at 'B';

--Short-term deposits at 'B'.

--Viability rating at 'bb-'

--Support at '5'

--Support floor at 'NF'.

Banco Popular de Puerto Rico

--Long-term IDR at 'BB-';

--Long-term deposits at 'BB';

--Short-term IDR at 'B';

--Short-term deposits at 'B';

--Viability rating at 'bb-';

--Support at '5'

--Support floor at 'NF'.

BanPonce Trust I

--Trust preferred at 'B-'.

Popular Capital Trust I

--Trust preferred at 'B-'.

Popular Capital Trust II

--Trust preferred at 'B-'.

Popular North America Capital Trust I

--Trust preferred at 'B-'.

Popular Capital Trust III

--Trust preferred at 'B-'

Additional information is available at www.fitchratings.com

In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Risk Radar' (Oct. 15, 2012);

--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011).

--' Recovery Ratings for Financial Institutions' (Aug. 16, 2012)

Applicable Criteria and Related Research:

Recovery Ratings for Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538

Risk Radar October 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691996

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810978

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Contacts

Fitch Ratings
Doriana Gamboa, +1-212-908-0865
(Primary Analyst for DRL, FBP, BPOP, SBP)
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Jaymin Berg, +1-212-908-0368
(Secondary Analyst for DRL, FBP, BPOP, SBP)
Director
or
Committee Chairperson
Christopher D. Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Peter Fitzpatrick, London, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com

Sharing

Contacts

Fitch Ratings
Doriana Gamboa, +1-212-908-0865
(Primary Analyst for DRL, FBP, BPOP, SBP)
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Jaymin Berg, +1-212-908-0368
(Secondary Analyst for DRL, FBP, BPOP, SBP)
Director
or
Committee Chairperson
Christopher D. Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Peter Fitzpatrick, London, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com