Fitch Affirms First Bancorp's L-T & S-T IDRs at 'B-/B'; Outlook Revised to Positive

NEW YORK--()--Fitch Ratings has completed a peer review of its two rated Puerto Rican banks and has affirmed the Long-Term Issuer Default Ratings (IDRs) at 'B-' and Short-Term IDRs at 'B' for First Bancorp (FBP) and its subsidiary FirstBank Puerto Rico. The Rating Outlook has been revised to Positive from Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRS AND VRS

FBP's current rating levels incorporate the significant challenges facing Puerto Rican banks. The Puerto Rican bank VRs and IDRs are somewhat constrained by weak economic conditions within their main operating market, the Commonwealth of Puerto Rico (PR). Despite the challenging operating environment, the Rating Outlook has been revised to Positive from Stable reflecting an improving overall financial profile, including the resumption of dividend payments on its trust preferred securities, and our view that there may be upward ratings potential.

Fitch believes the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) has removed a degree of uncertainty in the operating environment, and may address some of the recessionary and fiscal challenges facing the Commonwealth if fully implemented. Although economic pressures may ensue in the near term, the fiscal oversight board should ensure fiscal discipline for the government, assuming the government complies, which we view as a positive over the longer term.

The affirmation of FBP's ratings reflects the company's stability and modest improvements in the company's asset quality, earnings, capital, and deposit funding.

FBP's level of nonperforming assets (NPAs) has improved and stabilized since the crisis. NPAs were approximately 12.5% at third quarter 2016 (3Q'16; includes accruing TDRs and OREO) and have been in the 11%-12% range since 2013. Fitch notes that NPAs are up 177 basis points (bps) relative to 4Q'15 due largely to inflows related to loans made to the hotel industry, which receive a secondary guarantee from a government entity. Prospectively, we expect NPAs to trend in line with 2015 levels as the company resolves these hotel-related loans. Although NPAs are high when compared to U.S. mainland averages, NPAs are down from peak levels in 2012 of over 16%. NCOs were 1.35% in 3Q16, and we expect this metric to remain at similar levels going forward.

In addition, during 2016, FBP continued to reduce its indirect and direct PR government exposure. In Fitch's view, exposure to the Commonwealth and its instrumentalities is manageable and our expectations for severe losses have been reduced given the orderly restructuring process established under PROMESA.

While returns tend to outperform similar sized mainland U.S. banks, we note that FBP's absolute earnings profile is somewhat lackluster relative to its operating environment. We note that global banks in similar operating environments tend to have higher levels of net income. That said, we note that FBP's CRE and construction portfolios, a source of elevated provisioning in the past, have been significantly reduced through loan portfolio de-risking efforts. This de-risking is likely to not act as a headwind earnings performance in the future as it has in the past. Reflecting the low rate environment and increase in funding costs, NIM was 4.09% at 3Q'16 compared to 4.18% a year ago. However, expectations for rising interest rates in 2017 should provide further buoyancy to the company's NIM.

Similar to most peers, FBP has improved its capital position following the peak of the crisis. At 3Q'16, FBP's TCE and Common Equity Tier 1 ratios were 14.27% and 17.64%, respectively and reflect an appropriate level of capitalization given its risk profile. The company also remains in compliance with its regulatory order minimum capital ratios. Fitch believes that as the company's core earnings continue to improve, its capital position will be maintained near current levels as any shareholder capital return actions are expected to be modest. Fitch also notes the company's solid DFAST results, which are supportive of our expectation of continued sustainable performance even under extremely weak economic conditions.

FBP has been reducing its reliance on non-core funding sources, particularly brokered deposits, over the past several quarters, which has improved the overall stability of its deposit base. As of 3Q'16, the amount of brokered CDs had decreased to $1.6 billion from $2.1 billion as of 4Q'15. Historically, FBP's funding profile was very weak when compared to U.S. bank and Puerto Rican rated peers due to its heavy reliance on non-core funding sources. Fitch notes that FBP faces competition for deposits from locally based commercial banks, several U.S. and foreign banks, and over one-hundred cooperative banks, which limits deposit gathering on the island.

Presently, FBP's VR is higher than Puerto Rico's commonwealth debt rating of 'D'. This reflects Fitch's view that the Commonwealth of Puerto Rico operates broadly within the legal system of the United States and transfer and convertibility risk is not foreseeable, as Puerto Rican banks are regulated by the U.S. Federal Reserve and Federal Deposit Insurance Corporation.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's view that FBP is not considered systemically important, and therefore the probability of support is unlikely. The IDRs and VRs do not incorporate any support.

LONG- AND SHORT-TERM DEPOSIT RATINGS

FBP's uninsured deposit ratings at its subsidiary banks are rated one notch higher than FBP's IDR and senior unsecured debt rating because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

FBP has a bank holding company (BHC) structure with the bank as the main subsidiary. 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 the FBP parent company.

RATING SENSITIVITIES

IDRS AND VRS

FBP's ratings may be upgraded with continuing improvement in asset quality, particularly continued improvement in inflows into non-performing status. We note that FBP's NPAs will likely remain very elevated over the near term; however, if realized credit losses do not deteriorate meaningfully from current levels, upward rating potential may occur.

We believe PROMESA removes a degree of uncertainty in the operating environment and provides a credible path forward for the recessionary and fiscal challenges facing the Commonwealth, if fully implemented. To the extent that we observe improvement in the operating environment, this may also contribute to an upgrade for FBP.

Fitch assumes the fiscal oversight board will carry out its functions and begin to restore fiscal discipline to the Commonwealth. If that were not to occur, Fitch would re-visit its ratings for Puerto Rican banks.

With regard to a revision of the Rating Outlook back to Stable or a downgrade, although not expected, aggressive capital management would be viewed negatively. We view FBP's capital levels as appropriate given the risk profile of the company.

FBP's current ratings incorporate the potential for write-downs on its securities holdings and credit exposures to the Commonwealth and its instrumentalities. However, should market events in the Commonwealth of Puerto Rico result in losses beyond our expectations and/or the company's exposure to the Puerto Rican government materially increases, negative pressure on the ratings could develop.

To date, consumer portfolios have performed better than expected. However, FBP's loan mix has shifted towards more consumer assets over the past few years. Should this mix shift lead to greater than expected credit losses, Fitch could revise the Positive Outlook back to Stable.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by FBP subsidiaries are primarily sensitive to any change in the company's IDRs. This means that should a long-term IDR be downgraded, deposit ratings could be similarly affected.

HOLDING COMPANY

If FBP became undercapitalized or increased double leverage significantly, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has affirmed the following ratings:

First BanCorp

--Long-Term IDR at 'B-'; Outlook revised to Positive from Stable;

--Short-Term IDR at 'B';

--Viability Rating at 'b-';

--Support at '5';

--Support floor at 'NF'.

FirstBank Puerto Rico

--Long-Term IDR at 'B-'; Outlook revised to Positive from Stable;

--Long-term deposit at 'B/RR3';

--Short-Term IDR at 'B';

--Short-term Deposits at 'B';

--Viability at 'b-';

--Support at '5';

--Support floor at 'NF'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015199

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015199

Endorsement Policy
https://www.fitchratings.com/regulatory

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New York, NY 10004
or
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Senior Director
or
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Contacts

Fitch Ratings
Primary Analyst:
Stefan Kahandaliyanage, +1-646-582-4918
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Doriana Gamboa, +1-212-908-0865
Senior Director
or
Committee Chairperson:
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com