Fitch Affirms First Bancorp's 'B-/B' LT & ST IDRs; Outlook Stable

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

KEY RATING DRIVERS

IDRS AND VRS

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 Puerto Rican bank VRs and IDRs are significantly more sensitive to economic conditions within their main operating market, the Commonwealth of Puerto Rico (PR) and current rating levels incorporate the weak state of the local economy. Although Fitch recognizes that FBP has been operating under these conditions for a number of years, while continuing to improve performance and strengthen its balance sheet, the prolonged recessionary environment and fiscal challenges of the Commonwealth together could intensify pressure on retail and commercial customers.

In addition, while direct exposure to the Commonwealth and its instrumentalities appears manageable in Fitch's estimation, Fitch remains concerned with the Commonwealth's fiscal situation and potential spill-over effects to the local economy over the medium to longer term, especially in light of the Governor of the Commonwealth of Puerto Rico's statements in June regarding the possibility of restructuring numerous debt instruments, including government general obligation (GO) bonds.

Presently, FBP's VR is higher than Puerto Rico's commonwealth debt rating of 'CC'. 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.

The affirmation of FBP's ratings and the Stable Outlook reflect the company's idiosyncratic improvements in credit performance, earnings, capital position, and deposit funding. The affirmation also reflects improvements the company has made to its overall risk profile, which has resulted in the company's release in April from an FDIC Consent Order (a Written Agreement with the Federal Reserve remains inforce) as well as solid Dodd Frank Act Stress Testing (DFAST) results under adverse and severely scenarios. Although these fundamental improvements are significant, the worsening operating environment for Puerto Rican banks remains a concern.

Although Puerto Rican consumers have been resilient, continued stress in the local economy, especially within the context of any heightened fiscal dislocation, may pressure borrowers. FBP may be exposed to such changes given its increase in consumer assets over the last three years. In addition, FBP continues to operate with a high level of NPAs (which includes accruing TDRs) totalling 12.36% at 3Q'15. This metric is higher than rated Puerto Rican rated peers. Although FBP's absolute level of NPAs has improved/stabilized, Fitch believes that FBP could still experience volatility. Nonetheless, Fitch does not expect NCOs to return to the peak level experienced in 2010.

FBP has direct exposure of about $371 million to the local government through investment securities, credit facilities to some of the public corporations, and loans to entities related to the government as well as municipalities. Recent market events in Puerto Rico may put pressure on credit performance, but Fitch does not believe that negative pressure on the ratings would likely develop as exposures appear to be well structured and mostly secured by collateral and/or with specific sources of payment. Further, Fitch has stressed FBP's Puerto Rico exposure (a 40% writedown for securities and 20% writedown to other direct and indirect exposures) and has concluded the company's ratings could be sensitive to losses approaching this level.

Financial performance as measured by PPNR is a rating strength with full-year 2015 on track to exceed full-year 2014. PPNR to average assets has averaged 1.68% over the past four quarters. This metric compares favorably to Puerto Rican rated peers. In addition, FBP's CRE and construction portfolios, a source of increased provisioning in the past, have been significantly reduced through loan portfolio derisking efforts, which should bode well for continued PPNR resilience. Despite the low rate environment, NIM improved to 4.31% at 3Q'15 compared to 3.82% at year-end 2012. This is attributed in part to improved funding costs. The company's expectation for rising interest rates in 2016 as well as an improving deposit cost profile could 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'15, FBP's TCE stood at 12.73% and Common Equity Tier 1 stood at 16.63%. The company also remains in compliance, by a sizeable margin, with its regulatory order minimum capital ratios. Fitch believes that as the company's core earnings improve, its capital position will continue to be maintained at current levels and support the current risk on the balance sheet.

FBP's funding profile has historically been weaker when compared to U.S. bank and Puerto Rican rated peers given stronger reliance on non-core funding sources. FBP faces competition for deposits from locally based commercial banks, several U.S. and foreign banks as well as over one-hundred cooperative banks and the Government Development Bank for municipal deposits. However, FBP has been reducing its reliance on non-core funding sources, particularly higher cost brokered deposits, over the past several quarters, which has both improved the overall stability of its deposit base as well contributed to earnings growth.

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. All subsidiaries are considered core to the parent holding company supporting equalized ratings between bank subsidiaries and the BHC. 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.

SUBSIDIARY AND AFFILIATED COMPANIES

All of the FDP entities factor in a high probability of support from the parent. 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.

RATING SENSITIVITIES

IDRS AND VRS

Given uncertainty regarding Puerto Rico's fiscal situation and potential impacts from current exposure, upside may be limited in the near term. Positive rating momentum would be predicated on sustained improvement in Puerto Rico's operating environment.

FBP's current ratings incorporate the potential for write-downs on its securities holdings and credit exposures to the Commonwealth and its instrumentalities. Fitch has applied loss factors of 40% to securities exposure and 20% for both other direct and indirect exposures in its sensitivity analysis of capital. Fitch believes that capital as measured by tangible common equity-to-tangible assets remains sufficient to absorb these stress losses. However, should market events in the Commonwealth of Puerto Rico actually result in losses approaching this level, or the company's exposure to the Puerto Rican government materially increases, negative pressure on the ratings could develop.

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.

SUBSIDIARY AND AFFILIATED COMPANIES

As the IDRs and VRs of the subsidiaries are equalized with those of FBP to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in FPB's IDRs.

Fitch has affirmed the following ratings:

First BanCorp

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

--Short-term IDR at 'B';

--Viability Rating at 'b-';

--Support at '5';

--Support floor at 'NF'.

FirstBank Puerto Rico

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

--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'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995310

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995310

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Doriana Gamboa, +1-212-908-0865
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stefan Kahandaliyanage, +1-646-582-4918
Associate Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-1560
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Doriana Gamboa, +1-212-908-0865
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stefan Kahandaliyanage, +1-646-582-4918
Associate Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-1560
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com