Banking Industry Reports
Our Quarterly Banking Industry Reports are designed as a tool for top executives to get a quick, yet deep understanding of the banking industry in Puerto Rico and Dominican Republic.
Our Banking Industry Reports are designed to provide top banking executives with a brief three page report with enough depth in order to augment their decision making. It is strictly based on publicly available information and only distributed to a selected set of clients or potential clients in the banking industry. The report is divided in five sections:
- Our Perspective. Concise and synthesized overview of the industry and our perspective about it.
- Profitability. Understanding of the level and source of profitability (ROE and ROA) of the players.
- Asset Quality and Risk. Review of capitalization levels vs. minimum levels required, asset portfolio composition and NPLs analysis.
- Productivity. Identify sources of productivity performance and compare vs. competitors.
- Liquidity. Describe the dynamics on funding sources, market share of deposits, and brokered deposits levels.
The local banking industrys profitability stayed in positive territory in year-end 2017, reaching an industry-wide Pre-Tax ROE of 4.6%, notwithstanding the challenging operating market conditions, characterized by an economy mired in a prolonged and deep contraction, a bankrupt government under Puerto Rico Oversight, Management and Economic Stability Act Title III court proceedings, and more recently, the devastation and ensuing cascading effects of Hurricanes Irma and María which severely disrupted the islands normal social and economic life. During the first half of 2017 local banks on a consolidated level posted Pre-Tax ROEs above 8.5%, dipping to -0.6% in Q3 2017 and 1.6% in Q4 2017. All banks, with the exception of Scotia which took the hit in Q4, incurred in high provision expenses in Q3 2017 due to anticipated hurricane-related losses, materially decreasing in Q4 2017. Despite this panorama, bank executives remain optimistic of the short-term outlook, pointing to the influx of funds from the federal government, insurance claims, and other sources propping up deposits, favorable trends in loan payment moratoriums, and construction sector lending op- portunities when rebuilding efforts pick up. Nevertheless, downside risks to economic and bank activity still loom large.
The local banking industrys profitability dove into negative territory in Q3 2017, posting a Pre-Tax ROE of -0.6%, after a modestly strong first half of the year. Most local banks, anticipating asset quality deterioration and loan losses in the aftermath of the historic 2017 Atlantic hurricane season, materially increased their loan loss provi-sions. Industry-wide credit provision expenses reached close to $300 million in Q3 2017, a roughly three-fold increase with respect to Q3 2016. Pre-hurricane asset quality had been showing improvement, but after Superstorms Irma and María, it is under threat given the adverse impact on economic activity, borrowers financial standing, and labor market conditions. Since the hurricanes hit in the latter part of Q3 2017, the quarters cost to income ratio was not materially impacted. However, in Q4 2017, with the expected decrease in loan originations, missed loan payments, and subdued Point of Sale activity, income generating capacity will be restrained. On the upside, the exceedingly strong capital levels of local banks will help absorb potential post-disaster losses. This issue reviews the potential macro-impacts of the hyperactive 2017 hurricane season, as well as examines bank performance and financial condition in impacted areas post-Hurricane Katrina.
The local banking industry has done a formidable job managing its operations in a historically challenging environment, posting positive levels of profitability since 2014, and registering a Pre-Tax ROE of 8.7% during the first half of 2017. While it has been able to weather the economic and fiscal headwinds which have been fiercely and relentlessly blowing through the Island since more than a decade ago, local banks are now faced with the catastrophic aftermath brought about by the passage of Hurricanes Irma (Sep. 6) and María (Sep. 20). Moodys has estimated economic losses could amount to $95 billion. Large capital buffers of local banks will help mitigate the potential losses due to the myriad disruptions engendered by the hurricanes. Although banks have been able to gradually improve their asset quality, registering a 90+ days past duenon accruing ratio of 5.9%, loan quality issues could reemerge due to the negative impact on business and household income and expenses. The next issue will focus further on the macro-impacts of the 2017 hurricanes, leveraging what was learned from the effects of Hurricane Katrina on the U.S. Gulf Coasts banking sector.
The local banking industry maintained a positive trajectory in the first quarter of 2017, registering a Pre-Tax ROE of 8.6% on an annualized basis, despite ongoing severe economic and fiscal hardships being faced by Puerto Rico. Economic growth forecasts pointing to continued contraction, uncertainties regarding the impact of imminent austerity measures, and tepid loan demand, among other downside risks, will likely continue to temper the performance of banks. Banks are advised to continue cost optimizing their operations, exploiting opportunities to enhance customer and shareholder value by leveraging emerging technologies, and strengthening their digital competencies to achieve greater productivity. The strong capital levels of banks, with the Tier 1 Risk Based Capital Ratio reaching 20.5% in YTD 2017, provide a robust capital cushion in the event that adverse risks materialize. The delinquency ratios have continued to decrease, with the 90+ days past duenon accruing ratio reaching 6.3% in YTD 2017. In this issue we examined the historical and possible future trends of total loan originations and total loan portfolios, and their implications for banks.
Although local banks are operating against a backdrop of a deep economic malaise, an unre-lenting fiscal and debt crisis, and a persistent population decline, they have been able to maintain, on a consolidated basis, positive levels of profitability for three consecutive years. The local banking industry posted a Pre-Tax ROE of 4.3% in 2016, 5.7% in 2015, and 3.3% in 2014. Revised forecasts of economic growth point to a prolonged economic contraction which will keep local banks profitability levels subdued. In this issue we will highlight the difference in performance and financial condition of banks that are highly geographically diversified and the banks that are Puerto Rico-centric. Broadly speaking, Popular, FirstBank and Oriental have experienced increases in their market share in assets, deposits and loans & leases from the end of 2011 to the end of 2016. On the other hand, Santander and Scotia, which operate locally as affiliates of large multinational financial entities, have either maintained their market share or lost market share. With few possibilities of local growth, banks might be eyeing the market share of savings and credit cooperatives and nondepository entities.
The banking industry has largely become acclimated to a challenging local operating market, sustaining positive and increasing levels of profitability on a consolidated basis for 3 consecutive years, reaching a Pre-Tax ROE of 7.1% in YTD 2016. Although the economic and fiscal landscape might very well continue to deteriorate in coming quarters before there is a turnaround, as per the Planning Boards downward revised economic growth forecasts (-2.3% for FY 2017) and the daunting liquidity issues and debt obligations being faced by the government, Dodd-Frank Act Stress Tests (DFAST) results indicate that local banks can withstand additional pressures given strong capital positions. In this issue we will present trends in ATM-related indicators, check processing and POS transactions. ATM terminals, ATM debit transactions and check processing have all decreased significantly in the past 5 years, while POS transactions have materially increased, pointing to increased use of online/mobile banking and non-cash methods of payment. Lastly, we analyze the implications of interest rate hikes by the U.S. Federal Reserve Board on the local economy and banking sector.
The local banking industry as a whole has been able to sustain positive returns during the first half of 2016, despite operating in a challenging and uncertainty-laden environment, posting a Pre-Tax ROE of 7.1%. Given the current bleak economic forecasts, banks will likely continue to embrace a de-risking, deleveraging and cost rationalization strategy in the local market. In this issue, a review of macro consumption trends will be presented, highlighting the relative stability of personal consumption vis-à-vis investments and government spending. Subsequent sections will also examine the amount of loan originations and balances of consumer loans and leases (i.e. credit cards, other revolving credit plans, auto loans, and other consumer loans and leases). Consumer loan originations have been gaining a greater share of total loan originations, increasing from 26% in 2012 to 35% in YTD 2016 (13% in 2005), while consumer loan balances as a per cent of total balances increased to 19% from 15% in 2012. Given the generally higher net interest margin of consumer loans and stable net charge-off rates, this segment has become materially important for banks profitability.
The banking industry kicked off the year on a positive note, posting a solid industry-level Pre-Tax ROE of 8.4%, despite the continuous reduction in economic activity. This reduction is clearly reflected in the drop in loan originations, impacting the revenue generating capacity of the banking system. In this issue, we will provide a 10-year review of mortgage originations by depository and non-depository institutions as well as a 5-year analysis of market share fluctuations. The number of institutions originating mortgages in 2015 reached 35, down from a peak of 53 in 2006 (-18 or -34%). In terms of mortgage origination count, the Island experienced a steep drop from 95.5K in 2005 to 21.6K in 2015 (-73.9K or -77%) while the dollar volume decreased from $12.7B to $3.5B (-$9.2B or -73%). Among depository institutions, Popular leads the way commanding 34% market share (dollar volume), followed by Santander and FirstBank both with 18%. Among non-depository lenders, Moneyhouse (17%), SunWest (9%), and Preferred (9%) are the leaders. Given bleak prospects for renewed growth in the near future, loan originations and banks earnings potential will remain subdued.
In this final issue of 2015, we will be highlighting the main local banking trends of the past 10 years and offer our outlook for 2016. In the last decade, total employment has decreased by 20%, real GNP by 14% and the GDBs EAI by 19%. Looking at macro banking trends specifically, the number of retail banks has decreased from 10 to 5, the number of branches has been cut by 34%, and total assets have experienced a reduction of 42%. Delinquency levels have remained at very high levels, with noncurrent loans and leases ratio averaging 10% in the 2006-2015 period compared to 2% between 2002 and 2005. Credit losses have translated into a deterioration of the pre-tax return on equity (ROE) of the local banking system which averaged 1.4% during the 2006-2015 period, compared to 17% between 2002 and 2005. Notwithstanding tough local market conditions, during the past years banks have done an extraordinary job at reducing the amount of troubled assets and have dramatically increased capital levels (risk-based capital ratio of 18.6% in 2015 vs. 10.6% in 2006). As a result, the banking sector currently boasts a much healthier balance sheet and a more robust capital position which will allow it to face the additional economic and financial stress expected for 2016 and beyond.
The local banking industry continues to weather the storm of economic and fiscal malaise that is gripping the Island. It has maintained positive, albeit modest, levels of profitability during YTD 2015, reaching a Pre-Tax ROE of 6.2% on a consolidated level. Profitability by individual bank exhibited notable variability. Popular, Scotia and Santander posted relatively strong levels of profitability, with Pre-Tax ROEs of 9.7%, 8.9%, and 7.2% respectively, while First Bank and Oriental produced ROEs below 1% (0.9% and 0.3%, respectively). Higher provision expenses due to heightened credit risk stemming from uncertainties regarding PR government assets and current shaky economic grounds, have adversely impacted local banks 2015 performance. Nevertheless, a strong capital base provides banks with an adequate cushion to assimilate potential future losses. Given the importance of the auto industry for the local economy and specifically for local banks and other financial institutions, this issue will provide an overview of key auto trends. New auto sales in Puerto Rico peaked in 2005 with 140,400 cars sold, dropping to 88,175 in 2014 (-52K units or -37%), continuing a downward trend in YTD 2015. This trend has important implications for local banks as well as for already strained public coffers.