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.
Los cinco principales bancos múltiples de la República Dominicana (Top 5) siguen mostrando un alto nivel de rentabilidad en la primera mitad del 2018 (ROE antes de impuestos del 23.8%). Les acompaña un crecimiento económico superior al 6% que podría peligrar si los precios del petróleo siguen subiendo y el Banco Central Dominicano tiene que seguir aumentando la tasa de intermediación bancaria. El semestre cierra con la noticia de la compra de Banco del Pro-greso Dominicano por parte de ScotiaBank. Esta compra deja a tan solo 4 bancos con el 86% de los activos de la banca múltiple (75% de los activos del sistema financiero dominicano) y a otros 13 bancos con el 14% restante. Por tanto, las oportunidades de seguir creciendo inorgánicamente por parte de los cuatro grandes se reducen considerablemente, dada la limitada cuota de mercado de los demás bancos múltiples. Como veremos en el informe, Scotia se afianza en la cuarta posición aunque lejos todavía de BHDLeón y tendrá oportunidades de consolidación de sucursales dada la ubicación de las del Banco del Progreso.
The local banking industrys profitability on a consolidated basis has rebounded strongly in the wake of Hurricanes Irma and Maria, reaching a Pre-Tax ROE of 17.4% in Q2 2018, making it the highest quarterly profitability level in a decade. The liquidity position of local banks, particularly of Popular, has experienced a material improvement, with total deposits reaching $54.1 billion as of the end of Q2 2018 from $48.8 billion in Q3 2017, a $5.3 billion or 10.9% increase. Hurricane-related private insurance claims paid out to policyholders and post-disaster federal assistance funds deposited in private banks have largely driven this surge in deposits. This newfound liquidity will need to be put to productive use, either through increased lending or investments. The unadjusted nonperforming loans ratio showed some improvement in Q2 2018, decreasing from 9.2% to 8.8%, temporarily appeasing concerns of a spike in delinquencies. Capital positions of banks continue exceedingly strong, reporting an industry-wide Tier 1 Risk-Based Capital Ratio of 21.5%. The deployment of excess capital through organic and inorganic growth opportunities (e.g. Populars Reliable purchase), stock repurchases or dividend payments to shareholders must be strategically pondered. Moreover, in this revamped issue we analyze Post-Hurricane Maria foreclosure relief efforts and their impact on banks and the housing market.
The local banking industry as a whole registered a Pre-Tax ROE of 8.3% in Q1 2018, rebounding back to pre-hurricane levels, after dipping down to -0.6% in Q3 2017 and 1.6% in Q4 2017. All banks except Scotia posted positive Pre-Tax ROEs fluctuating from 7.6% to 11.1%. Other key banking indicators have also returned to pre-hurricane levels. The industry cost to income ratio reached 61.6% in Q1 2018 after a spike in Q4 2017 due to non-recurring, storm-related expenses. Capital adequacy metrics returned to an upward trajectory, reaching a Tier 1 Risk-Based Capital Ratio of 21.8%, providing a robust cushion for potential future losses and excess capital to acquire promising portfolios of assets for sale. On the other hand, concerns over the potential deterioration of asset quality have returned given the uptick in delinquency ratios. Moreover, in this issue, we provide a brief overview of the latest trends concerning International Banking and Financial Entities (IBEs/ IFEs). As of the end of Q1 2018, IBEs managed $50.6 billion in assets while IFEs managed 4.1 billion, jointly representing 39% of the total assets of Puerto Ricos financial sector, making them the 2nd largest player on the islands financial sector. Profitability and productivity of these entities have been on a healthy path since 2011.
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.