Challenging environment for Puerto Rico banks
There's no question Puerto Rico banks had it tough in 2006 and 2007 was no different. In 2007 as in 2006 local banks had to deal with a recessionary economy, low consumer confidence, squeezed profit margins, dramatic drops in market capitalization and mortgage originations along with steep increases in loan delinquencies and loan loss provisions.
Nonetheless, some local banks were able to make inroads in 2007. Doral, FirstBank and R&G Financial were able to restate all or most of their financial statements and/or settle their class action lawsuits, byproducts of the accounting issues that surfaced in 2005 at these and other local banks but ended up hurting the entire group as a whole.
On a positive note, the extra 2% tax imposed by the government that targeted banks expired Dec. 31, 2006 and the Federal Reserve lowered interest rates twice in 2007: a 50 basis points cut on Sept. 18 (from 5.25% to 4.75%) and a 25 basis points cut on Oct. 31 (from 4.75% to 4.50%).
Nevertheless, the impact of a recessionary economy, rising inflation, low consumer confidence, high unemployment and a government fiscal shortfall despite the implementation of a 7% Sales and Use Tax (IVU) remained the mayor hurdles for the local banking industry.
Despite the island's prevailing tough economic environment, there were new players in certain segments of the market. In January Reliable Financial Services launched its mortgage division Reliable Mortgage, adapting its proven and successful auto financing formula to the mortgage lending business.
Also, Scotiabank acquired 10% of FirstBank in February, and Popular acquired the retail banking division (17 bank branches) of Citibank in Puerto Rico as well as the broker-dealer operations of Smith Barney on the island in August and September, respectively.
Most stateside financial analysts that cover the local financial sector concur that more consolidations are on the way as the island is overbanked and there is not much economic activity going around that would justify the high number of financial institutions on the island and their survival.
See Banking for complete article.
