November 22, 2016 / 5:21 PM / 2 years ago

Fitch Affirms Popular's Long- & Short-Term IDRs; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, November 22 (Fitch) 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 'BB-' and Short-Term IDRs at 'B' for Popular Inc. (BPOP) and its subsidiaries. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRs, VRs, AND SENIOR DEBT BPOP's current rating levels incorporate the significant challenges facing Puerto Rican banks. The Puerto Rican bank Viability Ratings (VRs) and IDRs are constrained by the weak economic conditions within their main operating market, the Commonwealth of Puerto Rico (PR). The affirmation and Stable Outlook reflect Fitch's view that the bank's current operating performance is sustainable and will likely continue despite the difficult operating environment. Fitch recognizes stabilizing trends in BPOP's asset quality, earnings, capital, and deposit funding over the last few years. Fitch also believes BPOP's ratings are well situated relative to the challenging operating environment. 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 Fitch views as a positive over the longer term. The affirmation of BPOP's ratings and the Stable Outlook reflects the company's dominant franchise across most loan and deposit categories versus peers and that the bank's current operating performance is sustainable in spite of the challenging operating environment. Fitch recognizes improvements over a number of years to BPOP's core fundamentals such as stabilization of credit trends, earnings, capital, and deposit funding. Fitch also recognizes BPOP's solid and consistent Dodd Frank Act Stress Testing (DFAST) results, which incorporate punitive economic assumptions, as well approval to reinstate quarterly dividends in Q3 2015. Asset quality remains in line with the current rating as the company's NPA ratio (includes accruing TDRs and OREO, covered and non-covered) still remains elevated at 7.9% as of 3Q16 and NCOs at 0.67% as of 3Q'16 are still much higher than U.S. Mid-Tier peers. BPOP has taken significant steps to reduce its problem assets including the successful execution of bulk loan sales, which has helped reduce NPAs since the peak in 2010. However, prospectively, Fitch does not expect much improvement in asset quality metrics beyond current levels given the challenging operating environment. Additionally, BPOP's loan portfolio includes $588 million of covered loans, where risk of loss is largely borne by the FDIC. Although Puerto Rican consumers have been resilient, continued stress in the local economy, especially during the early phases of PROMESA implementation, may pressure borrowers in the short term. BPOP may be exposed to such changes given its exposure to consumer-related assets. In addition, during 2016, BPOP 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. Core earnings continue on a positive trend, and Fitch expects ROA, NIM and PPNR-to-average assets will remain in line with current levels, which supports the rating. Although slow-to-negative economic growth in Puerto Rico may be the norm for some time to come, the company's growth strategy in the U.S., expectations for rising interest rates in 2016 as well as an improving deposit cost profile could provide a partial offset. Similar to most peers, BPOP has improved its capital position following the peak of the crisis. At 3Q'16, BPOP's TCE and Common Equity Tier 1 ratios were 12.13% and 16.64%, respectively and reflect an appropriate level of capitalization given its risk profile. The company also remains in compliance, by a sizable margin, 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 well above average levels as any additional shareholder capital return actions are expected to be modest. The company's capital profile is also supported by its Evertec common stock investment, which has a current market value of $196 million compared to a book value of $37 million. Any gains on sale would also be accretive to the company's capital position. BPOP has been reducing its reliance on non-core funding sources, particularly higher cost brokered deposits, over the past several quarters, which has improved the overall stability of its deposit base. Overall, compared to peers, BPOP has a leading deposit franchise and a solid funding profile driven by a favorable loan-to-deposit ratio, currently at 77%. Historically, BPOP's funding profile has been weaker when compared to U.S. bank peers given greater reliance on non-core funding sources. Presently, BPOP'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 FLOOR The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's view that BPOP 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 BPOP's uninsured deposit ratings at its subsidiary banks are rated one notch higher than BPOP'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. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Hybrid capital instruments issued by BPOP are notched down from the company's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which may vary considerably. BPOP's preferred stock and trust preferred stock rating at 'B-' is three notches below its Viability Rating (VR) of 'bb-', in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles for issuers that have VRs rated below 'bb+'. HOLDING COMPANY BPOP 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 BPOP parent company. SUBSIDIARY AND AFFILIATED COMPANIES All of the BPOP 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, VRs, AND SENIOR DEBT The rating is sensitive to changes in Fitch's view of the operating environment, positive or negative. However, Fitch believes the rating is solidly situated at the current level based on current and expected financial performance. Fitch believes 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. Although incremental improvement in the operating environment is credit positive for BPOP, the company's current ratings are still higher than what the operating environment alone would imply, which limits upside potential in the near term. 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. Fitch views BPOP's capital levels as a rating strength. Although not expected, aggressive capital management would be viewed negatively. BPOP'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. 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 BPOP subsidiaries are primarily sensitive to any change in the company's IDRs. This means that should the Long-Term IDR be downgraded, deposit ratings could be similarly affected. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of hybrid securities are sensitive to any change in BPOP's VR or to changes in BPOP's propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation. HOLDING COMPANY If BPOP 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 BPOP 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 BPOP's IDRs. Fitch has affirmed the following ratings: Popular, Inc. --Long-term IDR at 'BB-'; Outlook Stable; --Senior unsecured at 'BB-'; --Short-term IDR at 'B'; --Short-term Debt at 'B'. --Viability rating at 'bb-'; --Preferred stock at 'B-'; --Support at '5' --Support floor at 'NF'. Popular North America, Inc. --Long-term IDR at 'BB-'; Outlook Stable --Senior unsecured at 'BB-'; --Short-term IDR at 'B'; --Short-term Debt at B --Viability rating at 'bb-'; --Support at '5' --Support floor at 'NF'. Banco Popular North America --Long-term IDR at 'BB-'; Outlook Stable --Long-term deposits at 'BB'; --Short-term IDR at 'B'; --Short-term deposits at 'B'. --Viability rating at 'bb-' --Support at '5' --Support floor at 'NF'. Banco Popular de Puerto Rico --Long-term IDR at 'BB-'; Outlook Stable --Short-term IDR at 'B'; --Short-term deposits at 'B'; --Viability rating at 'bb-'; --Support at '5' --Support floor at 'NF'. BanPonce Trust I --Trust preferred at 'B-'. Popular Capital Trust I --Trust preferred at 'B-'. Popular Capital Trust II --Trust preferred at 'B-'. Popular North America Capital Trust I --Trust preferred at 'B-'. Popular Capital Trust III --Trust preferred at 'B-' Contact: Primary Analyst Stefan Kahandaliyanage Associate Director +1-646-582-4918 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Committee Chairperson Julie Solar Senior Director +1-312-368-5472 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015200 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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