Kroll Bond Rating Agency (KBRA) assigns senior unsecured debt and deposit ratings of BBB- and short-term debt and deposit ratings of K3 to San Juan, Puerto Rico-based Oriental Bank ("the bank"). The Outlook for the long-term debt and deposit ratings is Stable.
The ratings for the bank are underpinned by its sustained level of profitability, including the ability to accrue equity capital, in the face of a protracted economic downturn and severe fiscal crisis in Puerto Rico, culminating with the commonwealth’s default on its general obligation debt in 2016. Profitability has been buoyed by resilient risk-adjusted margins; loan losses, while elevated compared to mainland peers and generally on upward trajectory (not to be unexpected given the sharp deterioration in the local economy and the adverse consequences of Hurricane Maria), have been well absorbed by the company’s effective loan-risk pricing strategy.
Capital protection, while historically strong in relation to both the bank’s own risk profile and the peer group, is sharply lower following the all-cash acquisition of the Scotiabank de Puerto Rico, which was completed on December 31, 2019. KBRA estimates that the bank can accrete capital at a considerable rate going forward, with earnings retention of about 1% per annum in relation to total pro forma assets of approximately $10 billion. Management has communicated a plan that returns regulatory capital to levels that are well above its peer group within three years.
A key ratings factor is the anticipated near- to intermediate-term stability in the Puerto Rican economy, due largely from the influx of federal funds and private insurance payments along with an expected much lower debt burden, although the commonwealth will continue to face long-term challenges especially surrounding population growth and economic competitiveness.
KBRA recognizes that Oriental Bank has a strategy to diversify beyond Puerto Rico. Total loans to borrowers based in the United States currently comprise 6% of total loans; over time, management anticipates that these loans will grow to 20% of the total. Even so, that vast majority of operations and loans will remain centered in Puerto Rico and this includes a concentration in residential loans collateralized by properties located in Puerto Rico. KBRA, therefore, agrees with management’s plan to rebuild capital to levels in excess of its mainland peers (peer group defined by its primary federal regulator).
A ratings report will be published soon.
The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Shannon L. Servaes, CFA, CPA, Senior Director
Ian Jaffe, Managing Director
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