The seizure of three Puerto Rican banks in April,
accounting for about 20 percent of the island’s banking assets,
cost the Federal Deposit Insurance Corporation insurance fund more
than $5 billion. But despite the island’s continuing economic woes,
the FDIC received 18 bids from 5 bidders, reports Charles
Davis.
Go deeper with GlobalData
The latest US banking crisis popped up
in Caribbean waters thousands of miles from the nation’s capital,
but will likely have a significant effect on financial reform
legislation anyway.
Federal regulators turned their attention to
the island territory of Puerto Rico, assisting in the sale of three
failing institutions and in essence reconfiguring the island’s
banking market.
Scotiabank acquired troubled R-G Premier Bank
of Puerto Rico in a US Federal Deposit Insurance Corporation
(FDIC)-assisted transaction, expanding its already impressive
presence in the Caribbean. Scotiabank, which has conducted business
in Puerto Rico for a century, gained $5.6bn in assets, including
$5.3m in loans, 80% of which are covered under a FDIC loss-sharing
agreement.
The Toronto-based bank adds 29 branches to the
17 it already has in the struggling US territory; Scotiabank first
opened a branch there in 1910.
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By GlobalDataRick Waugh, president and CEO of Scotiabank,
said: “This will increase our market share [in Puerto Rico] to
approximately 9% and is consistent with Scotiabank’s international
strategy to grow incrementally to scale in target markets.
Scotiabank has an international scope that few banks match, and we
look forward to leveraging our strengths and expertise to benefit
the ongoing operations of the new bank.”
Canadian interest
Scotiabank was the third Canadian bank
to make a FDIC-assisted transaction in April. Bank of Montreal, the
country’s fifth-largest lender, bought the assets of Rockford,
Illinois-based Amcore Bank on 23 April to expand its
footprint in the US Midwest. Toronto-Dominion Bank, the
second-biggest, agreed to buy three failed Florida-based financial
institutions on 16 April as part of its US growth strategy.
Scotiabank, on the other hand, has no interest
in entering the US mainland, instead employing an international
strategy that studiously avoids the market that has punished its
competitors.
Ratings agency Moody’s praised the deal, while
also noting that from the perspective of Scotiabank as a whole, the
transaction is small, since it will only increase assets by about
1%.
“This transaction is consistent with the bank’s
expansion strategy, which has focused on building scale in select
international markets, including in the Caribbean,” the ratings
agency said.
Nonetheless, Moody’s notes that the Puerto
Rican economy has performed very poorly over the past few years,
which will likely continue to negatively impact the banks’ credit
metrics for some time, making robust profitability unlikely in the
near-term.
With operations in 50 countries around the
world, Scotia is easily Canada’s most international bank. Earlier
this year it acquired a stake in a bank in Thailand as part of a
strategy aimed at building a position in developing regions focused
on Asia and South America.
Staying on top
Popular Inc, meanwhile, cemented its
status as the Caribbean’s dominant player by snapping up
Westernbank, a deal that CEO Richard Carrion described as the new
centrepiece of the bank’s strategy for retrenching in Puerto Rico
after a painful expansion into the US mainland.
Westernbank – with $12bn of assets – was the
largest of the three. Popular paid no premium for $2.5bn of
unbrokered deposits and collected $8.5bn in loans, 80% of which are
covered by a loss-sharing agreement with the government. Analysts
estimate that Popular now controls nearly half of the island’s
deposits and more than a third of its loans.
The Westernbank deal gives Popular the
opportunity to scrutinise its Puerto Rican branch network, as the
bank is expected to realise cost savings in coming quarters as it
closes a number of the 46 branches it acquired that overlap with
the 187 Popular already has on the island.
Popular bought Citigroup Inc’s retail
operations in Puerto Rico last year, so it is an old hand at
integrating acquisitions.
Popular had a loss of $85m last quarter,
widening from $52.5m a year earlier, but its losses stemmed from
its mainland US expansion rather than from Puerto Rico,
despite how deeply distressed the island’s economy has become.
Following the rescue operation, the Puerto
Rican banking system is left with eight banks and close to 15,500
employees, with approximately 100 branches changing name and
owner.
A third Puerto Rican institution, Eurobank,
went to Oriental Bank and Trust. The three failed banks together
held more than one-fifth of the total bank assets on the US
Caribbean territory. They had struggled to stay afloat during
Puerto Rico’s grinding, four-year recession.
Lenders have had a rough time in Puerto Rico in
recent years, facing the financial crisis as well as changes in
legislation that resulted in the departure of a significant portion
of corporate deposits. One of the biggest challenges currently is
staying profitable in an environment of limited economic growth and
low average income.
The impact of the US government’s intervention
in Puerto Rico can hardly be overstated. The government has
effectively recapitalised the entire banking industry, agreeing to
absorb an estimated $5.3bn in losses on those acquisitions.
It was quite the dance: FDIC Chairman Sheila
Bair travelled to the island for a press conference, where she
assured depositors their money was safe. The FDIC was intervening
on behalf of more than a third of all deposits in the island
without sparking a panic.
“The consolidation that is being announced
today, I think, will strengthen the banking sector here,” Bair
said. “The acquirers… bring balance-sheet strength, they bring
new capital, they bring new resources.”
The FDIC may not be through with its rescue
efforts, either. Another island institution, the $20bn-asset
Firstbank of Puerto Rico, the territory’s second-largest bank
behind Popular, still faces crippling credit losses.
In a Securities and Exchange Commission
filing, Firstbank reported a $107m first-quarter loss, more than
double its fourth-quarter loss.
