Latin Finance - November 2008 - 44

of the 2008 Immune to Subprime Puerto Rico Best Bank – FirstBank espite an ongoing local recession that has lasted more than two years, FirstBank Puerto Rico during the past 12 months has grown assets, market share and deposits. In the near future it may continue to grow through acquisitions, but there is also a possibility that it will be swallowed by Scotiabank. Assets as of June 30 totaled $18.8 billion compared to $17.6 billion as of the same date in 2007, making it the second largest bank in Puerto Rico. In terms of total deposits it is third, with an 8.38% share, according to company filings. As of June 30, the bank had $1.8 billion in retail deposits, $746.5 million in commercial deposits and $7.1 billion in brokered CDs, filings show. The recession’s impact on construction and consumer spending, inevitably affects banks on the island. “Construction lending in Puerto Rico has slowed down tremendously,” says Joe Gladue, an analyst with Los Angeles-based research and investment banking firm B. Riley, adding that overbuilding of condos is one factor contributing to this. FirstBank chairman and CEO Luis Beauchamp agrees, saying that developers of upscale communities with homes costing more than $400,000 are sitting on unsold inventory. “While two or three years ago the absorption period for these units was about a year, now it takes two or three years for a developer to sell all the units.” However, FirstBank’s exposure to construction loans is “relatively small,” according to Beauchamp. Gladue notes that the bank has “little exposure to high-end developments in commercial neighborhoods in the San Juan area that are experiencing low demand,” which has helped it avoid pitfalls. Construction loans account for 8% of company assets, totaling $725.8 million in June 30, making FirstBank the fourth largest construction loan originator on the island. Beauchamp says he does not expect to raise exposure to construction loans. Up in a Downturn D In residential mortgages as of June 30, FirstBank’s portfolio showed a decline to $2.5 billion. But this drop was not caused by the subprime mess that created havoc in the US. “Fortunately, Puerto Ricans showed no interest in the financial schemes that have caused so much trouble. They always prefer a 30-year fixed rate loan,” he says. Puerto Rico has not seen any banks collapse due to subprime. Beauchamp adds that most residential mortgage activity in 2005 was not generated by new home sales, but by refinancing. As for the effects of the global credit crunch on local banks, FirstBank treasurer Victor Barreras says that several banks have significant reliance on FDIC-insured brokered CDs to fund operations. “Given the flight to quality that has been observed the brokered CDs market has experienced a surge in demand, which has kept rates from following the spike in Libor rates,” he adds. Commercial loans, which account for 28% of assets, are the bright spot for FirstBank. Beauchamp says the bank, which is allowed to make corporate loans of up to $300 million, usually syndicates them. “We are very active in lending to businesses such as fast food franchises and hospitals,” adds the executive. As for non-performing loans, company filings show that they increased 6% in the second quarter of 2008, from $421.5 million as of March, to $448.5 million in June 30. Although this figure includes company operations in the US Virgin Islands and Florida, the company states that in Puerto Rico, the increase in non performing loans is due to continuing adverse economic conditions. Three years ago, Firstbank set up what it calls a “mid-market loan product” in Puerto Rico, with which it provides up to $5 million per loan in financing to businesses. “Banco Popular and Santander are the leaders in this segment, but we have been expanding by increasing our market penetration,” Beauchamp explains. As for retail, most of FirstBank’s growth comes from deposit accounts and credit cards. Since the beginning of 2008, FirstBank has added more than 44,000 deposit accounts and gained 50,000 card holders. Growth in the cards business happened when Citi sold its credit card portfolio to Bank of America through FirstBank’s exclusive relationship with MBNA for Puerto Rico. FirstBank picked up 190,000 new customers via this deal. Buyer or Bought? To grow further, FirstBank is proactively evaluating acquisition opportunities. But it may also be a target. In fact, there is a possibility that Canada’s Scotiabank, which operates 21 branches in Puerto Rico, may make an offer for FirstBank in early 2009. In February, Scotiabank bought a 10% stake in FirstBank for $94.8 million. “That agreement established a standstill period that gives Scotiabank 18 months to increase its stake, or buy the bank outright. If we receive an offer from another party, then we have to let Scotiabank know so it can make a counteroffer,” Beauchamp says. Gladue says a deal between the two is feasible, as Scotia’s market share in Puerto Rico is relatively small. Scotiabank Puerto Rico had $1.6 billion in assets as of June 30, according to information from the FDIC. “Scotiabank won’t let the opportunity pass it by and it is possible that it will make an offer which we shall consider,” says Beauchamp. “Our preference would be for us to acquire another institution to strengthen our franchise and improve our distribution network. We have the financial capability to participate in the island’s banking industry consolidation,” he adds. LF Bolivia Best Bank – Banco Mercantil Santa Cruz BMSC Wrestles Conflict B anco Mercantil Santa Cruz (BMSC), Bolivia’s biggest bank, says the recent social unrest has not yet impacted on the economy or the banking system. However, the bank, which has 235,000 clients and 57 branches throughout Bolivia, believes that could change. “The social conflicts in the country have not had an immediate effect in the economy,” Emilio Unzueta Zegarra, president of the bank, tells LatinFinance. 44 LATINFINANCE November 2008

Latin Finance - November 2008

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