• The San Juan Daily Star

Puerto Rico banking industry continues to strengthen, key index shows

Leslie Adames, director of the Economic Policy and Analysis Division at Estudios Técnicos Inc.

By The Star Staff

Since 2020, the Puerto Rican banking industry has continued to strengthen, supported by the increase in liquidity and the strengthening of asset quality, according to the Financial Stability Index of commercial banks in Puerto Rico created by the economic advising and research firm Estudios Técnicos Inc. (ETI).

The index shows that the island banking industry increased to 0.60 in the third quarter of 2021, compared to 0.47 in the same period in 2020. This year, Banco Santander branches were purchased by First Bank, reducing the number of commercial banks.

“The banking financial stability index continued to improve from 0.46 in the third quarter of 2020 to 0.57 in the second quarter of 2021, and more recently, 0.60 in the third quarter. Stronger industry liquidity and a decline in the loan default rate continue to influence the index’s positive performance so far in 2021,” said Leslie Adames, director of the Economic Policy and Analysis Division at ETI.

ETI developed the index to measure the financial health of banks based on four indicators: liquidity (total loans/deposits), solvency (capital to total assets), asset quality (non-performing loans/total loans) and profitability (return on assets, or ROA). The index fluctuates between 0 and 1, with values ​​close to zero indicating financial fragility and values closer to one showing strength.

Adames said the liquidity of the banking industry continued to improve, supported by total deposits that increased by $1.2 billion quarter-over-quarter to $85.8 billion in the third quarter of 2021, while loans decreased by $198.8 million to $37.5 billion.

The quality of banks’ assets also improved, with the delinquency rate decreasing from 6.57% in the third quarter of 2020 to 4.83% in the second quarter of 2021 and subsequently to 4.32% in the third quarter of 2021. Adames noted that asset quality figures released by the Federal Deposit Insurance Corp. do not yet reflect material impairments in asset quality at the level of individual portfolios of industry loans.

The banking sector’s profitability also showed improvements. The industry reflected a sequential increase of $318 million in net profits for a total of $923 million in the third quarter. The release of provisions for loss on loans and leases and increases in interest income and other non-interest income, for example, charges to deposit accounts and trust activities, contributed to maintaining the profitability of the industry in the quarter, Adames said.

Although capital over total assets decreased from 9.05% in the third quarter of 2020 to 7.77% in the third quarter of 2021, it remained stable compared to 7.70% in the previous quarter. The “Common Equity Tier 1,” meanwhile, increased from 15.65% in the second quarter of 2021 to 16.22% in the third quarter of 2021, remaining above the minimum regulatory requirement of 6.5% established by regulators to be considered a banking institution well capitalized.

ETI’s consulting team offers free access to the data and its implications for the benefit of the business community.

The results obtained by ETI coincide with those of the Financial Institutions Commissioner’s Office (OCIF by its Spanish acronym), Adames said.

OCIF data show that bank assets continue to grow driven by the arrival of federal funds to deal with the COVID-19 pandemic. In the third quarter, assets stood at $96.4 billion.

This is an increase of 11.2% or $9.7 billion compared to the same period last year. When compared to the previous quarter, assets grew 1.6%, or $1.5 billion more. Assets have been experiencing year-on-year increases since mid-2016.

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