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Rating Action:

Moody's affirms Popular (bank deposits Ba2), FirstBank (bank deposits B1), and Banco Santander Puerto Rico (bank deposits A2), following Hurricane Maria

Global Credit Research - 10 Oct 2017

New York, October 10, 2017 -- Moody's Investors Service affirmed the ratings of Popular, Inc. and its subsidiaries (Popular), FirstBank Puerto Rico (FirstBank), and Banco Santander Puerto Rico (BSPR). Moody's maintained the outlooks for the long-term deposit ratings of Popular, FirstBank, and BSPR at stable, while maintaining the review for upgrade for BSPR's issuer and debt ratings in line with those of its US affiliate, Santander Bank N.A. (Baa2, issuer, review for upgrade). The rating actions were as follows:

For Popular, Moody's affirmed the lead bank's (Banco Popular de Puerto Rico) long- and short-term bank deposit ratings at Ba2 and Not Prime, respectively, the issuer rating at B2, and the long- and short-term CR Assessments at Ba3(cr) and Not Prime(cr), respectively. Moody's also affirmed the bank's standalone and adjusted BCAs at b1. Moody's also affirmed the holding company's long-term ratings: senior unsecured at B2, subordinate MTN shelf at (P)B2, junior subordinate shelf at (P)B3, preferred shelf at (P)B3, non-cumulative preferred stock at Caa1(hyb), and non-cumulative preferred shelf at (P)Caa1.

For FirstBank, Moody's affirmed the long-and short-term bank deposit ratings at B1 and Not Prime, respectively, the issuer rating at Caa1, and the long- and short-term CR Assessments at B2(cr) and Not Prime(cr). Moody's also affirmed the bank's standalone and adjusted BCAs at b3.

For BSPR, Moody's affirmed the long-term supported deposit rating at A2 and the long-term Counterparty Risk (CR) Assessment at A3(cr). Moody's also affirmed the short-term deposit rating at Prime-1, the short-term bank note program shelf rating at (P)Prime-2, and the short-term CR assessment at Prime-2(cr). Moody's also continued the review for upgrade for the bank's issuer rating at Baa2 and its senior unsecured bank note program shelf rating at (P)Baa2. The bank's standalone baseline credit assessment (BCA) of ba3 and adjusted BCA of baa1 were also affirmed.

RATINGS RATIONALE

The ratings affirmations for Popular, FirstBank, and BSPR reflect Moody's view that the banks' current high capital ratios provide them flexibility to meet regulatory capital requirements should hurricane-related loan-loss provisions or other costs lead to operating losses that ultimately result in capital erosion in the coming two to three quarters. The affirmations also reflect the view that Puerto Rico's economy should begin to recover in the second half of 2018 fueled by federal government aid and insurance coverage.

Moody's said that the banks' high capitalization is an important credit mitigant against higher losses because the banks face difficult economic challenges for the next few quarters. For example, although power plants are intact, progress in repairing power lines is slow, stalling full recovery of the banks' operations and overall business activity and those of their customers. Consequently, Moody's expects a hike in the banks' loan loss provisions during the next two to three quarters to absorb hurricane-related charge offs at a time when bank earnings will also be hurt by a halt in new originations, waived fees and elevated operating expenses.

Regarding the capital buffer that the banks have to meet these approaching challenges, Moody's calculated that the banks could increase their provisions by almost tenfold over the latest quarter's provisions (9.6 times for each of Popular and FirstBank, and 9.8 times for BSPR). As of June 2017, Moody's tangible common equity/risk-weighted assets ratios for Popular, FirstBank, and BSPR were 15.2%, 19%, and 28.5%, respectively. Although operating losses would result if such heightened provisions were taken, their capital ratios would still meet the regulatory well-capitalized minimum for total risk-based capital of 10%. Popular, FirstBank, and BSPR, have each steadily improved their capital and liquidity positions over the past few years, having raised equity and/or streamlined their operations in response to more than a decade of economic recession.

Moody's observed that elsewhere bank hurricane-related losses for US banks have been manageable thanks to loss mitigants such as federal government aid, property insurance, and disaster relief programs that help fuel rebuilding activity. In the case of Puerto Rico, considering its already weak economy, the combination of two highly destructive hurricanes, low insurance penetration, and its status as an island territory, the level of insurance coverage and government aid are less certain than for mainland states.

FACTORS THAT COULD LEAD TO AN UPGRADE

The destruction from Hurricane Maria eliminates the likelihood of upward movement in the three banks' standalone BCAs in the near term. In the long term, the b1 and b3 BCAs of Popular and FirstBank, respectively, could be upgraded if Moody's observes sustained improvement in the banks' problem loan levels and profitability and the banks maintain strong capitalization and liquidity.

BSPR's ba3 BCA is also unlikely to move up in the near term. In the long term, it could be upgraded if Moody's sees a reduction in problem loan levels and sustained improvement in the bank's profitability, and maintenance of strong capitalization and liquidity. BSPR's issuer and senior unsecured bank note program ratings would be upgraded by one notch in line with those of its US affiliate if Moody's review finds that the holding company, Santander Holdings USA, Inc. (SHUSA, Baa3, senior, stable)'s debt issuance plan and resolution framework would provide sufficient subordination to lessen the loss severity of its bank subsidiaries' debt. Moody's believes that within a US banking family, which includes Puerto Rico, the adjusted BCA, deposit and debt ratings of affiliates should be equalized because of regulatory powers afforded by the cross-indemnification provisions of the Federal Deposit Insurance Act.

FACTORS THAT COULD LEAD TO A DOWNGRADE

For all three banks, the standalone BCA could be downgraded if Moody's believes that the recovery after Hurricane Maria will not materialize as anticipated.

RATINGS LIST:

Issuer: Banco Santander Puerto Rico

..Affirmations:

....LT Bank Deposits, Affirmed A2, Stable

....ST Bank Deposits, Affirmed P-1

....ST Senior Unsecured Bank Note Program, Affirmed (P)P-2

....LT Counterparty Risk Assessment, Affirmed A3(cr)

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

....Adjusted Baseline Credit Assessment, Affirmed baa1

....Baseline Credit Assessment, Affirmed ba3.

..Remain under Review for Upgrade:

....LT Issuer Rating, currently rated at Baa2 remains under Review for Upgrade

....LT Senior Unsecured Bank Note Program, currently rated at (P)Baa2 remains under Review for Upgrade

..Outlook Action:

....Outlook, Remains Under Review for Upgrade

Issuer: Popular, Inc.

..Affirmations:

....Senior Unsecured Regular Bond/Debenture, Affirmed B2, Stable

....Senior Unsecured Medium-Term Note Program, Affirmed (P)B2

....Senior Unsecured Shelf, Affirmed (P)B2

....Subordinate Medium-Term Note Program, Affirmed (P)B2

....Subordinate Shelf, Affirmed (P)B2

....Junior Subordinate Shelf, Affirmed (P)B3

....Preferred Shelf, Affirmed (P)B3

....Preferred Shelf Non-cumulative, Affirmed (P)Caa1

....Preferred Stock Non-cumulative, Affirmed Caa1 (hyb)

..Outlook Action:

....Outlook, Remains Stable

Issuer: Banco Popular de Puerto Rico

..Affirmations:

....LT Bank Deposits, Affirmed Ba2, Stable

....ST Bank Deposits, Affirmed NP

....LT Issuer Rating, Affirmed B2, Stable

....LT Counterparty Risk Assessment, Affirmed Ba3(cr)

....ST Counterparty Risk Assessment, Affirmed NP(cr)

....Adjusted Baseline Credit Assessment, Affirmed b1

....Baseline Credit Assessment, Affirmed b1

..Outlook Action:

....Outlook, Remains Stable

Issuer: BanPonce Trust I

..Affirmations:

....Backed Preferred Stock, Affirmed B3 (hyb)

Issuer: Popular Capital Trust I

....Backed Preferred Stock, Affirmed B3 (hyb)

Issuer: Popular Capital Trust II

....Backed Preferred Stock, Affirmed B3 (hyb)

....Backed Preferred Shelf, Affirmed (P)B3

Issuer: Popular Capital Trust IV

....Backed Preferred Shelf, Affirmed (P)B3

Issuer: Popular North America, Inc.

..Affirmations:

....Backed Senior Unsecured Shelf, Affirmed (P)B2

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)B2

....Backed Subordinate Shelf, Affirmed (P)B2

....Backed Subordinate Medium-Term Note Program, Affirmed (P)B2

....Backed Junior Subordinate Shelf, Affirmed (P)B3

Issuer: Popular North America Capital Trust I

....Backed Preferred Stock, Affirmed B3 (hyb)

Issuer: Popular North America Capital Trust II

....Backed Preferred Shelf, Affirmed (P)B3

Issuer: Popular North America Capital Trust III

....Backed Preferred Shelf, Affirmed (P)B3

Issuer: FirstBank Puerto Rico

..Affirmations:

....LT Bank Deposits, Affirmed B1, Stable

....ST Bank Deposits, Affirmed NP

....LT Issuer Rating, Affirmed Caa1, Stable

....LT Counterparty Risk Assessment, Affirmed B2(cr)

....ST Counterparty Risk Assessment, Affirmed NP(cr)

....Adjusted Baseline Credit Assessment, Affirmed b3

....Baseline Credit Assessment, Affirmed b3

..Outlook Action:

....Outlook, Remains Stable

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeanne Del Casino
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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