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Rating Action:

Moody's affirms ratings on three Puerto Rican banks

23 Feb 2015

Affirmations follow downgrade of Puerto Rico's GO bond rating

New York, February 23, 2015 -- Moody's Investors Service affirmed all of its ratings on three Puerto Rican banks: Banco Santander Puerto Rico (BSPR; deposit rating of Baa1, standalone bank financial strength rating [BFSR] of D); Popular, Inc. and its subsidiaries (bank deposit rating of Ba3, standalone BFSR of D-); and FirstBank Puerto Rico (deposit rating of B2, standalone BFSR of E+).

The banks' standalone baseline credit assessments (ba2 for BSPR, ba3 for Popular and b2 for FirstBank) were maintained. Following the affirmations, the outlook for BSPR's rating remains stable, while the outlooks for Popular's and FirstBank's ratings remain negative.

Today's affirmations follow Moody's 19 February downgrade of the general obligation (GO) bond rating of the Commonwealth of Puerto Rico to Caa1 from B2 (see "Moody's downgrades Puerto Rico GO bonds to Caa1 from B2, COFINA to B3/Caa1 from Ba3/B1" on moodys.com).

RATINGS RATIONALE

The bank rating affirmations take into account Puerto Rico's current economic conditions, which, although very weak, remain within Moody's expectations for the banks' liquidity and capital profiles. The affirmations were in contrast to the downgrade of Puerto Rico's GO bond rating, which reflected not only the commonwealth's continued economic weakness, but also its reduced liquidity, which has increased the probability of default on central government debt over the next two years. Moody's said the three banks' ratings already incorporate risks stemming from Puerto Rico's broader economic and fiscal challenges, including the high probability of a public-sector default.

Moody's added that it had affirmed BSPR's supported deposit and debt ratings because those ratings benefit from the bank's connection with its US affiliate, Santander Bank, N.A. (deposit rating of Baa1 stable). Moody's believes that the deposit ratings of affiliates in a US banking family should be equalized because of regulatory powers afforded by the cross-indemnification provisions of the Federal Deposit Insurance Act.

However, the banks will continue to face challenges, particularly with respect to their public-sector exposures and the likelihood that asset quality will deteriorate if economic conditions do not improve.

Moody's said that if the commonwealth defaults on its debt, the banks were likely to take losses on their public-sector exposures. In this event, however, the banks' capital positions would provide a sizable buffer. At 31 December 2014, BSPR's consolidated Tier 1 capital ratio was 28.0%, Popular's was 18.2% and FirstBank's was 17.9%. Popular's direct public-sector exposure (to the commonwealth, public corporations and municipalities in the form of outstanding loans and securities) amounted to 21% of Tier 1 capital (21% at year-end 2013), and FirstBank's to 23% (32% at year-end 2013). BSPR's public-sector exposure is not publicly disclosed.

With regard to the banks' asset quality, Moody's expects deterioration in the next year or two, given Puerto Rico's protracted recession. A deeper recession and higher unemployment would further weaken business and household balance sheets, which would have negative implications for the banks in the form of higher non-performing assets, higher provisions and capital erosion.

Following today's affirmations, the outlook for BSPR's standalone bank financial strength rating is stable, whereas the outlook for both Popular's and FirstBank's is negative. BSPR's stable outlook reflects the bank's strong capital and funding positions, both of which have benefitted from the bank's strategy to deleverage in recent years, as well as its comparatively stable asset quality and profitability. Because of its stronger capital and funding positions, BSPR is better able to absorb additional macroeconomic stresses.

The negative outlooks for Popular's and FirstBank's ratings reflect the two banks' greater vulnerability to further deterioration in Puerto Rico's economy. Their capital positions are also less robust than BSPR's to absorb additional stresses. The negative outlooks additionally reflect that Popular and FirstBank rely more on wholesale funding than BSPR does. FirstBank has the weakest funding profile of the three banks, as it relies the most on brokered deposits, which accounted for 30% of its total deposits and 26% of its liabilities at 31 December 2014.

The principal methodology used in these ratings was Global Banks published in July 2014. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

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

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms ratings on three Puerto Rican banks
No Related Data.
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