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Rating Action:

Moody's concludes reviews for downgrade of three Puerto Rican banks

13 May 2014

Banco Popular's deposits downgraded to Ba3, Banco Santander's deposits affirmed at Baa1, FirstBank's deposits confirmed at B2

New York, May 13, 2014 -- Moody's Investors Service concluded the reviews for downgrade on certain ratings of three Puerto Rican banks, including Popular, Inc. (Popular), Banco Santander Puerto Rico (BSPR), and FirstBank Puerto Rico (FirstBank). Today's actions conclude the reviews for downgrade that were initiated on 11 February 2014. The affected ratings are as follows:

LIST OF AFFECTED RATINGS:

Banco Popular de Puerto Rico:

- Standalone bank financial strength rating (BFSR) downgraded to D- from D; standalone baseline credit assessment (BCA) lowered to ba3 from ba2

- Long-term deposit ratings downgraded to Ba3 from Ba2

- Issuer and long-term OSO ratings downgraded to B1 from Ba3

- All short-term ratings affirmed at Not Prime

- Negative outlook assigned to all long-term ratings, including the standalone BFSR

Popular, Inc.:

- Senior unsecured MTN program rating downgraded to (P)B2 from (P)B1

- Subordinate MTN program rating downgraded to (P)B3 from (P)B2

- Junior subordinate shelf rating downgraded to (P)Caa1 from (P)B3

- Non-cumulative preferred stock rating downgraded to Caa2 (hyb) from Caa1 (hyb)

- Negative outlook assigned to all long-term debt ratings

Popular North America, Inc.:

- Senior unsecured debt rating downgraded to B2 from B1; senior unsecured MTN program rating downgraded to (P)B2 from (P)B1

- Subordinate MTN program rating downgraded to (P)B3 from (P)B2

- Negative outlook assigned to all long-term debt ratings

Popular Capital Trust I, Popular Capital Trust II, Popular Capital Trust III, BanPonce Trust I, and Popular North America Capital Trust I:

- Preferred stock ratings downgraded to Caa1 (hyb) from B3 (hyb)

- Preferred stock shelf ratings downgraded to (P)Caa1 from (P)B3

- Negative outlook assigned to all long-term debt ratings

Banco Santander Puerto Rico:

- Standalone BFSR downgraded to D from D+; standalone BCA lowered to ba2 from ba1

- All long- and short-term supported deposit and debt ratings affirmed (deposits at Baa1/Prime-2)

- Stable outlook assigned to all long-term ratings, including the standalone BFSR

FirstBank Puerto Rico:

- Standalone BFSR confirmed at E+; standalone BCA unchanged at b2

- Long-term deposit rating confirmed at B2

- Issuer and long-term OSO ratings confirmed at B3

- All short-term ratings affirmed at Not Prime

- Negative outlook assigned to all long-term ratings, including the standalone BFSR

RATING RATIONALE

Moody's said the rating reviews focused on the potential effect of further deterioration in Puerto Rico's weak economy and/or the Commonwealth's (Ba2 negative) constrained fiscal condition on the credit profiles of Popular, BSPR and FirstBank.

Puerto Rico's economy has been in recession since 2006, and it continues to be challenged by high unemployment, low workforce participation, high poverty levels compared to the US mainland, a declining population, and weakness in its key pharmaceutical sector. Accordingly, the prospects for future economic improvement are uncertain. This economic weakness, combined with years of deficit financing, pension underfunding and budgetary imbalance, have now put the Commonwealth in a position where its debt and fixed costs are high and rising, its liquidity is narrow, and its market access is constrained.

Moody's said actions to address these issues in the coming years will likely put additional stress on Puerto Rico's already-weak economy and the banks' asset quality, which is currently weak. For example, the recent budget proposal for fiscal-year 2015 includes expenditure cuts that may have negative consequences for unemployment and near-term economic growth, which increase the likelihood of higher delinquencies by bank customers.

Popular

Moody's said the downgrade of Popular's ratings and the continued negative rating outlook reflect the aforementioned vulnerability in the bank's financial performance caused by further deterioration in Puerto Rico's economy. Despite recent improvement, Popular's still-high level of non-performing assets could lead to greater losses if the recession continues. Popular's ratings are underpinned by the bank's leading deposit market position in Puerto Rico, which supports the bank's funding profile, and its sound capital position. However, Popular's dominant market position in the local banking system makes it more exposed to macroeconomic shocks, which would likely affect large portions of its retail and commercial banking portfolios. Moody's added that Popular's direct and indirect exposure to Puerto Rico's public sector is manageable at 29% of Tier 1 capital at first-quarter end. This exposure consists largely of collateralized loans or obligations that have a specific source of income or revenues, such as taxes, identified for its repayment.

Banco Santander Puerto Rico

The downgrade of BSPR's standalone BFSR to D, which is the equivalent of a standalone BCA of ba2, incorporates the potential for weakening in the bank's financial performance as a result of further deterioration in the economy. Despite the fact that BSPR's asset quality has been consistently better than the other Puerto Rican banks, Moody's is concerned that the bank's high level of non-performing assets could lead to greater losses with further deterioration in the economy. BSPR's stable outlook reflects the bank's strong capital and funding positions, both of which have benefited from BSPR's strategy to deleverage in recent years. These positions better establish BSPR relative to the other banks (that each have negative outlooks) to absorb additional stresses that could result from continued macroeconomic weakness.

Moody's 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. (deposits Baa1 stable). We believe that within a US banking family, the deposit ratings of affiliates should be equalized because of regulatory powers afforded by the cross-indemnification provisions of the Federal Deposit Insurance Act. Following the affirmation, the outlook on BSPR's supported ratings is stable.

FirstBank

The confirmation of FirstBank's ratings with a negative outlook reflects Moody's view that the bank's low ratings already incorporate its vulnerability to continued economic weakness and to further deterioration in Puerto Rico's economy because of the bank's high non-performing asset levels. The ratings also reflect FirstBank's weak profitability and its reliance on brokered deposits for funding.

The principal methodology used in these ratings was Global Banks published in May 2013. 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.

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.

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.

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 concludes reviews for downgrade of three Puerto Rican banks
No Related Data.
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