New York, September 01, 2020 -- Moody's Investors Service ("Moody's") has today upgraded the ratings and
assessments of FirstBank Puerto Rico (FirstBank) following the close of
the acquisition of Banco Santander Puerto Rico (BSPR). FirstBank's
long-term deposit rating was upgraded to Ba2 from Ba3, its
long-term issuer rating was upgraded to B2 from B3 and the long-term
Counterparty Risk Rating was upgraded to B1 from B2, following the
upgrade of the standalone Baseline Credit Assessment (BCA) to b1 from
b2. The short-term bank deposit rating was affirmed at Not
Prime (NP). Today's rating action concludes the review for
upgrade announced on 23 October 2019, which was prompted by FirstBank's
announcement of the BSPR's acquisition for $1.1 billion,
which was funded in cash. Moody's has also simultaneously
withdrawn all ratings and assessments of BSPR since that entity no longer
exists.
List of affected ratings:
Upgrades:
..Issuer: FirstBank Puerto Rico
.... Adjusted Baseline Credit Assessment,
upgraded to b1 from b2
.... Baseline Credit Assessment, upgraded
to b1 from b2
.... Counterparty Risk Assessment, upgraded
to Ba3(cr) from B1(cr)
....LT Counterparty Risk Rating (Foreign Currency),
upgraded to B1 from B2
....LT Counterparty Risk Rating (Local Currency),
upgraded to B1 from B2
....LT Issuer Rating, upgraded to B2
from B3, outlook changed to Stable from Rating Under Review
....LT Bank Deposits (Local Currency),
upgraded to Ba2 from Ba3, outlook changed to Stable from Rating
Under Review
Affirmations:
..Issuer: FirstBank Puerto Rico
....ST Counterparty Risk Assessment,
affirmed at NP(cr)
....ST Counterparty Risk Rating (Foreign Currency),
affirmed at NP
....ST Counterparty Risk Rating (Local Currency),
affirmed at NP
....ST Bank Deposits (Local Currency),
affirmed at NP
Outlook Actions:
..Issuer: FirstBank Puerto Rico
....Outlook, changed to Stable from
Rating Under Review
RATINGS RATIONALE
The upgrade of FirstBank's BCA and long-term ratings reflects Moody's
view that the acquisition of BSPR's operations incrementally improves
the diversification of FirstBank's retail-focused loan portfolio,
as BSPR's loan book had a comparatively higher proportion of commercial
real estate loans. Moody's has assessed that the combined
FirstBank-BSPR loan portfolio is of higher quality than both banks'
existing loan portfolios pre-acquisition because FirstBank has
not assumed any of BSPR's non-performing assets at the time of
closing. Moody's also expects that FirstBank's capital will remain
strong after the close of acquisition, notwithstanding the all cash
purchase. FirstBank has estimated its closing pro-forma
common equity tier 1 (CET1) to risk-weighted assets ratio to be
16.13%, down from 21.5% at 30 June 2020.
Moody's tangible common equity to risk-weighted assets ratio for
FirstBank was 21.27% at 30 June 2020 and while Moody's
expects this ratio to decline by a similar amount, it will still
remain well above the US mainland regional bank average. This capitalization
level provides a significant cushion to buffer unexpected credit losses
resulting from the potential broadening and lengthening of the coronavirus
pandemic outbreak.
FirstBank has made strong efforts to reduce its reliance on brokered deposits
by capturing a larger proportion of more stable core deposits in recent
years. As of 30 June 2020, brokered deposits stood at 3%
of total deposits compared to 35% in 2012 and 60% in 2009.
The acquisition of BSPR will further reduce the bank's reliance
on brokered deposits and other confidence-sensitive market funds.
While the current low interest rate environment coupled with the economic
impact of the coronavirus pandemic has pressured profitability,
reducing net interest margin (NIM) to 4.22% for the second
quarter of 2020 compared to 4.9% for the same period the
previous year, NIM (and pre-provision income) remains high
compared to higher rated regional banks on the US mainland.
Moody's believes that the acquisition carries some integration and execution
risks, which will not fully recede until BSPR's conversion
to the FirstBank brand and systems is complete, including a full
integration of staff, platforms and corporate cultures, a
process likely to continue well into 2021.
The stable outlook is driven by Moody's view that the banks' credit fundamentals
will remain broadly unchanged over the next 12 to 18 months despite the
uncertain operating environment resulting from the potential broadening
and lengthening of the coronavirus pandemic. The outlook also incorporates
Moody's view that the operating conditions for banks in Puerto Rico
have improved since Hurricane Maria in 2017, reflecting better near-term
economic prospects for the island, despite the uncertainties in
the implementation of structural economic reforms and measures to balance
the Commonwealth's fiscal position.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FirstBank's b1 BCA could be upgraded if Moody's were to assess a sustainable
improvement in the bank's asset quality profile without deterioration
in the bank's capital, funding and/or liquidity profile.
The BCA could also be upgraded if Moody's were to assess a sustainable
improvement in Puerto Rico's bank operating environment, which would
lead to a reduction in problem loan levels, sustained improvement
in profitability, capitalization and/or liquidity. A higher
BCA would likely lead to a ratings upgrade.
FirstBank's BCA could be downgraded if Moody's were to assess a stark
deterioration in bank operating conditions in Puerto Rico, beyond
its current expectations. Additionally, the BCA could be
downgraded if Moody's believes the risk appetite of FirstBank has increased,
for example because of above-peer average loan growth, a
notable increase in lending concentrations, or heightened execution
risks from unexpected integration challenges. Lower capitalization
could also lead to a downgrade in the BCA. A lower BCA would likely
lead to a rating downgrade for FirstBank.
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Sadia Nabi
Asst Vice President - Analyst
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
