FDIC Seeks Buyers For Three Puerto Rican Banks: Sources
March 16 2010 - 10:58AM
Dow Jones News
The Federal Deposit Insurance Corp. is seeking to find buyers
for three banks in Puerto Rico, a small island with big banking
problems.
According to two people familiar with the matter, the agency has
hired an investment bank to try to find capital or outright
purchasers for W Holding Co. Inc. (WHI), R&G Financial Corp.
(RGFC), and Eurobancshares Inc. (EUBK), three banks located in
Puerto Rico with almost $21 billion in combined assets.
The three banks hold almost 30% of Puerto Rico's $62 trillion of
deposits, and their bank subsidiaries are operating under enhanced
FDIC scrutiny.
The three banks didn't respond to requests for comment. A
spokesman for the FDIC declined to comment.
The FDIC's search for buyers comes after five years of crisis in
Puerto Rico's banking industry, a small and fiercely competitive
market for 11 banks.
"We've been talking about consolidation here for years, and
finally it seems that its going to happen in the next few months,"
one banker said. Sources said the three weak banks will likely
struggle to file their first-quarter earnings to their
regulators.
Most Puerto Rican banks entered the financial crisis in weak
condition. Several of the island's banks were still recovering from
deep problems related to the valuation and accounting of
complicated derivative contracts and loan sales that went bad in
2005. In 2006, the island's economy fell into a recession. Loans
tied to luxurious real-estate developments started to go sour at a
rapid rate.
The FDIC slapped W Holding, R&G, and Eurobancshares with
sharp enforcement actions last year, disclosing a laundry list of
deficiencies, including "insufficient" or "unsatisfactory"
earnings, "inadequate" management, too little capital, and
"excessive" levels of troubled loans.
Such cease-and-desist orders limit banks' ability to raise and
renew deposits from brokers rather than their retail customers;
about half of R&G's and Eurobank's deposits are brokered
deposits, and at W Holding the share is more than 70%.
"All of these banks need capital infusions, I don't see any
other way out," said Christopher Whalen, managing director of
Institutional Risk Analytics, a research and risk-management firm.
The three banks spend as much or more in operating costs as they
receive in revenue, Whalen said.
According to Federal Reserve data, W Holding, the third largest
bank on the island, lost $14 million last year, R&G $62.8
million, and Eurobancshares $72 million.
R&G had to restate earnings from 2002 to 2004 because of the
derivative and loan issues, shaving between 30% and 70% off its
profits for those years. It has yet to file subsequent earnings
reports with the Securities and Exchange Commission. In late 2007,
it hired KBW Inc. (KBW) and Sandler O'Neill + Partners LP to
explore "its strategic options."
Puerto Rico's economy grows more slowly than that of the
mainland in the best of times; now its unemployment rate is around
15% and household income is below the level of Mississippi, which
has the lowest household income among U.S. states. Deposits are
scarce. "There seems to be little interest from banks other than
the ones already there," one investment banker said.
However, once the economy recovers, the island's industrial base
and potential for tourism may bode well for commercial loan growth,
bankers said. Real-estate investors have shown some interest in
possibly bidding for some loans, said one lawyer with knowledge of
the situation.
Possible local bidders for the troubled banks include Doral
Financial Corp. (DRL). A group of private-equity investors bought a
majority stake in Doral to stem off the bank's default in 2007,
hoping they could expand Doral through acquisition.
Popular Inc. (BPOP), the island's largest bank by assets and
deposits, has long said it would be interested in
consolidating.
And Oriental Financial Group Inc. (OFG), one of the island's
smallest banks, said Tuesday morning it raised $86.6 million in a
public offering, in part for "possible participation in
government-assisted transactions in Puerto Rico."
Bank of Nova Scotia (BNS, BNS.T), which owns about 10% of
another Puerto Rican bank, First Bancorp Puerto Rico (FBP), and
which has a large Caribbean banking network, might also be a buyer,
investment bankers said. A spokeswoman wouldn't discuss Puerto
Rico, but said the bank "is always looking for strategic
opportunities to grow."
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471;
matthias.rieker@dowjones.com
(Robin Sidel in New York contributed to this article.)
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