Puerto Rico once was an attractive place for banks to invest, with pharmaceutical manufacturing driving growth. Banks piled in, ATMs sprouted on street corners and once-scarce financing expanded for everything from homes and cars to consumer electronics. But many drug companies left when their tax breaks were phased out in the 10 years through 2006, and a decade-long recession left the economy 14% smaller. Residents, who are U.S. citizens, began a a mass emigration to the mainland that the hurricane accelerated.

In 2017, the commonwealth declared a form of bankruptcy. Negotiations continue over $120 billion in debt and pension liabilities, and the hurricane prompted a spike in mortgage delinquency.

Banks, which already sold many commonwealth securities to reduce risk, now face elevated uncertainty around their home-loan portfolios.

Glen Manna, a Puerto Rico bank analyst with New York-based Keefe Bruyette & Woods, said local banks may buy competitors' loans, but the industry is contracting organically without much dealmaking.

“If there's an attractive piece, the other banks would acquire it, and the rest will just sort of run off,” Manna said.
Puerto Rican banking has already been through several rounds of consolidation. In 2010, the Federal Deposit Insurance Corp. stepped in to arrange deals as lenders teetered after the financial crisis. Westernbank Puerto Rico, until recently the island's third-biggest bank by deposits, was sold to No. 1 Popular. R&G Financial Corp., sixth-biggest, had its assets sold to Scotiabank.

But Doral Financial Corp., the parent of the commonwealth's second-biggest mortgage lender, epitomized the rise and fall of Puerto Rico banking. A one-time stock-market juggernaut that got investment from Goldman Sachs Group Inc. and hedge funds, it was brought down by the recession, the revelation that it overstated earnings and a failed legal gambit to recoup $230 million in taxes it said it paid on the phantom profits. It was also haunted by the mysterious killing of a rising-star executive as he drove his Lexus on a San Juan highway — a case that remains unsolved.
Popular assumed Doral's deposits when it shut its doors in 2015. Popular today has 56% of deposits in Puerto Rico and 49% of net loans, compared with 27% and 24% a decade ago, making it a critical element in the Puerto Rican economy.

Santander Puerto Rico Chief Executive Fredy Molfino said in an email that although its securities unit's San Juan branch will close May 25, it is committed to being “the best bank in Puerto Rico.”

Citigroup Inc., which focuses on institutional clients at its one island branch, declined to comment. Nor would OFG Bancorp, the San Juan-based lender that's No. 3 in deposits.

Scotiabank spokesman Juan Iramain declined to speak about its Puerto Rico plans. He noted that the bank has been in Puerto Rico for 108 years, and “has been and continues to be a strong partner with various stakeholders in the economic development of the island.”
Executives with Popular and FirstBank say they're in the market for deals.

“We're going to be opportunistic buyers of portfolios of assets,” Popular Chief Executive Ignacio Alvarez said last month after the company's $1.7 billion acquisition of Wells Fargo & Co.'s commonwealth operation, including auto and commercial loans. “If there are assets for sale in Puerto Rico that we like, we're going to buy them if we can get them at a reasonable price.”

“The auto sector is one we've really liked,” he said, adding that sales are rebounding this year. Puerto Rico's poor public transportation has made car ownership a relative necessity.

FirstBank, which has a large cash reserve like Popular, has also not-so-subtly suggested that it would be interested in competitors' assets. Its last investor presentation predicted a “long-term opportunity for additional consolidation” and outlined competitors whose branches were closest to their own. Both banks have capital at or near a 10-year high, and lenders need to deploy money to drive profits.

FirstBank Chief Executive Officer Aurelio Aleman-Bermudez said there are reasons to be hopeful about the future. He said the Hurricane Maria reconstruction could create jobs. The island projects growth of 6.7% in fiscal 2019 as insurance and federal aid money pour in.

“We bankers learned to live through a 10-year recession and actually produce capital under that environment,” he said. “We're already seeing an economic cushion provided to Puerto Rico by all the funding that is coming in, all the construction work that is already happening and all the workers that are being hired.”

But even as banks look for ways to deploy capital, it remains to be seen how much consolidation regulators would allow. To assess deals, the U.S. Justice Department uses a ranking of market concentration, known as the Herfindahl-Hirschman Index. Puerto Rico's deposit market has a score of 3,558 out of 10,000.

“That's a highly concentrated market,” said Manna, the analyst. “And eliminating another bank headquartered on the island would significantly reduce competition.”

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