NEW YORK — 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., R&G Financial Corp., and Eurobancshares Inc., three banks located in Puerto Rico with almost $21 billion in combined assets.
The three banks hold almost 30% of Puerto Rico's $62 billion 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. 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. 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., the island's largest bank by assets and deposits, has long said it would be interested in consolidating.
And Oriental Financial Group Inc., 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, which owns about 10% of another Puerto Rican bank, First Bancorp Puerto Rico, 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."