For an institution with plenty of capital, BBU Bank in Coral Gables, Fla., has made what some consider an odd move — expanding from the troubled Florida market into the turbulent Puerto Rico market.
For more than a decade, U.S. banks have been departing the island. Yet the $281 million-asset BBU has eagerly moved in, through the purchase of San Juan-based Banesco International Bank Corp. BBU's president and chief executive officer, Rafael Saldana, a Puerto Rico native, said he sees only potential for growth and profits from a presence in both South Florida and Puerto Rico.
"When the tide is low, you know who's swimming naked. And the tide is low there," he said of Puerto Rico in a recent interview.
The young bank — it will turn five in January 2011 — had a profit in the first quarter and reported net income of $514,000 for the second quarter. The purchase of Banesco, which closed Sept. 2, gives the well capitalized BBU another $16 million in capital and, as Saldana sees it, a logical extension of its Florida base. "We need to grow our earning assets base to a point to help support sustainable profitability," he said.
Some analysts, however, question why a bank with the capital to expand would choose to go from one economically battered market to another.
South Florida is "the poster child for the whole recession and housing crisis," said Ken Thomas, a bank consultant and economist in Miami. "Puerto Rico is one of the few places in the country that makes South Florida look good."
For example, nonperforming assets were 6.24% of total assets of FDIC-insured banks in Florida as of June 30 — nothing to brag about. Yet in Puerto Rico, the nonperformers' share was 8.62%.
Other U.S. mainland banks are unlikely to follow BBU. In addition to Puerto Rico's economic woes, the market is tough to crack because it has several dozen highly competitive international banks and it is difficult to secure approval for expansion there.
In 2000, Puerto Rico was home to 14 banks insured by the Federal Deposit Insurance Corp. Today, after consolidation, the loss of several U.S. banks and three failures in April, seven insured institutions remain, according to the FDIC. First National Bank of Boston, which left in the mid-1990s, was the last mainland bank to open an outpost.
"The real estate market has taken a huge hit, and it really affected a lot of banks in Puerto Rico, and they did not have enough capital" to sustain it, said Frank Gonzalez, a partner specializing in financial institutions at the accounting firm Morrison, Brown, Argiz & Farra LLP in Miami.
Yet Gonzalez said this situation creates opportunities for a bank that is well capitalized — BBU had a total risk-based capital ratio of 17.92% as of June 30 — and has a president from Puerto Rico who understands the economy there. Saldana was an executive vice president and the commercial director at Banco Santander in San Juan before becoming president of R-G Crown Bank in Orlando. He joined BBU in 2006.
Saldana said BBU has expanded its loan portfolio by 15% each year, largely through commercial and industrial loans as well as owner-occupied and nonconforming residential portfolios. He said it would have been difficult for a young and small bank to sustain such growth solely in Florida.
BBU is targeting customers who travel between Miami and Puerto Rico and is hoping to further tap into the trade business.
Yet BBU's ultimate goal is to leverage the capital it received through the purchase to expand in South Florida. Saldana said BBU wants to become one of the 10-largest state-chartered banks in Florida in both asset size and profitability.
With the deal BBU has about $326 million in assets. It plans to open a second branch in San Juan early in 2011.
Despite the difficulties facing Puerto Rico banks, by some measures they have weathered the tough climate better than their Florida counterparts. For insured Puerto Rico banks, returns on assets and equity remained positive until the fourth quarter of 2009 — outpacing insured banks in Florida, which had negative returns on assets and equity starting in the second quarter of 2008.
Though analysts do not expect BBU to lead other banks to Puerto Rico, they think its move will help the island. This is a "signal of confidence in the economy," said Arturo Carrion, executive vice president of the Puerto Rico Bankers Association. "They have done their homework, and that's why they're getting in."