If Puerto Rico's eight-year recession has left any bank better off, it's OFG Bancorp.
OFG faces significant uncertainty due to the island's economic woes, but the recession has also provided opportunities. The $7.6 billion-asset company's executives sense an opening to take a commanding position in the island's banking industry, which is reeling from a seemingly never-ending economic contraction and fiscal chaos.
A number of major competitors have failed, disappeared or scaled back, leaving OFG as one of the few healthy players on the island. And management is eager to consolidate its strength through an acquisition on or off the island and by modernizing its retail business to move beyond the old-school branch banking that's still the norm in Puerto Rico.
"For us, there's an opportunity right now to gain some traction," said José Rafael Fernández, OFG's vice chairman and chief executive.
For OFG, that could include buying a mainland bank with cheap deposits or assets, then putting them to work in Puerto Rico. Ganesh Kumar, OFG's chief financial officer, called the strategy "balance-sheet arbitrage," estimating that the company has about an 18-month window to make a move before interest rates rise and drastically alter the M&A landscape.
Puerto Rico's economy appears to be stabilizing, Fernandez said at an event last week at the New York Stock Exchange to celebrate OFG's 50th anniversary. However, he didn't sugarcoat the territory's fiscal problems. Puerto Rico has been in recession since 2006, its economic activity recently hit a 20-year low, and some analysts fear the government will default on its debt.
Despite these headwinds, OFG which for now only does business on the island has been consistently profitable throughout the financial crisis and its aftermath. Profit held steady in the third quarter from a year earlier, at $16.1 million, and the bank had a 49% efficiency ratio and a 5.84% net interest margin.
Much of its revenue comes from a renewed focus on commercial lending, Fernandez said. OFG also has a thriving auto-lending business, which has remained strong throughout the downturn.
Most important, OFG isn't saddled with the poisonous crisis-era loans that brought down so many other Puerto Rican banks.
OFG held about 9.4% of the territory's deposits at June 30, making it the fourth-biggest bank behind Popular, Citigroup and First BanCorp, according to the Federal Deposit Insurance Corp. In comparison, OFG only had 2.4% market share in mid-2008.
OFG has simply "outlasted some of its competitors," said Emlen Harmon, an analyst at Jefferies.
Before 2008, there were about a dozen banks chartered on Puerto Rico; now OFG essentially has four competitors. The largest, the $27.3 billion-asset Banco Popular, is now profitable, but was restricted for years by its prolonged participation in the Troubled Asset Relief Program, which it exited in July.
Another competitor, the $8 billion-asset Doral Financial, is struggling, losing $79 million in the first half of this year. It was recently designated "significantly undercapitalized" and ordered by the FDIC to raise cash immediately. Doral's fate could hinge on an ongoing legal fight with the Puerto Rican government over a $230 million tax refund Doral says it's owed; the government has refused to pay.
The $12 billion-asset First BanCorp, is healthy enough to make acquisitions, agreeing to buy $193 million in mortgages from Doral last month. Yet it also suffered serious losses due to the downturn, and lost more than $150 million last year.
The foreign banks that operate in Puerto Rico are pulling back in the face of the territory's macroeconomic problems.
ScotiaBank and Banco Santander are trimming island operations, and Citigroup has a relatively small business and is "not a big factor" on the island, said Brian Klock, an analyst at Keefe, Bruyette & Woods. He said Puerto Rico is a challenging market for foreign players and OFG has a "home-team advantage."
Other foreign banks are unlikely to enter the market until the island's economy improves, said Taylor Brodarick, an analyst at Guggenheim Securities.
OFG's current health can be traced back to its decision in the mid-2000s to drastically pull back its lending. In 2006, a law that allowed foreign manufacturers to avoid paying taxes on Puerto Rican profits expired. The law had given a massive boost to the island's banks for decades companies had to park their cash on the island, giving the banks low-cost deposits and OFG thought there could be a hard landing.
Management pulled back so sharply that, when the financial crisis hit, just 20% of its assets were tied up in loans, and the rest was invested in securities. In the aftermath, OFG expanded, snapping up EuroBank in an FDIC-assisted deal in 2010 and buying the Spanish giant BBVA's Puerto Rican operations in late 2012.
OFG's M&A strategy differs from that of other Puerto Rican banks that have traditionally expanded to areas on the mainland with large Puerto Rican populations. Kumar said OFG's search isn't restricted to a particular region, since the idea would be to find a balance-sheet match rather than expand OFG's Oriental Bank brand. ("Oriental" means "eastern" in Spanish and refers to the company's origin on the island's eastern coast.)
M&A on Puerto Rico itself is a trickier proposition, analysts said. The generally poor financial condition of the island's banks means that there are more sellers than buyers. "The potential buyers are holding the reins," Brodarick said.
Because of its troubles, Doral has been viewed as a possible seller, but Kumar said that company's high-cost deposits make it less appealing. In the near term, sales of assets or business lines are more likely than whole-bank deals on Puerto Rico, analysts said.
OFG's other priority involves upgrading its branch model. In Puerto Rico, long teller lines and in-branch transactions are still the norm, Fernandez said. OFG is trying to change that, and has recently introduced mobile check deposit and an online-based free checking account.
"We're the only bank on Puerto Rico that has brought these things to market," Fernandez said.
Other banks will surely follow, but not right away, he said.
"It's hard for the local banks to copy us too soon" because they use proprietary systems that are more cumbersome to upgrade, Fernandez said. Adoption of OFG's new offerings has been strong; use of the mobile app has increased sevenfold since last year, and roughly 800 new customers sign up for the fee online checking every month, he said.