Almost three years after they became entangled in an accounting scandal, two Puerto Rican banking companies have dealt with most of their issues and, having attracted the financial backing of investors, are strong enough to make deals of their own.
The $17.1 billion-asset First BanCorp, which sold a 10% stake in itself to Bank of Nova Scotia early last year, announced a deal Thursday to acquire a tiny Caribbean bank.
And observers say that the $9.5 billion-asset Doral Financial Corp., which sold a 90% stake to private-equity investors over the summer, may have the legs to start making acquisitions and could even digest the $11.2 billion-asset R&G Financial Corp., the third San Juan company ensnared by the massive accounting problems. R&G said two weeks ago that it was exploring its strategic options, and several observers said that finding a buyer would be the best possible outcome.
Doral, the first of the three companies to run into problems in early 2005, conceded it made mistakes in valuing interest-only strips. Shortly thereafter R&G reported similar issues, and both companies subsequently had to reverse a number of mortgage sales. Since First BanCorp had bought mortgages from both companies, it also became ensnared. The three continue to operate under regulatory cease-and-desist orders.
The accounting problems sliced 48.4% off Doral’s earnings for 2000 through 2004, and many observers did not expect the company to survive. However, last summer it avoided bankruptcy by striking a last-minute $610 million recapitalization deal with a group of investors led by Bear Stearns Merchant Banking — at a 49% discount to Doral’s common stock price. Of the three troubled companies, Doral also was the first to finalize a slew of earnings restatements and to become current with its regulatory earnings filings. First BanCorp became current with its earnings reports in September, a month after Doral did, and R&G has yet to report results for the last three years. Doral reported $137 million of losses for the first three quarters of last year.
“We have excess capital as the result of the recapitalization, and we are interested in deploying that capital in a number of ways,” Christopher Poulton, its chief business development officer, said in an interview Wednesday. “Certainly acquisitions — acquiring assets — would be part of that.”
According to an investor presentation last month, Doral’s Tier 1 capital ratio is 18.4%, and the ratio for its banking subsidiary is 15%. That cushion would give it the capacity to buy $8.5 billion of assets and remain well capitalized, Mr. Poulton said. And there are rumors that Doral is in talks to raise even more capital. Mr. Poulton would not say whether it is raising more capital or whether it would bid for R&G.
However, investment bankers said gauging R&G’s worth is hard without current financial figures. Its shares were delisted from the New York Stock Exchange last year and now trade on the pink sheets. The stock slid 86% last year, to $1.06 at yearend. On Nov. 2, R&G sold its Florida thrift to Fifth Third Bancorp and said it would use the proceeds to strengthen its Puerto Rican operations. However, last month R&G said it had hired investment bankers to explore strategic options.
“I am not sure … [Doral] would jump into an acquisition, but it’s a hard opportunity to pass up,” said Peter Shimkus, an analyst at Fitch Inc. R&G “has some value,” and buying it would be a remarkable comeback for Doral, he said. “It was on its deathbed and came back to life.”
Observers say that Popular Inc., the island’s largest banking company, also could make a bid but might have a problem getting regulatory clearance because of its market share. And the $47.3 billion-asset Popular also is restructuring its struggling mainland operations. Other possible bidders include Santander BanCorp, which is 91% owned by Banco Santander Central Hispano SA of Madrid, observers said. “I would think Santander is in a better position” to make such a deal, said Anthony Polini, an analyst with Raymond James & Associates Inc. Neither Santander nor Popular would discuss the speculation.
Mr. Shimkus of Fitch said First BanCorp might also feel that R&G presents an opportunity too valuable to pass up. A spokesman for First BanCorp would not discuss the matter, but on Thursday it said the acquisition of Virgin Islands Community Bank in St. Croix confirms its commitment “to continue growing the banking franchise in the principal markets we serve.” R&G has 16 branches in the British and the U.S. Virgin Islands. (Bank of Nova Scotia has an option to buy the rest of First BanCorp but has not said whether it would do so, and the spokesman for First BanCorp would not discuss that idea.)
Mr. Shimkus said that R&G would enhance First BanCorp’s own retail banking operations and give it a more viable mortgage business, though whether now is the time to buy a mortgage lender is another question.
Credit quality has been deteriorating broadly in Puerto Rico, he said, and even though “there is not an overabundance of subprime” lending on the island, all major mortgage lenders originate a sizable number of nonconforming loans. R&G said in its most recent earnings filing that over 90% of its mortgage originations were nonconforming.
