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Puerto Rican banks waiting for relief, say rebuild could stimulate economy

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Puerto Rican banks waiting for relief, say rebuild could stimulate economy

Following 2017's devastating hurricane season, bank executives in Puerto Rico are cautiously optimistic that a revised fiscal plan will stabilize the island's turbulent economy.

More than 450,000 customers were still without power as of Jan. 24, the United States Army Corps of Engineers reported. And in December 2017, about three months after Hurricane Maria made landfall, more than 230,000 of Puerto Rico's 3.4 million residents had migrated to Florida, Bloomberg News reports.

Ignacio Alvarez, president and CEO of Puerto Rico's largest bank, Hato Rey-based Popular Inc., said it is unclear how many residents will return.

"The island was facing structural problems which have been festering for years," Alvarez said on a fourth-quarter 2017 earnings call. "And we now have a unique opportunity to tackle these problems, not to go back to where we were, but to make important structural changes in areas such as energy, housing, health and education."

He said the pace of economic recovery will depend on the speed of power restoration, as well as the magnitude and timing of funding inflows from federal agencies and insurance companies.

Puerto Rico's 92-page revised fiscal plan, dated Jan. 24, includes $35.3 billion in disaster relief, and $21.9 billion in private insurance claims. The Puerto Rico Electric Power Authority laid out its plans for privatization in the document. Fifty-one percent of the $35.3 billion funding would be used to repair, modernize and strengthen water and power infrastructure.

The requested funding is significantly less than the $94.4 billion in federal relief assistance that Puerto Rico Gov. Ricardo Rossello originally requested. On Feb. 1, the Department of Housing and Urban Development announced a $1.5 billion grant for hurricane relief in Puerto Rico. Rossello said the grant will be used for repairing damaged homes and businesses, and "facilitating the social and economic recovery here in the island."

In a Jan. 25 industry note, Sandler O'Neill & Partners analyst Alexander Twerdahl wrote that the new plan is a "starting point," but unlikely to be approved as is. The Financial Oversight and Management Board of Puerto Rico has until Feb. 23 to make adjustments. The original plan, approved in March 2017, was drafted to combat the island's debt issues, but its implementation was delayed due to the storm. Twerdahl said he expects significant pushback from bondholders, since the new plan implies a five-year deficit of $3.4 billion, compared to a five-year surplus of $3.7 billion under the March 2017 draft.

He said it would be positive for banks, since they do not own central government debt and would benefit from "less austerity" on the island. The plan includes tax cuts of more than $3 billion and would slash individual income and corporate tax rates to less than 30%.

The island's banks are now navigating a "softer economy" than ever before, said Piper Jaffray analyst Brett Rabatin, who covers the three banks headquartered in Puerto Rico.

But Rabatin said there could be a silver lining — namely the rebuild and possible privatization of the island's faulty energy grid. "You don't want to see them just re-patch it up and keep going," he said in an interview. "If they can get things newer and better, that would be a huge win out of this disaster for them."

Rabatin said Puerto Rico's remaining banks Popular, First BanCorp. and OFG Bancorp — have extensively de-risked their balance sheets over the past decade and are benefiting from competent management teams and less competition.

"The great thing about the three banks that are left is they are the three banks that are left," he said.

He said all three are conservatively monitoring credit and loan underwriting. They will find ways to utilize excess capital over the next two years, rather than having "big-revenue-growth type stories," he added.

"I think the stocks are too cheap," Rabatin said. "And I think they'll continue to move higher as we get more evidence that Puerto Rico isn't going to sink into the ocean."

Alvarez said he is seeing greater demand for commercial lending and expects additional construction lending opportunities to develop.

Alvarez also called consumer trends encouraging, noting that in some cases, consumer activity is close to pre-hurricane levels. He said consumer loan origination during the fourth quarter was about 80% of 2017 pre-hurricane levels. He said sectors like personal loan and auto have recovered faster than others, such as mortgages.

All three of the island's banks offered payment moratoriums following the storm, with most expiring in December 2017.

"The moratorium has given our customers a nice cash cushion, which we've seen reflected into the deposit growth," First BanCorp President and CEO Aurelio Alemán-Bermudez said on a recent earnings call. "Again, we're seeing some insurance money flowing to the island, but not at the level we anticipate seeing in the coming quarters."

"It is too early at this point to come to a conclusion, but we are encouraged," President and CEO José Fernández said on OFG's earnings call.