Scotiabank may bag Puerto Rico's Firstbank

BANGALORE Tue May 4, 2010 2:30pm EDT

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BANGALORE (Reuters) - As U.S. banking regulators move to clean up the financial mess in Puerto Rico and put the island's ailing economy back on track, another major local lender, First BanCorp (FBP.N), could emerge as a blip on the takeover radar.

In such a case, Bank of Nova Scotia (BNS.TO), Canada's third-biggest and the most international lender, could turn out to be the perfect suitor as it already owns a 10 percent stake in Firstbank and is familiar with the bank's operations.

A buyout of Firstbank would position Scotiabank as a leading force in the island's banking industry, second only to Popular Inc (BPOP.O), said Cantor Fitzgerald analyst Michael Diana in a note titled "Time to Sell to Bank of Nova Scotia? Could Be."

Firstbank, which lost $275 million in 2009 and a further $107 million in the first quarter of this year, is exploring the possibility of raising about $500 million.

Macquarie Capital analyst Sumit Malhotra said if the financial health of Firstbank worsens, Scotiabank would have the opportunity to participate in additional consolidation.

"Certain synergies within the Puerto Rico franchises as well as the acquisition of the Virgin Islands franchise would make a deal attractive to Nova Scotia at the right price," analyst Amanda Larsen of Raymond James told Reuters.

If First Bancorp fails to raise common equity, Scotiabank could be able to buy out the company at a "bargain price," Larsen said.

U.S. regulators seized three Puerto Rican banks on Friday and sold their deposits to other banks, costing the Federal Deposit Insurance Corp (FDIC) insurance fund $5.3 billion -- one of the largest hits from the banking crisis.

The FDIC sold $5.6 billion in deposits of R&G Financial Corp RGFC.PK to Scotiabank de Puerto Rico, a unit of Scotiabank, under a loss-sharing agreement.

"Right now our focus is on the integration of the operations and assets that we have purchased of R&G Premier Bank," Scotiabank spokeswoman Ann DeRabbie said.

"If any other opportunities present themselves we will review them at that time."

Firstbank did not reply to an email seeking comment.

Scotiabank has an aggressive international strategy, which also augurs well for another foreign deal for the banking giant.

"The (R&G) announcement will increase our market share to about 9 percent and is consistent with Scotiabank's international strategy to grow incrementally to scale in target markets," Scotiabank's Chief Executive Rick Waugh said in a statement.

The deal comes after Canada's second-largest bank, Toronto-Dominion Bank (TD.TO), and No.4 Bank of Montreal (BMO.TO) recently announced deals to buy the assets of failing U.S. lenders, folding regional branch networks into the growing retail franchises of the Canadian brands.

The latest deal also catapults Scotiabank, which already had a century of existence in the island, to a major banking position, and it will not be a surprise if it tries to bulk up further with a buyout of Firstbank.

FIRSTBANK'S WOES WORSEN

An accounting scandal weakened many of Puerto Rico's biggest banks, beginning in 2005, making it difficult for the FDIC to find local buyers for their troubled assets, people briefed on the matter told Reuters.

But most buyers from outside Puerto Rico were reluctant to gain exposure to an island that has been in recession since 2006 and with an unemployment rate of 16 percent.

First BanCorp has been battered by a precipitous decline in value of residential and commercial real estate in Florida and Puerto Rico in the wake of the financial crisis.

However, when speculation about the FDIC moving in to close troubled lenders was growing, analysts expected that Firstbank might use the opportunity to raise capital and participate in the consolidation.

That did not happen.

"They can raise money, but I think it will be difficult and probably more expensive than it had been. There is not a possibility of an accretive acquisition out there," analyst Joe Gladue of B. Riley & Co said.

Macquarie Capital's Malhotra said while the current picture for banks in Puerto Rico is not very pretty, it appears that Scotia is taking the "long view" and it has clearly benefited from banking sector rationalization in other international markets in which it operates.

(Reporting by Anurag Kotoky and Sweta Singh in Bangalore, and Andrea Hopkins in Toronto; Editing by Gopakumar Warrier)

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