TEXT-S&P cuts Doral Financial rating to 'CCC-', outlook is negative

Mon Dec 17, 2012 4:25pm EST

Overview
     -- Doral Bank is required to maintain higher regulatory capital ratios 
because of its consent order with the Federal Deposit Insurance Corp., and its 
total risk-based capital ratio is only 80 basis points above the requirement.
     -- We believe the bank is at risk of breaching the required regulatory 
levels given its very high nonperforming assets. 
     -- We are lowering our issuer credit rating on Doral Financial Corp. to 
'CCC-' from 'CCC+'. 
     -- The negative rating outlook on Doral reflects our view of the loan 
portfolio's weak credit quality, the bank's restrained core profitability, the 
poor economic conditions in Puerto Rico, and the bank's regulatory capital, 
which is narrowly higher than regulatory minimums. 

Rating Action
On Dec. 17, 2012, Standard & Poor's Ratings Services lowered its issuer credit 
rating on Doral Financial Corp. to 'CCC-' from 'CCC+'. The outlook is
negative.

Rationale
Our two-notch downgrade of Doral reflects the institution's weakened capital 
position and very high nonperforming assets. We view Doral's capital and 
earnings as "weak" (as our criteria define the term), and we believe that the 
bank is at risk of breaching its regulatory requirements in case of plausible 
adverse developments, including higher credit losses and further weakening of 
the Puerto Rican economy. Our revision of Doral's capital and earnings score 
to "weak" from "moderate" is responsible for one notch of the two-notch 
downgrade. We also believe that Doral's asset quality compares unfavorably 
with its Puerto Rican peers', which led us to lower the rating by another 
notch. 

On Sept. 11, 2012, Doral Financial entered into a written agreement with the 
Federal Reserve Bank of New York, which replaces and supersedes the cease and 
desist order that Doral entered into with the Board of Governors of the 
Federal Reserve System in 2006. The written agreement requires the company to 
take numerous actions, including supporting Doral Bank (not rated) to ensure 
it complies with any supervisory actions that the federal and state regulators 
take. Doral Bank entered into a consent order with the Federal Deposit 
Insurance Corp. on Aug. 8, 2012. In our opinion, these regulatory actions and 
the associated costs could hurt Doral's already weak earnings capacity. Doral 
is required to keep higher capital levels because of the consent order. As of 
Sept. 30, 2012, the bank's total risk-based capital ratio is 80 basis points 
higher than the minimum requirement of 12%. At this level, we believe the bank 
is at risk of breaching its regulatory requirements in case of plausible 
adverse developments, which, in our view, could eventually trigger regulatory 
intervention. 

Doral's risk position is "weak," in our opinion. We believe the bank's credit 
deterioration mainly results from Puerto Rico's high unemployment rates and 
economic challenges, and we believe there will be very little to no 
improvement over the next two years. Residential real estate mortgages make up 
more than half of Doral's total loans and the majority of its nonperforming 
assets. Nearly all of the mortgage loans are secured by single-family 
residences in Puerto Rico. 

Doral's nonperforming assets (including restructured loans and loans that are 
90 or more days past due) represented about 22.1% of total loans as of Sept. 
30, 2012. Although this ratio has declined over the past few years, it remains 
much higher than its peers'. The bank charged off $111.6 million of loans in 
the first nine months of 2012, which translated to a higher net charge-off 
ratio of 2.32% of average loans, compared with 1.41% one year ago. 
Furthermore, the bank took higher loss provisions of $154.8 million to build 
reserves against future losses.

Outlook
The negative rating outlook on Doral reflects our view of the loan portfolio's 
weak credit quality, the bank's restrained core profitability, the poor local 
economic conditions, and its capital that is only slightly higher than the 
regulatory minimum. If nonperforming assets and net charge-offs continue to 
climb, or if Doral's regulatory capital levels don't meet the required 
minimums, we could lower the rating. However, if the local economy stabilizes, 
and we believe that the bank will be able to maintain profitability, improve 
its asset quality, and increase its regulatory capital levels, we could revise 
the outlook to stable.

Ratings Score Snapshot
                                 To                     From
Issuer Credit Rating             CCC-/Negative/--       CCC+/Negative/--

SACP                             b-                     b
 Anchor                          bbb+                   bbb+
 Business Position               Weak (-3)              Weak (-3)
 Capital and Earnings            Weak (-2)              Moderate (-1)
 Risk Position                   Weak (-2)              Weak (-2)
 Funding and Liquidity           Below Average          Below Average
                                 and Adequate (-1)      and Adequate (-1)

Support                          0                      0
 GRE Support                     0                      0
 Group Support                   0                      0
 Sovereign Support               0                      0

Additional Factors               -1                     0

Related Criteria And Research
Banks: Rating Methodology And Assumptions, Nov. 9, 2011

Ratings List

Downgraded
                                        To                 From
Doral Financial Corp.
 Issuer Credit Rating                   CCC-/Negative/--   CCC+/Negative/--
 Senior Unsecured                       CCC-               CCC+

Ratings Affirmed

Doral Financial Corp.
 Preferred Stock                        C                  



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