Oriental Financial Group (OFG.N) said it would buy Spain's Banco Bilbao Vizcaya Argentaria's (BBVA.MC) Puerto Rican unit for $500 million in cash, a deal that will help it compete in the island's overbanked market, sending its shares up as much as 8 percent.
Even after a regulator-backed cull two years ago, Puerto Rico still has too many banks, forcing the smaller lenders to cut loan terms to stay afloat.
The merger with BBVA Puerto Rico will help Oriental climb three rungs to become the third-largest bank by assets on the island. Its increased size will allow it to grow its margins - the difference between what the bank earns on loans and pays out on deposits.
"The combined company will have a targeted net interest margin of 4 percent," Oriental CFO Ganesh Kumar said on a conference call with analysts.
Oriental currently has a margin of less than 3 percent, Kumar said.
After this deal, there will be six banks in the market, according to FDIC data. Popular Inc (BPOP.O), parent of Banco Popular, and First Bancorp (FBP.N) still lead the island in terms of assets.
"By acquiring BBVA Puerto Rico, we will achieve our long-time goal of transforming Oriental into a bank with a bigger branch network, a larger and more diversified loan portfolio," Oriental CEO Jose Rafael Fernandez said in a statement.
Michael Sarcone, an analyst at investment bank Sandler O'Neill Partners, said the deal would be transformative for the bank as it improves their funding base and gives them a more 'bank-like' balance sheet.
Oriental has been heavily dependent on investment securities as part of its earning assets. At the end of March, it had $3.6 billion in investments and just $1.6 billion in net loans.
The bank will sell about $1.3 billion of its investment securities portfolio and about $450 million of BBVA's securities portfolio to reduce capital requirements.
The securities portfolio will count for less than 40 percent of the bank's earning assets, once the bank finishes deleveraging the portfolio.
PAYING FOR THE DEAL
Oriental, which bought Eurobank's assets in a regulator-backed transaction in 2010, is paying more for BBVA's Puerto Rican operations than its own market capitalization, currently at $425 million.
Oriental Financial said it had raised $84 million in capital to pay for the deal and would fund the rest from $350 million in cash on its balance sheet.
It will also raise between $65 million and $70 million through the sale of preferred and common shares, the bank said.
Oriental said the deal would add to earnings from next year.
It said it expects to incur a one-time restructuring charge of about $40 million related to the transaction in 2013.
Jefferies & Co acted as financial advisor on the deal, Oriental said.
Oriental shares rose as much as 8 percent in early trade. They were up 5 percent at $11.04 in morning trade on the New York Stock Exchange.
(Reporting by Jochelle Mendonca in Bangalore; Editing by Anil D'Silva, Joyjeet Das, Saumyadeb Chakrabarty)