November 21, 2017 / 9:26 PM / in a year

Fitch Maintains Popular Inc. on Rating Watch Negative

(The following statement was released by the rating agency) NEW YORK, November 21 (Fitch) Fitch Ratings has maintained Popular Inc.'s (BPOP) 'BB-' Long-Term Issuer Default Rating (IDR), 'B' Short-Term IDR, and 'bb-' Viability Rating (VR) on Rating Watch Negative due to the uncertainty of the impact caused by Hurricane Maria on Puerto Rico. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT The ratings are maintained on Negative Watch because Fitch believes that the challenges posed by Hurricane Maria, including massive destruction to vital infrastructure, homes, businesses, and other property, could make it difficult for BPOP to maintain stable asset quality, positive core earnings, and improving deposit funding metrics, in line with our expectations for the current rating level. Further, uncertainties remain on the timing of recovery efforts. Historically, FBP's ratings have incorporated the significant challenges posed by the weak operating environment in Puerto Rico. Prospectively, Fitch expects the destruction caused by Hurricane Maria could further weaken the operating environment, which is a higher influence on the rating. Fitch also expects the hurricane's impact will complicate the Commonwealth of Puerto Rico's efforts to reverse outward migration, generate sustainable economic growth, and address its fiscal and debt imbalances. In Fitch's view, financial measures will likely be pressured given the negative impact on the economy from the hurricanes. Nonetheless, BPOP's solid core earnings strength should provide an offset and help absorb future provisioning needs. For 3Q17, BPOP reported net income of $20.7m despite a sizeable $108 million provision attributed largely to the estimated impact of the Hurricane Irma and Maria and a $35 million reserve for the U.S. taxi medallion portfolio. In Fitch's view, the estimated impact could change as the information flow from clients and market participants improves. Other negative impacts to financial performance included declines in net interest income as loans migrating into NPAs, reduced revenue from mortgage banking and fees. Credit trends were negative as the inflows of nonperforming loans (excluding covered loans) increased by $38.8m to $585.9m for 3Q17 with asset quality deteriorating driven mainly in residential and consumer loans. Early stage delinquencies are also up, but this is mainly due to disruption of its collection efforts. Reserves to NPLs stood at 104.8%. In Fitch's view, capital still remains solid and should provide a buffer to potential losses. Further, given BPOP's risk profile and uncertainties that remain regarding the Puerto Rican economy and hurricane impact, the company higher capital ratios are viewed as prudent and supportive of ratings. For 3Q17, BPOP's TCE and CET1 stood at 10.9% and totaled 16.6%, respectively. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating of '5' and Support Ratings Floor of 'NF' reflect Fitch's view that BPOP is not considered systemically important, and therefore the probability of support is unlikely. The IDRs and VRs do not incorporate any support. LONG- AND SHORT-TERM DEPOSIT RATINGS BPOP's uninsured deposit ratings at its subsidiary banks are rated one notch higher than BPOP's IDR and senior unsecured debt rating because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Hybrid capital instruments issued by BPOP are notched down from the company's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which may vary considerably. BPOP's preferred stock and trust preferred stock rating at 'B-' is three notches below its Viability Rating (VR) of 'bb-', in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles for issuers that have VRs rated below 'bb+'. HOLDING COMPANY BPOP has a bank holding company (BHC) structure with the bank as the main subsidiary. IDRs and VRs are equalized with those of the operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Double leverage is below 120% for the BPOP parent company. SUBSIDIARY AND AFFILIATED COMPANY All of the BPOP entities factor in a high probability of support from the parent. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch expects to resolve the Rating Watch Negative within the next six months. Fitch also expect that the bank's quarterly financial results as well as disclosures from the U.S. Federal Government and the Commonwealth of Puerto Rico will bring greater visibility into the potential short- and long-term effects that this unprecedented event may have on financial performance and ultimately the company's ratings. Further, if recovery efforts become more challenged and lag longer than six months pressuring the economy even further, the Rating Watch Negative could be removed and a Negative Outlook assigned. Additionally, if Fitch believes the effects of the hurricane will have long-term effects on the economy, it may negatively impact the franchise. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by BPOP subsidiaries are primarily sensitive to any change in the company's IDRs. This means that should the Long-Term IDR be downgraded, deposit ratings could be similarly affected SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of hybrid securities are sensitive to any change in BPOP's VR or to changes in BPOP's propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation. HOLDING COMPANY If BPOP became undercapitalized or increased double leverage significantly, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUBSIDIARY AND AFFILIATED COMPANIES As the IDRs and VRs of the subsidiaries are equalized with those of BPOP to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in BPOP's IDRs Fitch maintains the following ratings on Rating Watch Negative: Popular, Inc. --Long-term IDR 'BB-'; --Senior unsecured 'BB-'; --Short-term IDR 'B'; --Short-term Debt 'B'. --Viability rating 'bb-'; --Preferred stock 'B-'. Popular North America, Inc. --Long-term IDR 'BB-'; --Senior unsecured 'BB-'; --Short-term IDR 'B'; --Short-term Debt at B --Viability rating 'bb-'. Banco Popular North America --Long-term IDR 'BB-'; --Long-term deposits 'BB'; --Short-term IDR 'B'; --Short-term deposits 'B'. --Viability rating 'bb-'. Banco Popular de Puerto Rico --Long-term IDR 'BB-'; --Short-term IDR 'B'; --Short-term deposits 'B'; --Viability rating 'bb-'. BanPonce Trust I --Trust preferred 'B-'. Popular Capital Trust I --Trust preferred 'B-'. Popular Capital Trust II --Trust preferred 'B-'. Popular North America Capital Trust I --Trust preferred 'B-'. Popular Capital Trust III --Trust preferred 'B-' Fitch has affirmed the following ratings: Popular, Inc. --Support '5' --Support floor 'NF'. Popular North America, Inc. --Support '5' --Support floor 'NF'. Banco Popular North America --Support '5' --Support floor 'NF'. Banco Popular de Puerto Rico --Support '5' --Support floor 'NF'. Contact: Primary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Christopher Wolfe Senior Director +1-212-908-0771 Committee Chairperson Justin Fuller Senior Director +1-312-368-2057 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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