OREANDA-NEWS. Fitch Ratings believes that Banco Popular de Puerto Rico's (BPOP) current ratings (Long-Term IDR and VR of 'BB-') will not be impacted in the near term following the Governor of the Commonwealth of Puerto Rico's recent statements regarding the possibility of restructuring numerous debt instruments, including government general obligation (GO) bonds. BPOP's current ratings incorporate the potential for write-downs on its securities holdings and credit exposures to the Commonwealth and its instrumentalities.

In Fitch's report published on May 20, 2014 'Puerto Rico Banks: Difficult Operating Environment Constrains Ratings', Fitch stressed the institution's capital base and concluded that it should provide an adequate cushion to absorb potential losses.
Fitch recognizes that BPOP's exposure to the local government is large totaling about $1.20 billion as of March 31, 2015, which includes direct and indirect exposure through investment securities, credit facilities to some of the public corporations, and loans to entities related to the government as well as municipalities.

At this time, in Fitch's opinion, the company's capital position is sufficient to absorb potential losses from these exposures. Further, BPOP's tangible common equity (TCE) ratios remain solid and also incorporate recent market changes in value of its bond holdings. At March 31, 2015, BPOP's Common Equity Tier 1 Ratio and Tangible Common Equity to Tangible Assets totaled 15.74% and 10.72%, respectively. In a scenario assuming 40% writedown to direct and indirect exposures, Fitch estimates a pro-forma TCE of 9.37%. In Fitch's opinion, the stressed capital position would remain adequate and supports current rating level.

While direct exposures to the Commonwealth and its instrumentalities appears manageable in Fitch's estimation, Fitch remains concerned with the Commonwealth's fiscal situation and potential spill-over effects to the local economy. Fitch has noted in previous rating actions that BPOP's ratings are highly sensitive to deterioration in economic trends. Although the company's NPAs have remained stubbornly high, NCOs have not increased to the same magnitude. Future rating actions will be predicated on BPOP's ability to manage credit quality in a challenging environment. Credit trends such as past dues and delinquency rates, excluding covered and purchased impaired loans, that deviate materially from recent performance would likely pressure BPOP's current ratings.

Presently, BPOP's VR is higher than Puerto Rico's 'CC' general obligation rating. This reflects Fitch view that the Commonwealth of Puerto Rico operates broadly within the legal system of the United States and transfer and convertibility risk is not foreseeable, as Puerto Rican banks are regulated by the U.S. Federal Reserve and Federal Deposit Insurance Corporation.