Fitch: Puerto Rico's GDB Rule Fuels Competition for Deposits

(The following statement was released by the rating agency) NEW YORK, May 01 (Fitch) Recent Puerto Rico legislation will force some entities to withdraw deposits from private banks in favor of the newly expanded government banking services of the Government Development Bank (GDB) for Puerto Rico, Fitch Ratings says. The rule requires the commonwealth's public corporations, agencies and municipalities (the instrumentalities) to place their deposits with the GDB and scales back the already limited availability of institutional deposits for local private banks' funding. The expansion of banking services highlights the strategic importance that the commonwealth places on attracting accounts from the local banking sector to bolster the GDB's liquidity position. Many of the GDB's expanded services are being offered at no charge in an effort to achieve some savings for the instrumentalities. The GDB's principal role is to make loans and advances to public corporations and municipalities and to promote the economic development of commonwealth. The GDB functions as a bank, fiscal agent, and financial advisor for government instrumentalities. Fitch rates the Commonwealth of Puerto Rico 'B', Rating Watch Negative. In Fitch's view, the GDB's new product offerings, although rare for a policy and development bank, will help it compete with local commercial banks, given the operational uses of these government deposits. The GDB is not a member of the FDIC, thus instrumentalities depositing monies with the GDB are foregoing FDIC oversight and coverage powers. We expect the impact to the liquidity positions of banks such as Popular Inc. and First BanCorp to be minimal as the GDB draws in more of the instrumentalities' deposits. As of year-end 2014, Popular had a total of $1.4 billion in municipal deposits and First BanCorp had $227 million, comprising about 5.6% and 2.4% of these banks' total local deposit base, respectively. A counterweight to the loss of these deposits is that because local regulations required instrumentalities' deposits to be collateralized, their withdrawal would free the private banks' collateral, which could be used to attract funding from other sources. Puerto Rican banks' funding profiles have historically been weaker than their US bank peers given stronger reliance on noncore funding sources. This has long been a rating constraint for Puerto Rico's banks. In Fitch's view, the size of the local economy is limited in its capacity to support the funding needs of all the local banks. Thus the market is highly competitive among the six private sector banks, four foreign banks, 127 cooperative banks, and now heightened competition from the GDB. Contacts: Doriana Gamboa Senior Director Financial Institutions +1 212 908-1865 33 Whitehall Street New York, NY Matthew Noll, CFA Senior Director Financial Institutions Fitch Wire +1 212 908-0652 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch: Puerto Rico's GDB Rule Fuels Competition for Deposits