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Puerto Rico's Largest Bank Is Solid as a Rock, Good News for P.R.

December 24, 2017 in Economics

By Steve H. Hanke

Steve H. Hanke

The New York Times of
December 16th reports that more post-Hurricane Maria bad news is
just around the corner for Puerto Rico. Matthew Goldstein of
The Times clearly reports on the next storm that will hit
Puerto Rico:

A housing meltdown that could far surpass the worst of
the foreclosure crisis that devastated Phoenix, Las Vegas, Southern
California and South Florida in the past decade. If the current
numbers hold, Puerto Rico is headed for a foreclosure epidemic that
could rival what happened in Detroit, where abandoned homes became
almost as plentiful as occupied ones.

… Puerto Rico’s 35 percent foreclosure and delinquency rate is
more than double the 14.4 percent national rate during the depths
of the housing implosion in January 2010. And there is no prospect
of the problem’s solving itself or quickly.

This bad news means that non-performing loans in Puerto Rico
will probably explode. Many banks and financial institutions in
Puerto Rico will either become zombies or simply disappear into
insolvency.

So much for Puerto Rican bad news. Christmas cheer comes when we
learn that Puerto Rico’s largest bank — Banco Popular de
Puerto Rico, a subsidiary of Popular, Inc. — prepared for the
storm.

To obtain a clear picture of what is in the cards, I performed
an analysis of the Banco Popular de Puerto Rico’s parent, Popular,
Inc. This was done with the latest data from Popular, Inc.’s
filings with the Securities and Exchange Commission.

There is nothing better
than a strong balance sheet to bring Christmas cheer, even in
hurricane-ravaged Puerto Rico.

To conduct my diagnosis of Popular, Inc., I used a little known,
but very useful formula to determine the Bank’s health. It is
called the Texas Ratio. It was used during the U.S. Savings and
Loan Crisis, which was centered in Texas. The Texas Ratio is the
book value of all non-performing assets divided by equity capital
plus loan-loss reserves. Only tangible equity capital is included
in the denominator. Intangible capital-like goodwill-is
excluded.

The ratio measures the likelihood of failure by comparing a
bank’s bad assets to its available provisions for bad loans plus
its capital. When the ratio exceeds 100%, a bank does not have the
capacity to absorb its losses from troubled assets. In consequence,
it will either require a fresh capital injection, or it will
fail.

The table below presents the relevant data and Popular, Inc.’s
Texas Ratios for 2016 and the third quarter of 2017. Popular,
Inc.’s Texas Ratios of 16.16% and 15.98% for 2016 and 2017 Q3,
respectively, are very low. These ratios indicate that the bank is
solid as …read more

Source: OP-EDS

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