S&P puts BBVA PR on credit watch

S&P rates BBVA PR at ‘BB+/B’ with developing implications.

The credit watch placement follows Oriental's announcement Thursday that it has entered into a definitive agreement to acquire BBVA PR for

approximately $500 million in cash, which is a slight premium to its tangible book value. To facilitate the merger, Oriental expects to raise approximately $150 million of Tier 1 capital (common equity and noncumulative convertible preferred shares) to bolster capital ratios.

The transaction, which the Oriental board of directors and BBVA S.A.(the parent of BBVA PR) have approved, is expected to close in fourth-quarter 2012. The completion of the transaction is subject to customary regulatory approvals and approval by Oriental's common shareholders.

“We expect that Oriental will be able to complete the transaction partly because of its progress thus far in raising Tier 1 capital,” S&P analyst Caryn Trokie said.

“We will evaluate the business and financial profiles of the combined entity to update the rating on the company once the acquisition is complete,” the s&P analyst said. “In addition, we will monitor Oriental's progress in raising the additional capital noted above, as well as Oriental’s and BBVA PR's interim financial results.”

If the acquisition closes as expected, S&P said it could affirm or raise the ratings on BBVA PR by one notch to the same level as the ratings on Oriental Bank & Trust. However, if the deal is not completed, it could lower the ratings on BBVA PR by one notch.

“This is because we currently treat BBVA PR as a moderately strategic important subsidiary, and under our group methodology criteria, the rating on BBVA PR has one notch of support or uplift given its strategic importance to its parent company,” Trokie said. “However, if the transaction does not move forward, we would no longer view this subsidiary as having any strategic importance to the parent given the effort to sell it.”

The deal adds another chapter in a dramatic consolidation of the island’s banking industry over the past two years.

The sale comes on the heels of recent downgrades of Madrid-based BBVA and other Spanish banks by the major ratings agencies ― S&P, Moody’s and Fitch ― amid a deep financial crisis in that European country.

Acquiring BBVA Puerto Rico meets Oriental’s long time goal of transforming into a bank with a bigger branch network, a larger and more diversified loan portfolio, greater core deposit funding, expanded customer base, and a smaller investment securities portfolio.

“For Puerto Rico, we believe this transaction further increases the strength of the local banking industry. It is well timed, as the Puerto Rico economy has stabilized and the fiscal situation has continued to improve,” Oriental President & CEO José Rafael Fernández said.

Upon consummation of the acquisition, Oriental will be the second largest bank in Puerto Rico in terms of branches and core deposit funding, and the third largest in terms of assets.

The deal further consolidates Puerto Rico’s banking industry, a trend most analysts see as positive.

Westernbank, R-G Premier Bank and Eurobank were all seized by the Federal Deposit Insurance Corp on April 30, 2010 and auctioned off to local competitors. Banco Popular de Puerto Rico picked up Westernbank; Scotiabank de Puerto Rico bought R-G Premier Bank and Oriental acquired Eurobank.

With Oriental’s purchase of BBVA’s Puerto Rico unit, the island is left with Banco Popular, FirstBank, Oriental, Doral, Scotiabank, Banco Santander and relative newcomer Banesco.

Banco Popular, Doral, FirstBank and Oriental are all based in San Juan. Scotiabank is headquartered in Canada. Santander will stand as the lone Spain-based bank operating in Puerto Rico. Venezuela-based Banesco established a branch and offices in Puerto Rico through its Florida subsidiary last year.