Puerto Rico's Popular Suffering Island Fever

As a pall redescends on much of the banking industry, Puerto Rico’s Popular sinks further into distress.

Nonperforming loans at the $24 billion-asset bank shot up to $2.2 billion in the third quarter, up an alarming 91 percent compared with the year-ago figure. Chargeoffs, or permanently soured loans, soared 58 percent. Through Sept. 30, the company had a net loss of $360.7 million. Although that loss was narrower than a year ago, Popular warned that the downturn would continue:

Given the existing adverse economic conditions, it is likely that the corporation will continue to experience heightened credit losses, higher levels of non-performing assets and significant levels of provision for loan losses.

The decline of Popular, Puerto Rico’s biggest banking company, has accelerated in recent years, but its troubles pre-date the financial crisis. The commonwealth’s economy has been in the doldrums since 2005. The following year, fiscal stress forced the government to shut down for two weeks.

Mortgage delinquencies on the island have been rising for several years, outpacing rates on the mainland. That also has hurt other large banks operating in Puerto Rico, such as Spain’s Banco Bilbao Vizcaya Argentaria and Banco Santander. More recently, the commercial real estate market has started to fray.

The latter, in particular, is hurting Popular, with most of its nonpeforming loans for the quarter coming in the commercial sector. CRE non-performing loans amounted to 6.4 percent as of Sept. 30, which is up over the year-ago quarter. Fitch downgraded the company’s credit in June, noting concerns about its asset quality.

Popular is following the sick bank playbook by bolstering its capital reserves. In August, the company raised roughly $919 million by conducing an exchange offer with the U.S. Treasury Department. Although its capital ratios are sufficient, they’re slipping as the company’s loans deteriorate. Popular’s not yet in crisis mode, but it doesn’t look good.