DealTalk: In Puerto Rico, bank deal may mean survival
Fri, Aug 19 2011
By Jochelle Mendonca
BANGALORE (Reuters) - First BanCorp (FBP.N: Quote, Profile, Research, Stock Buzz) and Doral Financial (DRL.N: Quote, Profile, Research, Stock Buzz), the No.2 and No.3 banking groups by assets in Puerto Rico, may be pushed into combining their operations to survive profitably in the Caribbean U.S. island territory's overbanked market.
Almost a year after First BanCorp, the parent of Firstbank, rejected a $96 million offer from Doral, it has cut deals with three big private investment firms that could put it in a strong position to turn the tables, and go after Doral.
Thomas H Lee Partners, Oaktree Capital Management and Wellington Management will pump at least $500 million in capital into First BanCorp, which will also convert $424 million it received from the U.S. Treasury into common stock.
Once those deals are completed, First BanCorp will be significantly larger than Doral, which is currently valued at around $177 million.
"My view is that those investors are not going to make a decent return by just investing in Firstbank alone without combining with, most likely, Doral," said a Doral stockholder, who did not want to be named because of the sensitivity of the matter.
The investor, who has a significant Doral stake and previously owned First BanCorp shares, said First BanCorp "is going to have to talk" to Doral.
About 6.3 percent of Doral is currently held by funds which bet on merger activity as part of their investing thesis, according to Thomson Reuters data.
Both companies have problems tied to the weak Puerto Rican market -- both are under regulatory orders to maintain capital levels and, separately, neither has the muscle to really compete with market leader Popular Inc (BPOP.O: Quote, Profile, Research, Stock Buzz).
Joining forces would boost their earnings power and competitivity -- even as interest rates look set to remain low.
"A combination of First BanCorp and Doral will take out a large chunk of expenses, and that would help a combined institution be profitable almost right off the bat," B Riley and Co analyst Joe Gladue told Reuters.
Doral's April-June net income was less than a tenth of its quarterly non-interest expenses of $59.3 million. Firstbank's non-interest costs were $86.4 million, while it lost $22.2 million in the quarter.
Cantor Fitzgerald analyst Michael Diana expects a combination of the two banks to provide scale and help shore up pricing in Puerto Rico.
Combined, Firstbank and Doral would have $22.6 billion in total assets and more than $16 billion in deposits, according to data from the Federal Deposit Insurance Corp (FDIC). Popular has $29 billion in assets and $20.75 billion in deposits.
Doral and First BanCorp declined to comment for this article.
LOGICAL COMBINATION
Despite a cull last year, Puerto Rico remains over-banked, and analysts say there must be consolidation for surviving banks to grow.
If Firstbank and Doral want to look at other banks in the region, they will find the going much harder.
Others operating locally include units of Bank of Nova Scotia (BNS.TO: Quote, Profile, Research, Stock Buzz), Banco Santander (SAN.MC: Quote, Profile, Research, Stock Buzz) and Banco Bilbao Vizcaya Argentaria (BBVA.MC: Quote, Profile, Research, Stock Buzz) -- all of which have deep-pocketed parents.
"They could talk to them, but they will have to offer a higher premium. Those banks do not have to sell and may not want to," said B Riley's Gladue.
Popular, which took over a local rival last year with the regulator's blessing, could see the FDIC play spoiler this time as it already controls over 40 percent of the island's deposits.
"A better outcome for Popular would be the acquisition of First BanCorp by Bank of Nova Scotia, which would create a duopoly, with rational pricing," said Cantor's Diana.
However, the Canadian bank already has a Puerto Rican unit and has cut its stake in Firstbank to 3 percent from the 10 percent it bought in 2007 -- making an offer unlikely.
Scotiabank's U.S. unit is also smaller than Doral in assets and deposits and is a key part of its push into the Latin American market. In addition, Firstbank's private equity owners are unlikely to want to have to cede some control.
"There's a built-in logic if First BanCorp and Doral decide to merge," said Gladue.
(Reporting by Jochelle Mendonca in Bangalore, Editing by Ian Geoghegan)
