KBRA Upgrades Ratings for Oriental Bank

KBRA upgrades the deposit and senior unsecured debt ratings to BBB+ from BBB and affirms the short-term deposit and debt ratings of K2 for Oriental Bank ("the bank"). Oriental Bank is a wholly-owned subsidiary of Oriental Financial Group (NYSE: “OFG” or “the company”), a financial holding company domiciled in Puerto Rico (“PR” or “the Commonwealth”). The Outlook for all long-term ratings is revised to Stable from Positive in conjunction with the rating upgrade.

The key driver to the ratings remains tied to the ongoing economic recovery in PR, driven by the continued inflow of federal funds (primarily related to natural disasters), the preponderance of which have been invested in (and remain targeted toward) long-term growth and infrastructure projects. In 2023, unemployment in PR touched a cyclical, multi-year low. Also, the expansion of the Child Tax Credit to Puerto Rican families (beginning in 2021) has strengthened household finances, bolstered consumer spending, and introduced more citizenry into the banking system, all further buoying the local economy. (Because of the relatively low level of household income in PR, various forms of financial aid (e.g., expanded child tax credit) has a more dramatic impact as compared to in the U.S.).

Management’s stewardship of the bank in a period of substantial unforeseen and severe natural disasters, as well as the COVID era disruptions and economic dislocation caused by the Commonwealth’s debt default in 2016, also support the ratings.

KBRA expects that consolidated regulatory capital will continue to be managed prudently – currently at levels markedly more than peer levels – in the context of an uncertain interest rate environment and considering continued, steady growth in the U.S. based commercial loan portfolio, which has not been tested by a traditional, realized cyclical economic downturn.

Loan quality performance measures remain healthy, in a historical context, with the NPA and NCO ratios skewed to the lower end of the ranges reported in the past few years, and well below the periods surrounding and following the Commonwealth’s fiscal crisis.

Bottom line earnings performance continues to be robust, hinged to management’s disciplined risk-adjusted pricing of consumer loan portfolios, and moderate cost of funds, aided by its sturdy base on noninterest-bearing deposits, and limited reliance on higher cost and potentially more volatile sources of funding.

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