KBRA Affirms Ratings for Oriental Bank

KBRA affirms the deposit and senior unsecured debt ratings of BBB+ and 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), a financial holding company domiciled in Puerto Rico (“PR” or “the Commonwealth”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The key driver of the ratings for Oriental Bank 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 and remains low – especially versus historical standards. The expansion of the Child Tax Credit to PR families in 2021 has strengthened household finances, bolstered consumer spending, and introduced more citizenry into the banking system, all further buoying the local economy.

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 remains a pivotal rating factor. Bank regulatory capital levels further underpin the current ratings and are expected to remain in the current ranges, although most likely at their cyclical peak levels. KBRA recognizes that the combination of both strong capital levels and recent operating performance has created a more resilient banking franchise, particularly in the context of an uncertain U.S. interest rate and economic outlook, and the bank’s mostly steady growth in U.S. based commercial lending the past few years, which has not been tested by traditional 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. Profitability continues to be robust, hinged to management’s disciplined risk-adjusted pricing of consumer loan portfolios, moderate cost of funds, aided by its sturdy base of noninterest-bearing deposits, and limited reliance on higher cost and potentially more volatile sources of funding.

Rating Sensitivities

The long-term ratings for the bank are well positioned. Ratings momentum would most likely be tied to the continued maintenance of above-peer regulatory capital ratios and earnings performance, in conjunction with PR’s ongoing economic recovery and a period of steady fiscal performance. Although unlikely, the ratings would most likely come under pressure if loan quality were to deteriorate beyond expectations such that KBRA needed to re-evaluate the efficacy of management’s loan underwriting and administration standards, or periodic loan losses (or provision expense) were to move structurally higher such that the bank’s historically robust bottom line earnings profile were to compress to below peer-like levels.

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Methodologies