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 continues to be to the ongoing economic recovery in PR, as well as management’s stewardship of the bank during periods of unforeseen and severe natural disasters, the COVID era disruptions, and economic dislocation caused by the Commonwealth’s debt default in 2016 and the ensuing long-term consequences.

The positive economic performance in PR has been driven by the inflow of federal funds, and more recently, private capital, the bulk of which has been invested in and remains targeted toward growth and infrastructure projects, which has helped to stabilize the unemployment rate at low levels. The expansion of the Child Tax Credit to PR families in 2021 has strengthened household finances and introduced more citizenry into the banking system.

Profitability remains robust, driven by the bank’s relatively low cost deposit base (including throughout changed Fed monetary regimes), solid loan yields, notably within the auto book (38% of LHI), and sturdy (and diversified) sources of noninterest income. Risk-adjusted profitability continues to be strong.

Capital has been managed consistently in recent years, prudently in KBRA’s view, given the still weakened fiscal, albeit steadily improving, position of PR and the propensity for unpredictable natural disasters.

Loan quality, measured by NPA and NCO ratios, reflects the somewhat riskier customer base in PR but also the higher mix of consumer loans, which generally result in higher loan charge-off rates. Risk-adjusted margins on consumer-oriented loans remain favorable. KBRA notes the emergence of mild credit weakness within the U.S. commercial loan book, which appears isolated and has been managed proactively in terms of resolution.

Rating Sensitivities

The long-term ratings continue to be well anchored, reflective of solid multi-year operating performance and the sustained economic recovery in PR. Rating momentum remains tied to the continued maintenance of solid regulatory capital ratios and earnings performance, as well as the prospect for long-term stability in the Commonwealth’s fiscal position. Conversely, although unlikely, the ratings would most likely come under pressure if loan quality were to deteriorate beyond expectations such that KBRA needed to reevaluate the efficacy of management’s loan underwriting and administration standards (within PR and the U.S. loan books), 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.

To access ratings and relevant documents, click here.

Methodologies