Puerto Rico’s financial system has been shrinking for years along with the rest of its moribund economy, and now large international banks are starting to pull out, leaving the local banks to try to pick up the pieces:
Not only did the number of consumer banks drop by half over the past decade, but the main international players — Bank of Nova Scotia and Banco Santander SA — have been quietly shrinking, leaving the field to local institutions.
As the commonwealth tries to emerge from recession and rebuild after last year’s Hurricane Maria, a handful of banks may wind up in charge of deposits and lending for its 3 million people, curbing competition that helps control interest rates. Popular Inc., First BanCorp/Puerto Rico and OFG Bancorp are cash rich and have many branches, but limited ability to facilitate trade beyond the Caribbean and Florida.
“What would really be negative is if we lose access to the network of international banks — especially painful for business people,” said Antonio Fernos, an economist with the Interamerican University of Puerto Rico.
Puerto Rico once was an attractive place for banks to invest, with pharmaceutical manufacturing driving growth. Banks piled in, ATMs sprouted on street corners and once-scarce financing expanded for everything from homes and cars to consumer electronics. But many drug companies left when their tax breaks were phased out in the 10 years through 2006, and a decade-long recession left the economy 14 percent smaller. Residents, who are U.S. citizens, began a a mass emigration to the mainland that the hurricane accelerated.
But even as banks look for ways to deploy capital, it remains to be seen how much consolidation regulators would allow. To assess deals, the U.S. Justice Department uses a ranking of market concentration, known as the Herfindahl-Hirschman Index. Puerto Rico’s deposit market has a score of 3,558 out of 10,000.