A senior unsecured debt is a loan or bond that a company must repay before other unsecured obligations but is not backed by specific assets as collateral. Think of it as being earlier in line for repayment, like a preferred ticket in a queue, but without a guarantee you’ll get property if the company fails; that priority reduces risk compared with junior debt and affects expected interest rates and recovery prospects for investors.
subordinated debtfinancial
Subordinated debt is a type of loan that is paid back after other debts have been settled if a company encounters financial trouble. It is considered riskier for lenders because they have lower priority in getting repaid, similar to being last in line during a payout. For investors, this means higher potential returns in exchange for taking on more risk.
net interest marginfinancial
Net interest margin measures how much a bank earns from lending and investing compared with what it pays for funding, expressed as a percentage of its interest-earning assets. Think of it like a grocery store’s markup: it shows the gap between buying cost and selling price per dollar of goods — here, the cost is interest paid and the sale is interest received. Investors watch it because a higher margin usually means a bank is more profitable and better at managing interest rate and credit conditions.
CET1 ratiofinancial
CET1 ratio measures a bank's core equity capital (the most loss-absorbing funds like common stock and retained earnings) relative to the size of its risk-adjusted assets. It shows how big the bank's financial cushion is compared with what it has on its books; a higher ratio means greater ability to absorb losses, lower regulatory risk, and generally more investor confidence in the bank's stability.
nonperforming assetsfinancial
Nonperforming assets are loans or investments that are not generating expected payments or returns because the borrower has fallen behind on payments or the investment has lost value. They matter to investors because a high level of nonperforming assets can indicate financial trouble for a bank or institution, potentially affecting its stability and profitability.
net charge-offsfinancial
Net charge-offs are the amount of loans or credit a lender removes from its books as uncollectible after subtracting any money later recovered from previously written-off accounts. Think of it like a store writing off unpaid tabs but getting back a few dollars later — the net figure shows the real loss. Investors watch this to judge a lender’s loan quality, future profits and how much capital may be needed to cover bad debts.
NEW YORK--(BUSINESS WIRE)--
KBRA assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to San Juan, Puerto Rico-based First BanCorp. (NASDAQ: FBP) (“the company”). KBRA also assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to its primary bank subsidiary, FirstBank Puerto Rico. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
FBP’s ratings principally reflect its solid franchise within Puerto Rico which supports a granular, relatively low-cost deposit base and a better-than-peer average net interest margin (NIM). Despite the rising interest rate environment during the 2022 to 2023 Fed tightening cycle, FBP’s NIM was comparatively resilient, as it was able to lag deposit pricing substantially. And while the company remains spread dependent with fee revenue making up 12%-15% of total revenues historically, the company's deposit pricing power and efficient operations should remain supportive of its overall earnings power even as policy rates fall.
FBP’s capitalization profile has proven to be durable in the midst of economic volatility on and off the island of Puerto Rico. The CET1 ratio has resided in the ~16%-17% range since the company's acquisition of Santander's Puerto Rican operations in 2020, even with ongoing capital deployment strategies, including organic growth and business investments (both revenue and non-revenue producing) as well as paying out around 100% of earnings in any given quarter (~35%-40% dividend payout ratio with the balance in buybacks or the redemption of trust preferred securities). Capital could also be deployed through inorganic measures, particularly an acquisition in Florida. That said, FBP's ratings reflect our view that the company has meaningful loss absorbing capacity, with a CET1 ratio likely to be managed above mainland peers over time coupled with a higher than average loan loss reserve.
Ratings are further supported by our view of the company’s risk management which has significantly evolved and improved. Credit risk limits are reasonable and informed by the Board’s risk appetite and with the lessons learned during the GFC. This, along with an improving Puerto Rican economy, aided by low unemployment relative to historical measures and a steady flow of federal aid to be used for infrastructure development projects, has resulted in the company’s ongoing improvement in asset quality. Nonperforming assets (NPAs) have come down meaningfully over the last number of years and compare favorably to the other two main banks on the island. We note a modest “normalization” in net charge-offs (NCOs) to the 50-75 bps range coming off of historically low credit losses during the pandemic which were aided by stimulus payments. Still, we expect any uptick in credit losses to be manageable in the context of strong earnings power and high capital levels.
That said, Puerto Rico has historically reflected a more challenged economic environment compared to the mainland United States. While federal aid and improving infrastructure serve as potential mitigants to the impact of natural disasters (i.e., hurricanes), the economic risks associated with such events modestly constrain the company’s ratings in the near term. This headwind could lessen over time as the company diversifies onto mainland U.S. through organic and/or inorganic measures.
Rating Sensitivities
Positive rating momentum would most likely be tied to the continued maintenance of above-peer regulatory capital ratios and earnings performance, potentially in conjunction with further geographic diversification. Although not expected, the ratings would most likely come under pressure if loan quality were to deteriorate beyond expectations that would lead to higher-than-expected loan losses (or provision expense) and lower earnings.
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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.
