Municipal bonds are sort of like the "sovereign debt" of Puerto Rico. You could think of PR as an emerging market with many munis trading at 12% - 14% yield to maturities. Would an emerging market bank be likely to rally when the sovereign debt of the country where the bank was located was tanking?
PR needs to sell more debt, but can't sell debt with munis trading at distressed levels. They are trying to sell munis backed by sales tax (which are in slightly better shape). The forced belt tightening at local govt is good over the longer term, but short term less municipal jobs means higher unemployment. Unemployment changes are highly correlated to bank credit risk. Nothing against BPOP, but they are in the wrong place at the wrong time. The bank is well capitalized and will do fine over the long term, but next few months will be nasty. Many people are unaware of what is happening and more will be disclosed on Q3 conference call.
Unemployment had been trending down in PR all year, but rose in July and August. When Sept figures come out on 10/20, expect another really bad number. Municipal bonds are getting killed (they took another leg down Wednesday). The Wall St, Journal reported that many financial adviser firms are blacklisting all PR issues. In some case customers need to sign a special statement acknowledging risk if they buy a PR muni bond.
This is not the question. The question is why was there any kind of a run up. Everyone wants to listen to all of this corp bs. Here is the truth 1) Poor Management 2) Not generating new sources of income 3) Selling off every asset of value 4) they have the money to pay tarp, the fed doesn't think they are sound enough to take it back 5) The US operation is dead in the water 6) the puerto rico economy is far from recovery. The stock is owned by people and funds that made a very bad bet and have nothing better to do than wish for prosperity. On top of it all this Bank cannot even be sold, who would want this mess. Where is the value proposition? Poppy is rolling in his grave. There is one positive, they are too big too fail. The fed will do what they have too do keep Banco afloat. The consequences of a closure on the Island would have been a disaster.
This bank can turn around but it needs to transform itself. It needs to pull out of the US, shrink and pull back to Puerto Rico. It needs to go back to its roots. Banco was a bank of the people, once acknowledged for rebuilding the island and lifting the people after a hurricane. Well the island has once again been destroyed only this time it is financial destruction. This is your mission. You cannot compete with the large US players and your not a community bank despite your name. Focus where you can make a difference. Hope this helps.
The economy of PR is in deep trouble. Their government bonds are one category away from being ranked "Junk". The bank is highly dependent on the local economy and until the local economy improves, they will continue to struggle. In addition, they have not been able to repay the TARP loan taken in 2009. Not very good news to investors.