Popular rebounds from Maria, but Puerto Rico's challenges endure

Last September, after Hurricane Maria hit Puerto Rico with the kind of force seen once in a lifetime, Ignacio Alvarez got into his car and drove to Popular headquarters in San Juan.

Alvarez had lived through several hurricanes before. So when he saw downed trees and damaged terraces around his neighborhood, on the outskirts of San Juan, he wasn’t too concerned.

“Sometimes it looks worse than it really is,” Alvarez said.

But as Alvarez drove from the outskirts of San Juan into the city, the scale of the damage quickly became clear. He saw telephone poles that had been knocked into the street. Power was out across the island, and telecommunications lines — which the bank relied on to transmit data among its branches — were unavailable.

Alvarez and his leadership team quickly scrambled to assess the damage, setting up satellite phones and checking in with employees across the island. As days wore on without power, Alvarez even took a turn waiting in line for four hours to get fuel for the company’s generators.

“It was like the walking dead, everyone in line,” Alvarez said, recalling the first few days after the storm. “I had lived through Hurricane Georges [in 1998] and Hugo [in 1989], but this was a different scale.”

All told, Maria devastated Puerto Rico. Nearly 3,000 residents died as a result of the storm, according to a study from George Washington University, which has since been criticized by President Trump. As residents lacked power in the months after the storm, Popular became a vital supplier of cash as businesses hoarded greenbacks and residents waited for hours in front of ATMs and branches.

But a year later, even after power has been restored and a sense of business-as-usual has started to return, it’s clear that Maria made a lasting impact. Perhaps the biggest signs of that at Popular, the island’s largest bank, are the changes the company has made to prepare for the next storm.

“Not only did we survive it, we came out stronger,” Alvarez said, reflecting on the past year.

Over the past few months, for instance, Popular designated 55 of its roughly 170 branches across the U.S. territory to serve as “bunker branches.” The locations will feature exterior fortifications, such as stronger shutters on the windows. Additionally, computer systems — which are currently undergoing testing — will be connected to satellite communications networks, allowing those branches to be mostly functional if the telecommunication system goes down again in the future.

One of the biggest logistical headaches facing Popular immediately after the storm was the inability to transmit information from its branches to its central operations. Employees were forced to rely on paper balances.

Eventually, Popular implemented what it called the “Jedi system,” sending young employees by car from Popular’s headquarters to deliver flash drives with ledger information for the company’s branches. The so-called “Jedis” often left early in the morning and returned after business hours.

Popular also sent a boat back and forth every day to its branch on Culebra, a small island off of Puerto Rico’s eastern coast.

“We had a backup system with radio transmission, but that didn’t turn out to work that well,” Alvarez said.

Only a handful of branches were demolished by the storm and permanently closed.

Additionally, Popular has purchased larger generators, which are designed to run for longer periods of time. The company has also created a stockpile of extra parts and trained more employees on how to make basic repairs, according to Alvarez.

“We’ve taken a number of steps,” Alvarez said. “You learn from the last disaster. The next one may be totally different.”

While analysts braced for significant loan losses after the storm hit, given the scale of the destruction to homes and other property, those losses have not materialized — yet.

As of June 30, net charge-offs were stable from a year earlier, at $57 million. Nonperforming loans, however, increased 4% to $785.3 million. In the months following the storm, the company has remained profitable — excluding one-time accounting adjustments related to the corporate tax cut, but including a large reserve taken during the third quarter for potential losses related to the hurricane.

One of the factors keeping credit losses at bay has been a moratorium on foreclosures from federal agencies and local banks, Alvarez said.

Popular, meanwhile, has recently hired additional branch employees to help struggling homeowners modify the terms of their loans.

“I don’t think that we are going to see that avalanche of foreclosures that people have said we’re going to see,” Alvarez said. Still, he said he expects them to “go up” as banks and agencies become less lenient in the months ahead.

Additionally, new jobs in construction and other areas, created in response to federal disaster recovery aid, will also help borrowers stay in their homes, he said.

A disaster relief measure signed into law in February allocated roughly $20 billion in disaster relief to Puerto Rico for urban renewal, Medicaid and power grid restoration. In total, the territory expects to receive roughly $86 billion in recovery assistance in the years ahead, including from private insurance payouts, according to the island’s financial oversight board.

“It will be a humongous stimulative effect,” Alvarez said.

Still, Popular faces a number of big economic challenges in its home territory.

Outmigration from the island, which has been going on for years, accelerated after the storm. According to statistics from the San Juan airport provided by Popular, passenger departures exceeded arrivals after the storm between August and December by nearly 200,000.

Starting in early 2018 people began to return. Still, there were fewer than 100,000 net arrivals between January and March.

“That’s the longer-term challenge for Puerto Rico,” said Brett Rabatin, an analyst with Piper Jaffray, discussing the outflow of residents to the U.S. mainland. “They have to create jobs. They have to invest in education more. They have to set up an environment for people to have a reason to be in Puerto Rico.”

Additionally, Puerto Rico is in the midst of a debt crisis, as it owes roughly $74 billion to creditors.

Rabatin said that even in the midst of a struggling economy, Popular’s oligopolistic control of the island’s banking sector gives it a major competitive edge. The $48 billion-asset company accounts for roughly half of all bank branches on Puerto Rico, and controls over 40% of its total deposits, according to the Federal Deposit Insurance Corp.

Citigroup, meanwhile, controls 32.5% of the deposit market, while smaller competitors, such as the $12 billion-asset First Bancorp and the $6 billion-asset OFG Bancorp control 9% and 7%, respectively, according to the FDIC.

Popular's U.S. operations — which have recently expanded into private wealth and trust services — have also bolstered results.

Alvarez, for his part, says he is proud of how far his company has come over the past year. While the storm devastated the island, it also unified employees and served as a reminder of the company’s mission to provide financial services.

“When you’re in a situation like that, and you know that people need their banking services — they need their cash, they need to transmit their payrolls, they need to get higher lines of credit so that they can buy supplies — then you have a sense of mission that I think is hard to comprehend in the regular, day-to-day world,” Alvarez said.

After leading the company through one of its toughest hours, Alvarez, who is entering his second year as CEO, says he is ready for what is to come.

“We have some big challenges, but I’m relatively optimistic about the future,” Alvarez said.