NEW YORK (TheStreet) -- If you want to know what's going on in Puerto Rico, you have to look past the dire headlines, according to one San Juan-based banker.
"Things in Puerto Rico are a lot more stable than the headlines," Jose Rafael Fernandez, CEO of OFGBancorp, said at a conference in New York. "You won't see riots. You won't see things like Greece. You'll see an island that continues to operate business as usual with some level of uncertainty."
This summer, Greece fought a number of its international creditors who wanted strict austerity measures such as higher taxes and reduced pensions in return for financial assistance, and when funds were cut off, established capital controls that limited ATM withdrawals to $60 a day. Meanwhile, in Puerto Rico, retail banking operations are continuing normally, and while creditors have suggested the island explore and enact austerity measures, they have a long way to go before becoming a reality.
Still, "some" uncertainty comes with a hefty $73 billion price tag -- the amount Puerto Rico owes its creditors and that Puerto Rico's governor, Alejandro Garcia Padilla, said in June that the territory would unable to pay back. Investors in OFGBancorp worry that Puerto Rico's public-sector problems will creep into the private sector.
The island faces a payment of $58 million on Saturday, Aug. 1. Missing it would put the country in technical default, though Puerto Rico argues otherwise as the debts are "moral obligation bonds" which are said to be "morally" -- but not "legally" -- binding. Either way, failure to pay would further damage Puerto Rico's reputation and its ability to access capital or restructure its debts.
To cover its immediate obligations, Puerto Rico is seeking a number of temporary fixes including a "negotiated moratorium" on debt payments and the loan of an additional $500 million. The former means kicking the can down the road to a hopefully brighter future, while the latter is akin to using one credit card to pay off another.
As for OFGBancorp, things may be slightly more sanguine. Jefferies analysts maintain their buy rating on the bank's stock but lowered its price target from $15 to $13 on Thursday, citing a declining loan portfolio.
"Total loans continue to decline with declines in Puerto Rican government exposure, mortgage, and auto," Emlan Harmon, an analyst with Jefferies, said in a note to clients. "Loans declined despite a meaningful increase in new loan production, with commercial originations notably strong."
OFGBancorp is relying heavily on its commercial loan business as the bank wades through the island's economic troubles. Of its $7.4 billion in assets, $4.6 billion are loans. Commercial and mortgage loans each make up 29% of the bank's loan portfolio, while government debt comprises 11%.
Among the government borrowers is the Puerto Rico Electric Power Authority, which is said to have more than $8 billion in obligations to bondholders, banks, and other creditors, $197.6 million of which is owed to OFGBancorp. The power authority's line of credit with OFG was placed in non-accrual status in March, a move that cut the bank's first-quarter earnings by 35 cents a share.
Loans are moved into non-accrual status, a designation that prevents lenders from counting interest due on a loan as revenue until it's actually received, after a borrower goes 90 days without making a payment.
Difficulties with the bank's government loans have made it more reliant on -- and confident about -- its commercial business.
"We have 9 years -- almost 10 years -- of economic contraction," Rafael Fernández said. "Businesses in Puerto Rico that are thriving right now have survived 10 years of economic contraction. Clients that we are looking at -- and the commercial clients we have -- they have done well in difficult environments."
The industries where Rafael Fernández sees the most promise include healthcare, tourism, and professional services, and he predicts the loan pipeline in those sectors will expand.
"You're seeing businesses investing in their own business now to ensure that they are ready for the next cycle," Rafael Fernández said.
To affirm its own stability, the bank released the results of its internal stress-testing. Because the bank's assets are less than $10 billion, the process was not mandated by the Federal Reserve, though Rafael Fernández's says it's actually more robust than most.
The bank's most extreme scenario factored in a lengthy government shutdown and greater exposure to government loans in addition to a base scenario of two years of layoffs, sales tax increases, and "cumulative additional losses with no future earnings and a static balance sheet."
In the worst of all the scenarios, "when we're shocking our loan portfolios for eight quarters without taking into consideration any future earnings or pre-provisions for revenues, we still have enough capital to stand up," he said.
"There's some risk out there with the government shut down," Rafael Fernández said. "There's some risk with government issues that may affect credit performance but in general, I think we're seeing stable credit metrics and are comfortable on the commercial side."