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One industry that has taken a plunge is Puerto Rican banks.

The highlight would be the stock of Doral Financial (NYSE:DRL), whose chart resembles the flight of Icarus. I don’t know the full story (I think few do) of what happened to Doral. A few years ago, this was regarded as one of the fastest growing banks in the U.S.

But they got into trouble by overestimating their income from interest only strips, which are the coupons from mortgages dealing only with interest and not principle. They sold them to other PR banks but had an off balance sheet agreement in which they guaranteed payment. Hence these were not true sales and so the accounting was improper.

So Doral went down and had to restate massively and take massive losses. This enveloped most other banks in PR, including R&G Financial (RGF), W Holding (WHI) and others who had to restate but generally by much smaller amounts. Most of their stock charts look similar to Doral’s. Morningstar analyst, Ryan Batchelor, refers to Doral as “toxic waste,” not exactly a glowing endorsement. Yet overall, these banks are all undercovered and shunned by Wall Street.
I am not sure if any of these banks offer great investments, but I suspect that there is gold among the garbage for the enterprising investor who can do his own work. For example, I personally think the best bet may be W Holding. This is a particularly impressive operation. It has among the lowest expense ratios in banking anywhere. The CEO Frank Stipes seems to be a fantastic motivator and quite a visionary.

This bank, perhaps surprisingly, is at the forefront of banking technology. It has been in business since 1958 and has never had a loss. Few banks anywhere can say this. It is well capitalized and pays a nice 3.5% dividend. It is on the lookout for acquisitions both in PR and the U.S. and is not struggling like its weak competitors.

Their main problem seems to be that the yield curve is flat, suppressing their net interest margins. That will someday change and it isn’t really their fault anyway. When this changes the bank will grow very rapidly. I have picked up some shares recently, well below book value (or 1.2 x tangible book including preferreds.)

Disclosure: I hold stock in WHI.

WHI vs. DRL 1-yr chart

whi drl chart