Moving the Market -- Tracking the Numbers / Outside Audit: Puerto Rican Bank Woes Leave Tarnished Image; Doral Financial Disclosures Indicate, to Some Analysts, An Industry in Trouble
PUERTO RICO'S largest mortgage lender didn't answer all the questions about its books in a 195-page earnings restatement this week. It did say enough to convince some that the island's banking industry is in trouble.</br></br>Some of the disclosures by Doral Financial Corp., which faces a criminal investigation by the U.S. attorney's office in New York, feed into a view held on Wall Street that several of Puerto Rico's banks are operated more like private clubs than public companies. The Securities and Exchange Commission also is investigating Doral.</br></br>In its restatement Monday, Doral said 2004 net income was $214.8 million, 56% lower than originally reported. The main culprit in the restatement: improper valuations on certain mortgage-related transactions.</br></br>"This is bad for everyone," Avi Barak, an analyst at Sandler O'Neill in New York, says about the effect on several other Puerto Rican banks. Mr. Barak doesn't cover Doral, but he has "sell" ratings on First BanCorp and R&G Financial Corp., two Puerto Rican lenders under investigation by the SEC for the way they accounted for mortgage deals with Doral.</br></br>Specifically, Doral didn't put accurate values on some of the mortgage assets it sold to other banks. Those assets, called interest- only strips, or IOs, are likely to end up back on Doral's balance sheet after the other banks' auditors reclassify them as loans instead of sales, as required by generally accepted accounting principles.