Fitch Affirms Doral Financial Corp L-T IDR at 'CCC'; Assigns Positive Outlook

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Doral Financial Corporation (DRL) and its main subsidiary, Doral Bank (DB), at 'CCC' and assigned a Positive Outlook. A detailed list of ratings follows at the end of this release.

DRL's ratings reflect the company's ongoing challenges such as longer-term strategic plans, geographic and product concentration with a limited franchise, and high levels of non-performers. Given DRL's concentration in Puerto Rico and the pressures on the local economy, Fitch believes prospects for earnings growth is difficult in the near term.

The Positive Outlook reflects the view that DRL will continue to effectively manage through a difficult operating environment. Fitch also notes that performance year-over-year has improved albeit financial metrics are still weak. For the 4Q11, DRL profitability measures improved evidenced by an ROA of 0.58% and PPNR/Avg Assets of 0.66% compared to negative figures the previous year. The company's earnings benefited from good net interest margin (NIM) expansion. For 4Q11, NIM was up by 82bps to 2.67% compared to 1.89% in the same period a year ago. The expansion is due to improved funding costs and the origination of higher-yielding commercial and industrial (C&I) loans.

Although Fitch has noted some positives, DRL is operating with a significant level of nonperforming assets (NPAs) at 31.5% for 3Q11, which Fitch calculates including trouble debt restructuring (TDRs). Excluding performing TDRs, NPA ratio is about 12.6%, which still remains high among Fitch's rated universe. Non-performers are split about 51% and 49% between residential mortgages and CRE and construction loans. On a positive note, the level of inflows into non-accrual has slowed compared to the previous year.

Net charge-offs (NCOs) have remained manageable up to this point, but well-above normalized levels. The loss severity in the mortgage book is considered relatively low given the characteristics such as low LTVs, DRL's high reinstatement rate of 70% , and 75% of loan book had vintages prior to 2006 with avg. loan size $105k of traditional products and retail originations. However, with unemployment at 16% and weak economic conditions in the local market, Fitch believes NCOs will remain elevated for an extended time.

Fitch's ratings also incorporate the analysis of DRL's commercial real estate (CRE) exposures under various stress scenarios. Although CRE and construction exposures are down from peaks in 2007/2008, they still remain substantial totaling $1bn for 2011 and accounted for almost half of non-performing loans. Fitch believes additional write-downs are a possibility as the real estate sector in Puerto Rico continues to face pressures with high levels of unsold inventories.

Fitch expects credit and capital pressures to persist throughout 2012 that may result in the company needing additional capital as it works through its problematic loans tied to CRE and construction in Puerto Rico. DRL has managed to maintain regulatory capital ratios at well-capitalized and TCE was 6.12% at Dec. 30, 2011. Balance sheet shrinkage continues to support capital ratios. However, DRL's Texas ratio defined as NPAs/(Tangible Common Equity + Reserves) is on the high end of most Fitch-rated institutions at above 200% as of Sept. 30, 2011.

Positive rating action could occur if DRL has the ability to sustain adequate levels of PPNR, improves loan diversification and credit trends stabilize. However, should NCOs increase substantially impacting DRL's capital position, Fitch would revisit the ratings with the potential of a further downgrade.

More recently, DRL has ramped up its C&I loan originations through its U.S. branches with outstandings up 100% year-over-year totaling $1bn. Although the diversification is a positive, Fitch is concerned with the rapid rate of growth in a short-time frame. Additionally, banks industry-wide are targeting C&I, which could also lead to adverse selection. DRL's C&I growth has been aided by syndicated loan participations accounting for 63% of total loans originated in 2011. Should credit trends show signs of deterioration, Fitch would review ratings for a possible downgrade.

Fitch notes that DRL's senior debt rating at 'CCC/RR6' is an exception to Fitch's criteria (please see 'Recovery Ratings for Financial Institutions, Aug. 16, 2011' with regards to the notching from the Long-Term IDR.

Fitch has affirmed the ratings and assigned a Positive Outlook as follows:

Doral Financial Corporation

--Long-term Issuer Default Rating (IDR) at 'CCC';

--Viability rating at 'ccc';

--Senior debt at 'CCC/RR6';

--Preferred stock at 'C/RR6';

--Short-term Issuer Default Rating (IDR) at 'C';

--Support '5';

--Support Floor 'NF';

Doral Bank

--Long-term IDR at 'CCC';

--Viability rating at 'ccc';

--Long-term deposits at 'CCC/RR4';

--Short-term IDR at 'C';

--Short-term deposit at 'C'.

--Support at '5';

--Support Floor at 'NF';

Fitch has withdrawn the following:

Doral Financial Corporation

--Short-term debt rating at 'C';

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research

--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011);

--'Bank Holding Company Criteria' (Aug. 16, 2011);

--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011);

--'Recovery Ratings for Financial Institutions' (Aug. 16, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Bank Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648612

Rating Bank Regulatory Capital and Similar Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371

Recovery Ratings for Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648615

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