Sterne Agee analysts Brett Rabatin and Nathan Race have resumed coverage of Popular Inc (NASDAQ:BPOP), OFG Bancorp (NYSE:OFG), and First Bancorp (NYSE:FBP) giving each of the Puerto Rican Banks a Buy rating and price targets of $35, $21.50, and $8 respectively.
Puerto Rican Banks: Popular has improving capital structure
Popular Inc (NASDAQ:BPOP)’s $35 price target is based on 11x 2015 estimates and a 1.0x pro forma tangible book per share (TBVPS). Rabatin and Race argue that branch sales and an improving credit profile should allow Popular to exit TARP with plenty of earning power. Being the market leader in Puerto Rico as the commonwealth’s government is balancing its budget and the economy is expected to turnaround puts the bank in a good position for growth. Popular may be forced to raise more regulatory capital before its allowed to exit Tarp to satisfy liquidity concerns, but Rabatin and Race don’t expect there to be a dilutive common share issuance.
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Puerto Rican Banks: OFG natural choice to purchase a struggling rival
Rabatin and Race set their $21.50 OFG Bancorp (NYSE:OFG) price target with 10.5x 2015 estimate, but note that there is potential upside from M&A activity. “We believe OFG is the best positioned Puerto Rican bank to potentially benefit from near-term consolidation of a distressed competitor, which could boost full-year EPS by 15%-20% based on our initial modeling,” they write.
The analysts mention an $8.5 billion asset rival (presumably Doral Financial) that they expect to be sold in an FDIC-assisted transaction. With better regulatory position than most of its peers, the ability to raise more capital, and the experience of integrating BBVA PR they see OFG Bancorp (NYSE:OFG) as the natural choice as buyer.
Puerto Rican Banks: First Bancorp trading at a discount to rivals
Even though they believe that First Bancorp (NYSE:FBP) shares could continue to trade below other Puerto Rican banks as it works to improve its capital structure, Rabatin and Race argue that the current 0.6x TBVPS is too cheap and that value investors should give the bank a look. The discrepancy between current valuations and their $8 price target, which values the company at 0.95x TBVPS, is partially because investors are concerned about FBP’s $236 million worth of exposure to Doral Financial Corp. (NYSE:DRL) But Rabatin and Race don’t expect the loan to ever become non-performing, and expect that it will eventually benefit the bank’s net interest income.