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Piper Jaffray initiates on Puerto Rican banks

Piper Jaffray analyst Brett Rabatin initiated coverage of threebanks in the Puerto Rican bank space. He believes that investors are pricing thecompanies' stocks based on the continuous debt turmoil, while prospects for theresolution of the debt situation are higher today than the past two years. He alsonoted that the investors are giving limited credit to "pre-provision earningpower and significant excess capital" for the group.

He initiated coverage of OFGBancorp at "neutral" with a $7.50 price target.

His 2016 and 2017 EPS estimates are $1.02 and $1.04, respectively.

The analyst favors OFG from a long-term perspective, and he believesthe company's stock price will prove "substantially undervalued" if thePuerto Rican debt and economic situation resolves. He also expects the company'score earnings visibility to improve over time.

However, he noted that the company's near-term catalysts areless meaningful than its Puerto Rican bank peers. Compared to its peers, OFG hasless excess capital and no U.S. operations that can help offset continued higher-yieldingacquired loan runoff. The company also has highest direct exposure to the PuertoRico government's debt situation, mostly because of a Puerto Rico Electric PowerAuthority loan with $189 million outstanding, gross of specific loan loss reserves.

Rabatin rated FirstBanCorp. at "overweight" with a 12-month price target of $5.

His 2016 and 2017 EPS estimates were 34 cents and 45 cents, respectively.

The analyst expects the company's stock price to increase overthe next year, as First BanCorp. continues to de-risk its balance sheet and growits U.S. franchise.

He believes that the company's current stock price is more thanaccounting for the Puerto Rican fiscal and economic struggle, but the market has"overly discounted" the company's significant excess capital position,progress in cleaning up credit-quality metrics and recent growth in its mainlandfranchise. He noted that the company has reduced its nonperforming assets by 64%,or $1.1 billion, largely through bulk problem asset sales. He also noted that thecompany recently showed lower nonperforming assets inflows compared to its PuertoRican bank peers, which emphasizes its lower-risk profile across the remaining loanportfolio.

Rabatin rated PopularInc. at "overweight" with a $35 price target.

His 2016 and 2017 EPS estimates are $3.32 and $3.51, respectively.

Similar to First BanCorp., the analyst believes that Popular'sstock price is more than accounting for the Puerto Rican fiscal and economic struggleand is overly discounting the improvement in the company's mainland U.S. operationsand increasingly cleaner profitability profile.

He believes that the company will be in a better position toreturn higher levels of capital to shareholders through common dividends and/orshare repurchases compared to its Puerto Rican bank peers, if and when the region'sdebt situation is resolved. However, he believes that the company can continue todeliver improved credit quality and profitability metrics until the debt crisisis addressed, which should drive some multiple expansion.