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Puerto Rican banks among those with the most implied upside

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Puerto Rican banks among those with the most implied upside

Even amid the economic turmoil in Puerto Rico, analysts seeroom for the island's bank stocks to run.

S&P Global Market Intelligence ranked the top 20 U.S.banks and thrifts by implied stock price appreciation, based on share prices andmean analyst price targets as of April 15. To be included in the analysis, aminimum of three analyst price targets were required for each stock.

FirstBanCorp. shares have implied upside of nearly 62%, according to theanalysis. Analysts also forecast potential upwards stock price movement atPopular Inc. andOFG Bancorp.

In an interview, Keefe Bruyette & Woods analyst BrianKlock said that shares of First BanCorp. and its Puerto Rican peers are tied upin the island's fiscal situation. The persistent disconnect between the marketview and analyst view of these stocks is partly due to the fact that someinvestors who own fixed income are placing short positions on the banks tohedge against exposure on their own debt, he said.

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Klock pointed out that the banks themselves do not have muchdirect exposure to the government, yet investors remain hesitant in light ofthe unresolved economic situation in the U.S. territory.

"Investors are waiting to see this resolved which iswhy the stocks haven't moved up to what we think is closer to their fairvalue," Klock added.

In an April 8 note, Piper Jaffray analyst Brett Rabatinsuggested that First BanCorp. is being "unduly punished" for thePuerto Rican economic turmoil as investors discount "solid progress"by the bank to improve asset quality metrics and grow its U.S. franchise. Rabatincalled First BanCorp.'s exposure to the Puerto Rican government"manageable" and "mostly addressed."

Klock said the catalyst needed to boost First BanCorp.'sstock is "more certainty around the fiscal restructuring process,"which may come at the end of June when some government debt payments are due.Rabatin also pointed out that a resolution of the fiscal situation and improvedcredit quality would allow the bank's stock to reach a valuation above tangiblebook value.

"They've been able to weather some pretty tougheconomic times in Puerto Rico and still put up some pretty good results,"Klock said. If the fiscal situation is resolved or clarified, he believesinvestors can refocus on bank fundamentals again.

Among other notable stocks on the list, shares have thehighest implied upside in the U.S. banking industry, according to mean analystprice targets which value the stock's upward potential at 82.03%.

BofI shares have had a bumpy ride since October 2015amid troubles. Just last week, the Houston MunicipalEmployees Pension System filed an amended complaint against BofI alleging securities fraud. Thethrift's stock price fell 25.39% from the close of April 13 to the close ofApril 15 on news of the latest development.

San Diego-based BofI addressed the volatility in an April 18statement, saying thecompany "continues to be the target of anonymous short-seller hit piecesdesigned to manipulate the market in a veiled effort to benefit themselves atthe expense of BofI's shareholders." Shares rebounded to $18.45 during theApril 18 trading session.

"I think people just like to see that the company iscoming out and making its position clear," said Bob Ramsey, an FBR &Co. analyst. He noted that a lot of positive data points got lost in the noise,including the fact that the OCC conducts on-site exams at BofI, a federallychartered financial institution, twice a year. The OCC has also approved anacquisition since these allegations came out, and there has been no negativeregulatory action against the company.

In the industry more broadly, bank and thrift stocksoutperformed the broader market over much of the last 12 months. The SNL U.S.Bank index sank below the S&P 500 in mid-January, while thrifts continuetheir outperformance.

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