The partial shutdown of the federal government during the first half of October delayed the collection of data for the Government Development Bank of Puerto Rico (GDB), and the release of the bank's Economic Activity Inex (EAI) for September and October.
"We believe there could be weakness in the Puerto Rico bank stocks, as we believe the y/y comparisons are still tough, but we anticipate the m/m trends to stabilize," Klock wrote in note to clients on Sunday. "We will be more focused on the m/m trends and would be buyers of [Popular, Inc. (BPOP), First Bancorp (FBP) and OFG Bancorp (OFG)] if the shares are weak on a larger y/y EAI decline," he added.
The EAI has traditionally been closely correlated with the island territory's gross domestic product. Puerto Rico remains mired in a long and painful recession, and a year-over-year decline of over 5.5% could cause a negative reaction among investors, according to Klock.
The analyst would expect an over-reaction from investors in the above scenario, because "the EAI has over-estimated the absolute level of the decline in GNP in the past," and because he belives the Puerto Rico Planning Board's estimate of a decline in GDP of 0.80% for fiscal 2014 is "more realistic than the -5-6% y/y trend shown by the EAI."
Klock rates Popular "outperform," with a price target of $34. Popular's stock closed at $28.58 Friday. The shares have returned 37% this year and trade for 0.8 times tangible book value, according to Thomson Reuters Bank Insight, and for 10.4 times the consensus 2014 earnings estimate of $2.75. The consensus 2015 EPS estimate is $2.81.
Popular still owes the government $935 million in bailout funds received through the Troubled Assets Relief Program, or TARP, in December 2008. Klock in a client note on Nov. 15 wrote that he expected the bank's full repayment of TARP to be "a near-term event," possibly before the end of 2013. The analyst added that "potential accretion" to his 2013 EPS estimate of $1.77 could be "as much as $0.51 or 18%."
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