Buy First BanCorp Stock Now: Analysts

NEW YORK ( TheStreet) -- Two analysts on Friday initiated coverage of First BanCorp ( FBP) of San Juan, Puerto Rico, with price targets implying plenty of upside for investors.

Bank of America Merrill Lynch analyst Erika Penala rated First BanCorp a "buy," with a $9 price objective. "We think FBP offers investors an opportunity to invest in one of the few remaining, 'early stage' credit recovery stories in the banking sector -- implying a more material incremental re-rate in market multiples and sentiment," Penala wrote in a note to clients Friday.

"In fact," she added, "the 33% potential upside implied by our PO is the highest in our coverage universe."

First BanCorp's shares closed at $6.75 Thursday. The shares traded for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 13 times the consensus 2014 earnings estimate of 52 cents a share. The consensus 2015 EPS estimate is 62 cents.

Credit Suisse analyst Matthew Clark has an even sunnier outlook, initiating coverage of the stock on Friday with an "outperform" rating and a $10 price target, implying 48% upside over the next 12 months. His price target factors in a valuation of 10 times estimated earnings and 1.3 times tangible book value, when adding back an estimated recapture of $2.53 a share in deferred tax assets (DTA).

First Bancorp reported a DTA valuation allowance of $523.4 million as of June 30. The DTA increased from $384.4 million the previous quarter, because of "changes in tax rates" in Puerto Rico, and because the company reported a second-quarter loss of $122.6 million, which included a $72.9 million loss on the sale of nonperforming residential loans and a $66.6 million loss related to the write-off of assets pledged as collateral to Lehman Brothers, Lehman Brothers filed for bankruptcy in September 2008.

First BanCorp was a very troubled company at the height of the credit crisis, and received $400 million in federal bailout funds through the Troubled Assets Relief Program, or TARP, in January 2009. In July 2010, the U.S. Treasury's preferred shares in First BancCorp, plus $24.174 million in accrued dividends, were converted to mandatorily convertible preferred shares.

The bank completed a $525 million common share offering in October 2011 with institutional investors Thomas H. Lee Partners and Oaktree Capital Management each taking a $174.1 million stake. The offering consisted of 150 million shares, priced at $3.50 a share.

The Treasury then converted its preferred stake to common shares.

The capital raise and the Treasury's conversion of its preferred stake provided the strength the bank needed to steadily work through its high level of nonperforming loans, while avoiding paying dividends on the government bailout money.

First BanCorp has completed the bulk of its problem loan sales, "the balance sheet has stabilized at $13 billion, with credit problems being replaced with new loan originations," according to Clark. The analyst added that nonperforming assets were down by 50% from their peak level.

First BanCorp reported nonperforming loans of $51.7 million as of June 30, with $63.9 million in loans past due 90 days but still accruing. That total of $115.6 million was very well covered, with loan loss reserves totaling $301 million as of June 30.

The bank is strongly capitalized, with a tangible common equity ratio of 8.64% and a Tier 1 leverage ratio of 11.26%, as of June 30. Looking beyond the eventual DTA recapture, which will greatly boost capital, Clark estimated "FBP can double its operating EPS to $0.70 by 2016, which would equate to a 1.10% return on average assets, or ROA (from 0.52%)."

Those figures are not as excessive as some might think, as an ROA of 1.10% is respectable, but not very high.

Penala wrote that "major catalysts for material EPS recovery are lower provisions for loan loss reserves from improving credit quality, lower operating costs, and margin expansion."

First BanCorp is a fascinating play for long-term investors.

FBPI Chart FBPI data by YCharts

Interested in more on First BanCorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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