Morgan Stanley Reiterates on Popular

In a report published Wednesday, Morgan Stanley analyst Ken Zerbe reiterated an Underweight rating on Popular (NASDAQ: BPOP), with a price target of $24.00.

According to the report, BPOP could eventually announce that it has received approval to repay its $935 million of TARP. Some will view this as a positive catalyst, but it is important to note that both the repayment of TARP and the related EPS benefit are already in Morgan Stanley's model.

“We expect BPOP to raise $400 mil in debt, at a 6% yield, to fund the cash portion of its TARP repayment,” the report noted. “This estimated cash shortfall is based on our estimate of the company's excess cash position at the hold-co of roughly $350 mil (above the $200 mil that it might need to retain), which includes the $118 mil recently raised from selling part of Evertec, plus $185 mil of dividends that we expect the company to pull up from its BPPR subsidiary (total dividend capacity is $471 mil, but requires regulatory approval, per BPOP's most recent 10-Q). We do not model any equity raise.”

Some risks to the price target include economic activity remaining weak for longer than expected, if BPOP's credit quality deteriorates more than expected, or if loan growth slows further.

BPOP closed Tuesday at $28.75.