Puerto Rico

Raymond James, Sterne Agee pessimistic on Doral

Bnamericas Published: Monday, May 11, 2009
Raymond James (NYSE: RJF) has lowered its 2009 and 2010 earnings estimates on Puerto Rico's Doral Financial (NYSE: DRL), while brokerage Sterne, Agee and Leach cut its target on the company to US$1.00 on worries over the fragile economy's impact on Doral's future performance and over weak capital levels. Last week, Doral released first quarter results, posting a US$54.6mn - or US$1.01 per share - net loss attributable to common shareholders, compared to a US$10.6mn - or US$0.20 per share - loss in 1Q08 on higher provisions for loan losses and weaker interest income. Raymond James subsequently lowered its earnings per share estimate on Doral for 2009 to a loss of US$2.34 from the prior US$1.36 loss, and for 2010 to a loss of US$1.95, from the prior US$0.39 loss, saying Doral's operating performance continued to be negatively impacted by the three-year recession in Puerto Rico and economic downturn in the US. Although Doral offers some speculative appeal trading at only 92% of tangible book (of US$4.82 per share), Raymond James said it does not recommend taking a position at this time. In an effort to enhance its capital position, Doral Financial announced a tender offer on a limited number of its preferred shares (9mn preferred shares are outstanding) in exchange for newly issued shares of common stock plus a cash payment. Its target is to acquire US$200mn par value liquidation amount of preferred shares. This follows the announcement on March 20 related to the suspension of dividend payments on all outstanding preferred shares. The company's move to manage capital could result in a boost in the TCE (tangible common equity) ratio to 4.50% and tangible book value to US$7.35, Raymond James said. According to Sterne, Agee and Leach, capital continues to be the story for Doral, and likely one without a happy ending, as TCE fell from an already worrisome 3.3% to just 2.6% exiting 1QO9. "The decrease was due to the quarterly loss, along with a US$13mn negative OCI mark, and we would point out that TCE/TA (tangible common equity to tangible assets) was 6.7% just a year ago," the brokerage said in a report. As a result of the extremely low TCE ratio and the likely need for more common capital beyond the conversion of the preferred shares, Sterne, Agee and Leach said it was lowering its target to US$1.00 and reiterating its sell rating. "Our target is 20% of TBV, a discount to the Puerto Rican peer group at 60% as we feel capital needs will likely require additional dilution. Note that given the variation in results at Doral, we do not publish earnings estimates," the report reads. Doral - once Puerto Rico's largest mortgage lender - was founded in 1972 and had US$10.1bn in assets as of March 31.

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