UPDATE 1-DEALTALK-Popular Inc seen as buyer of failed banks

Mon Apr 5, 2010 3:46pm EDT

* Popular favorite buyer in FDIC-backed deals

* At least three island lenders in danger of closure

* Deal to add significant capital

* Antitrust likely to be cleared (Recasts; adds details, updates stock activity)

By Anurag Kotoky

BANGALORE, April 5 (Reuters) - Puerto Rican banks are likely to see a round of consolidation soon as regulators move to close underperforming lenders, giving Popular Inc (BPOP.O), the biggest player, an excellent chance to bulk up.

At least three of Puerto Rico's biggest banks are under cease and desist orders from regulators, and there is rising speculation in the market that the Federal Deposit Insurance Corp (FDIC) may take over operations.

In such a scenario, the FDIC will move ahead with a formal sale process of their assets, and Popular being the dominant and the oldest player in the island has every chance of emerging as the winning bidder.

Popular spokesman Enrique Martel said the company is not providing comments at this time.

One of the three troubled banks in the island, W Holding Co Inc WHI.N had said it would not be filing its annual report on time and that there was a possibility of auditors raising a "going concern" doubt.

"This makes it seem more likely that W Holding's days may be numbered and that Popular could be the beneficiary," B. Riley & Co analyst Joe Gladue said.

The FDIC-backed deals have often been a big boost for the acquiring bank's capital, something that would be helpful for Popular, Gladue said.

Gladue downgraded the parent of Banco Popular last month, saying it needs to raise capital in "not too distant future."

Option traders on Thursday exchanged about 47,000 call contracts in Popular, 14.5 times the normal daily turnover compared to 1,059 puts, according to option analytics firm Trade Alert.

"The action comes as the FDIC attempts to find ways to bring more capital to some of Puerto Rico's struggling financial institutions. The bullish trading might reflect the view that these efforts will help the industry, including it's largest player -- Popular," WhatsTrading.com option strategist Frederic Ruffy said. The other Puerto Rican banks under regulatory restrictions are EuroBancshares Inc EUBK.O and R&G Financial Corp RGFC.PK.

W Holding, EuroBancshares and R&G Financial could not be immediately reached for comments.

TROUBLED ISLAND

The island of Puerto Rico, a manufacturing hub for petrochemical, pharmaceutical and technology companies, as well as a tourism destination, faced the financial meltdown much before the rest of the world went into recession.

Although some companies like Popular and rival Doral Financial Corp (DRL.N) somewhat managed to put the worst behind them, many others are still fighting for survival.

While there are antitrust hurdles that could prevent Popular from taking part in FDIC-backed deals, the company should manage to get over it considering there are fewer buyers and smaller targets, Cantor Fitzgerald analyst Michael Diana said.

The analyst wrote in a research note last month that if FDIC decides to adopt a "go-with-strength" strategy, Canada-based Bank of Nova Scotia (BNS.TO) and Popular will be favorite buyers of failed banks.

However, if regulators decide to help the weakest to bolster capital levels through an assisted deal, the favorite would be First BanCorp (FBP.N), the analyst had said.

FDIC-assisted deals have turned very lucrative since last year with rising bank failures. These deals often add to earnings immediately and include a loss-sharing agreement with the regulators.

Popular has operations in Puerto Rico, the United States, the Caribbean, and Latin America, according to its website. It operates 177 branches in Puerto Rico alone.

The company posted its sixth straight quarterly loss in January, and said it expects adverse economic conditions to continue to hurt its earnings.

Popular shares, which have more than tripled since hitting a 52-week low of $1 last July, were up about 3 percent at $3.05 Monday afternoon on Nasdaq.

More than 19 million shares changed hands by 15:45 ET, compared with a 50-day moving average volume of just 8.5 million. (Reporting by Anurag Kotoky in Bangalore; additional reporting by Doris Frankel in Chicago; Editing by Ratul Ray Chaudhuri)

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