November 14, 2008 / 3:05 PM / 10 years ago

UPDATE 1-Morgan Keegan ups Colonial BancGroup to outperform

(Recasts, adds analyst comments, background, share movement) Nov 14 (Reuters) - Morgan Keegan raised Colonial BancGroup Inc CNB.N to “outperform” from “market perform,” as it believes the recent sell-off in the financial services company’s shares is overdone and has created an attractive entry point for investors.

Colonial’s shares stand to gain whether the company gets U.S. Treasury funding or not, because if it does not receive approval, it will potentially be sold at a price closer to its stress case $4.50 tangible book value, analyst Robert Patten wrote in a note to clients. The Montgomery, Alabama-based company’s shares have fallen 65 percent since Colonial posted a wider-than-expected third-quarter loss and suspended its quarterly dividend on Oct. 22.

The decline was aided by the uncertainty surrounding whether or not it will receive capital under the U.S. Treasury’s capital purchase program, the analyst said.

Colonial’s shares closed up 43 percent on Thursday after it said it had applied for funds under the program.

Despite the present downturn in the Florida economy, demographic trends should be positive for the state longer term, making Colonial, which is ranked sixth in terms of deposit market share in Florida, attractive to a host of potential buyers, Patten said.

“More importantly, with a current market capitalization of $510 million, Colonial is bite-sized for several regional/national as well as foreign banks to make a play,” he added.

The most likely acquirers for the company could be Toronto-Dominion Bank (TD.TO), Zions Bancorp (ZION.O), SunTrust Banks Inc (STI.N), Royal Bank of Canada (RY.TO), Fifth Third Bancorp (FITB.O), U.S. Bancorp (USB.N), and a host of potential foreign banks, Patten said.

Shares of Colonial were trading down 2 cents at $2.50 Friday morning on the New York Stock Exchange. (Reporting by Amiteshwar Singh in Bangalore; Editing by Pratish Narayanan)

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