* Millennium stock outperformed European banks
* Faces weak markets, possible cash call-sell side
* Recovery seen helping 2010 earnings, stock value-buy side
* Q3 results due Nov. 11
For more Reuters buy or sell items, please double click on
By Sergio Goncalves
LISBON, Oct 26 (Reuters) - Shares in Portugal's leading listed bank, Millennium bcp, have gained more than 40 percent in the last four months as investors took heart from improved capital ratios and cost-cutting.
The rise began after the bank issued 300 million euros ($450.2 million) in perpetual bonds to boost its core Tier 1 capital ratio to 6.2 percent from 5.5 percent.
Millennium shares, which are trading around 1 euro, have outperformed the DJ Stoxx European bank index, which has gained 30 percent since June. Is the rise sustainable?
SELL - FACES WEAK MARKETS, POSSIBLE CASH CALL
UBS has a price target of just 0.5 euro on the stock, compared with a 1 euro market price, and a "sell" recommendation on concerns Millennium may have to carry out a capital increase due to liabilities on its pension funds and low capital ratios at its Polish unit, Millennium.
Millennium carried out a rights issue worth 1.3 billion euros in April 2008 and has rejected a further capital increase.
Sergio Gamez, an analyst at Bank of America-Merrill Lynch, has added Millennium recently to his 'least preferred list,' with a price target of 0.73 euro per share.
"We see many uncertainties in the short term for BCP," he said. "The bank faces weak economies in its core markets (Portugal and Poland), along with margin pressure as competition intensifies and rising provision charges as credit quality deteriorates."
Analysts also say that although improved, the bank's core Tier 1 ratio is still low compared with around 8 percent at local competitors BES and Banco BPI.
In its key markets, Millennium is contending with the worst recession Portugal has experienced since 1975, while the Polish economy is stagnant. As a result, Millennium's net interest income slumped almost 20 percent in the first half of 2009 and bad loans increased sharply.
BUY - RECOVERY SEEN HELPING 2010 EARNINGS, STOCK VALUE
Other analysts say Millennium is preparing the ground for the economic recovery and higher interest rates, which could boost its net interest income and allow the bank to cut provisions.
"We think the worst has passed for Millennium, with earnings set to start rising at the end of this year. We see value in Millennium in the long term," said Tiago Bossa Dionisio, an analyst at Espirito Santo Research.
Dionisio raised his recommendation on Millennium early this month to "buy" from "neutral" with a 12-month price target of 1.2 euros per share. He says the price-earnings ratio for the bank's stock is "more attractive than its Iberian peers".
He estimates that the third quarter marked the low point of the cycle for Millennium and sees an average annual growth rate of 7 percent until 2011, when net interest income should reach 520 million euros, up from last year's 220 million euros.
Although cautious, analyst Andre Rodrigues at Caixa BI said that "if the business in Poland really returns, one could point to a value for the shares of 1.2-1.3 euros". He has had a 'Buy' recommendation on the stock since May, with a 12-month price target of 1.1 euros per share.
"More than that (will come) only with a sustained recovery in Millennium's earnings and with macro-economic stability, which is still not here," he said. (Writing by Axel Bugge; editing by Andrei Khalip and Jon Loades-Carter) ($1=.6664 Euro)