Shares of EuroBancshares Inc. (Nasdaq:EUBK) are on a tear today after the holding company for Eurobank, which provides commercial banking products and services to small and mid-sized businesses in Puerto Rico, was upgraded by Keefe Bruyette and Woods to “outperform” from “market perform” on valuation.

Keefe Bruyette and Woods analyst Bain Slack said there is still 73% upside to the current stock price and is maintaining a price target of $8.

“We think that due to lack of liquidity, it is better to be early rather than try and time the bottom,” Slack wrote in a research note today. “While the Fed cuts will help all of the Puerto Rican banks over the next year, Eurobank is the only stock where … we believe that credit risk, while still significant, is priced in the stock.”

The analyst says  that though credit costs are still elevated, management has been able to stabilize lease net charge-offs, which represented roughly 70% of net charge-offs in the past eight quarters.

Furthermore, the Slack says the bank’s private label collateralized mortgage obligation exposure is largely AAA paper and the collateral is split between Prime and Alt-A.

“Eurobank was able to take advantage of the disruption in the marketplace and purchase some of these securities at a discount,” wrote Slack. “If we assume Eurobank takes a 10% OCI haircut to these securities, which we believe is conservative, to-book-value declines by roughly $1.06 per share to $7.80 per share.”

The analyst is maintaining his earnings estimate of $0.07 per share for fiscal 2008. This compares with the consensus of five analysts polled by Thomson Financial of $0.14 per share. 

Shares of EUBK spiked 29.76%, or $1.37, to $5.98 at 3:23 p.m. ET. Shares have been trading in the range of $3.12 to $9.25 for the past 52 weeks.