Spanish bank lurches towards uncertain fate after loss

Bloomberg

Banco Popular Espanol SA’s decade-old crisis may finally be coming to a head.
For years, the Spanish lender managed to hold onto a mountain of soured real-estate loans made before the global financial crisis, tapping shareholders for new capital three times in the last five years. Now, with the stock down 98 percent from its 2007 peak and a market value barely above the amount it raised from investors last year, Chairman Emilio Saracho is pulling out all the stops to stabilize the lender.
The bank said it asked competitors whether they’d be interested in buying the company. A day later, the lender raised cash selling a stake in a property company. Then on Thursday, Popular moved to reassure markets that it will pay a July coupon on its riskiest bonds after the notes tumbled on speculation losses may be imposed on the debt to preserve reserves.
“The best outcome would be that there is a deal on the table — that would be the cleanest solution,” said Puja Karia, an analyst CreditSights Ltd. in London. “Things can’t linger on.”
The events of this week highlight the pressure on Saracho, a former JPMorgan Chase & Co. vice-chairman elected in December to replace Angel Ron, who held the post for more than a decade and refused a state bailout in 2012. Now Saracho is on a mission to line up more capital for the bank or sell it, after it booked a 3.6 billion-euro ($4 billion) loss for 2016.
Buyer interest has been muted, with mainly two rivals raising their hands so far, El Pais newspaper has reported: Banco Santander SA, Spain’s biggest lender, and Bankia SA, the fourth-biggest.
Santander’s capital position looks thin relative to its European peers. Bankia is state-owned after it was nationalized as part of a European bank bailout.
Santander hired Citigroup Inc. to advise it on a potential bid for Popular, a person familiar with the matter said. It has requested state guarantees to protect against potential future losses at Popular, said the person, asking not to be identified because the talks are private.
Officials for the banks declined to comment. Economy Minister Luis de Guindos said Tuesday that Bankia was examining Popular’s situation.
Popular’s shares rose as much as 8.6 percent on the news of Santander’s interest, which was earlier reported by El Confidencial. The stock was trading 4.6% higher in Madrid, paring losses this year to 25%. That’s still the worst performance in the 38-member Bloomberg Europe Banks and Financial Services Index, which is up 9%.
“I don’t see any incentive to offer the equity holders of Popular really very much — if they offer them anything,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. “Popular doesn’t have much negotiating power at this point.”
Popular’s one attraction is its business serving small and medium-sized Spanish companies, said Inigo Lecubarri, founding partner of Abaco Asset Management LLP, who helps oversee more than $1 billion invested in mostly European financial stocks. Margins in the business are attractive because it is based on relationship banking that’s shielded to some extent from low-cost competitors, he said.
“Here you have the chance to buy 7 percent banking market share in Spain with no premium — it’s a fantastic opportunity,” said Lecubarri. “If I were a bank, I would definitely be
interested in looking at Popular.”

Soured Loans
Popular would add about 34 billion euros of performing loans to small and medium-sized enterprises, a business where Santander already claims a 20 percent market share. But any buyer would also have to deal with Popular’s 37 billion euros of non-performing assets.
Santander closed the first quarter with a CET1 fully-loaded ratio of 10.66 percent. That compares with 11.6 percent at BNP Paribas, 12.5 percent for Barclays Plc and 11.5 percent at Spanish rival CaixaBank SA. Bankia’s balance sheet is relatively clean after its bailout, with a 13.4 percent ratio that’s the highest of Spain’s main banks.

Santander could decide to use a purchase of Popular as a pretext to raise more funds from shareholders and shore up its own capital ratio, said Andrew Lowe, an analyst at Berenberg in London. Santander is adamant that its capital levels are adequate and that it’ll continue to build them as it generates profits.
‘Over-Raise Capital’
“They could in theory over-raise capital to fund an acquisition and repair their own capital situation at the same time,” said Lowe.
Would-be buyers could also accelerate cost cuts at a lender that still has almost 12,000 staff and 1,779 branches, even after reducing headcount by 21 percent over the past year, said Jefferies International analyst Benjie Creelan-Sandford.
Saracho had initially focused on selling off assets and a return to the core lending business, but rising concern about the bank’s financial strength has put a spotlight on Popular’s strategic options. The lender this month reported a worse-than-expected first-quarter loss as it booked charges to cover real estate losses. Both capital and bad-loan ratios worsened.
Share Slump
On Thursday, Popular sold a 2.86 percent stake in Merlin Properties for 143.8 million euros, a filing showed. The bank is in talks to sell its U.S. business to Chile’s Banco de Credito e Inversiones, people familiar with the matter said last month. The unit could be valued at about $500 million, the people said.
Creelan-Sandford estimates Popular itself would have to raise at least 4 billion euros of capital to take capital and loan loss coverage levels up to those comparable with its peers.
While Popular is still open to a capital increase, the European Central Bank and Spanish regulators have told it that a sale would be the most appropriate option under the current circumstances, El Pais reported, citing unidentified sources.
The bank is working with JPMorgan and Lazard Ltd. to test interest among potential buyers, people familiar with the matter said last week.