Spain's Sixth Largest Bank Crashes Most In 28 Years On Liquidation Fears

Tyler Durden's picture

Even as attention has turned once again to Italy as the next possible source of European financial contagion, Spain's sixth largest bank has found itself in freefall over the past few days as concerns grow that the bank may be liquidated unless a last-minute buyer, or source of capital, emerges. In addition to the shares of Banco Popular crashing as much as 27%, the biggest intraday drop since 1989, its perpetual bonds have likewise been in freefall mode as investors liquidate securities which "they do not want to hold going into the weekend", according to Ignacio Cantos, of ATL Capital in Madrid, quoted by Bloomberg.

The latest twist in the ongoing saga of the bad debt-saddled Spanish bank was revealed yesterday, when El Confidencial reported that Banco Popular asked Deutsche Bank to come up with a plan for the troubled Spanish lender to raise capital after its previous adviser Morgan Stanley resigned. The paper reported that Popular was testing investor appetite for a capital increase of between €4 billion and €5 billion if its plans to find a merger partner or buyer fail. So far nobody has stepped up to throw more good money after bad. 

Earlier in the week, the European banking watchdog, the Single Resolution Board (SRB), warned European Union officials that Popular may need to be liquidated, or bailed-in, if it fails to find a buyer, according to Reuters.

The underlying problem with Popular, as with most European banks, is familiar: the bank has been unable to sell €37 billion of soured property loans fast enough, and is racing to find a partner after Spain's Economy Minister Luis de Guindos declined to consider a public bailout, while a capital increase has faced resistance from existing shareholders. The bank has said previously it could extend a June 10 deadline for binding takeover offers. So far none have emerged.

Meanwhile, the government urged citizens to keep "complete calm", and not to sell because, get this, the bank "passed its stress tests." Alas, "passing stress tests" did not help either Bankia or Dexia, two other famously insolvent European banks. From Reuters:

The solution for troubled Spanish lender Banco Popular is either a capital raise or a sale, a spokesman for Spain's government said on Friday, adding that it was not worried about the situation."

 

(Popular) passed its stress tests ... it is in the process of a sale or a capital raise, nothing more. Complete calm. We are going to wait for the next steps," Inigo Mendez de Vigo told a news conference.

Of course, the alternative to "complete calm" is a bank run, which Spain - and the ECB - would prefer to avoid.

For those who are unfamiliar with the developing situation, Bloomberg recently posted a handy Q&A on what may soon be Europe's biggest bank liquidation in years.

Banco Popular Espanol SA’s admission that it’s short of capital and may consider a sale caused turmoil in Spain’s banking industry, which wants to think its real-estate problems are in the past. Popular, with a balance sheet still groaning under the weight of toxic property assets, is a throwback to the boom-to-bust cycle that forced Spain to seek a bailout for its banking industry in 2012. A potential sale of Popular would hand its competitors the chance to buy a bank with a strong franchise in lending to small and medium-sized businesses. It also would allow the government to claim that Spain’s banking clean-up is finally complete.

 

1. Why is Popular so unpopular?

 

Short answer: real estate. Popular’s woes stem from the loans it made in the years before a housing crash pitched the economy into a five-year slump starting in 2008. Founded in 1926, Popular had prided itself on efficient management that made it one of the world’s most profitable banks. That story started to sour in 2007 as confidence in Spanish real estate ebbed away; Popular’s shares began a long slide from their peak to lose 98 percent of their value. Popular shunned the chance to take state aid in 2012, when a stress test uncovered a capital shortfall. Instead, it embarked on a series of share sales that so far have raised 5.5 billion euros. Angel Ron, who had run Popular as chairman since 2004, left the bank earlier this year to make way for Emilio Saracho, a former JPMorgan Chase & Co. vice-chairman charged with stemming losses and fixing its balance sheet.

 

2. Is a sale the likely next step?

 

Nobody knows for sure. Saracho told shareholders in April that the bank would need to raise more capital, with another option being a corporate transaction. Popular said earlier this month that some banks had expressed interest in combining businesses and that it had asked competitors to say whether they’d be interested in buying it. The bank says no final decision has been made about a sale versus other ways to raise money.

 

3. Who could buy Popular?

 

Banco Santander SA has hired Citigroup Inc. to analyse a purchase, people familiar with the plans said this month, while Banco Bilbao Vizcaya Argentaria SA is working with Rothschild to analyze the deal, according to newspaper Expansion. Economy Minister Luis de Guindos has said that Bankia SA, which is state-owned after being bailed out in 2012, is also looking.

 

4. What obstacles are there to a sale?

 

Despite years of taking charges to cover real-estate losses, the lender’s attempts to mop up all the soured assets are far from complete. It still has 37 billion euros of non-performing assets, booked a 3.6 billion-euro loss in 2016 and a further 137 million euros loss in the first quarter. Any bank that buys Popular would itself have to raise a lot of capital to absorb it. Societe Generale SA said in a report that Santander would need 12.5 billion euros, BBVA 9.3 billion euros and CaixaBank SA 7.5 billion euros. At 7.33 percent, Popular’s fully-loaded CET1 ratio, a measure of solvency, is one of the weakest in Western Europe.

 

5. Is there any urgency?

 

There could be. The bank said its first-quarter results, published May 5, showed only a modest 1 percent drop in customer deposits. Even so, Popular’s plight has generated plenty of headlines in the Spanish press since then, perhaps unnerving customers. The bank and its advisers may want to try to resolve its future before Spain’s long August break. A coupon payment on Popular’s riskiest bonds due in July is another focus of attention for investors. The bank has said it will make the payment as scheduled. It will cost about 30 million euros, based on Bloomberg data.

 

6. What’s attractive about Popular?

 

It has about 34 billion euros of performing loans to small and medium-sized enterprises, a high-margin business based on carefully crafted personal relationships. And who doesn’t like a bank with a bit of mystery to it? Popular is well-known in Spain for having close links to the Roman Catholic organization Opus Dei. The bank itself doesn’t say much on the subject. However, when Luis Valls, a former co-chairman Popular died in 2006, the lender said he had been a member.

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Ghost of PartysOver's picture

Ooopppss!

Spiderman Towels for everyone!

RAT005's picture

If this is the Popular Bank, imagine how the Unpopular Bank is doing!

Osmium's picture

Print more money.  Don't these idiots know anything?

NoDebt's picture

Why do you keep saying that word- "perpetual"?  I do not think that word means what you think it means.

 

NoDebt's picture

"the bank has been unable to sell €37 billion of soured property loans fast enough"

There is a word for something that doesn't sell fast enough.  Overpriced.

 

Philo Beddoe's picture

or the price could be fair or cheap but the product is shit. 

or...maybe this stuff is just expensive shit. 

That seems right. 

flapdoodle's picture

or maybe the stuff is good, the price is good, but those who would buy such crap simply aren't interested anymore for whatever reason (e.g they are busy packing their things for Patagonia)

jamesmmu's picture

Forget it, no matter how bad the news/headline is, stocks will go up, always. its out of control.

Bill of Rights's picture

The Trade:

 

Gold up sell BTC Gold down Buy BTC...repeat rinse...

Haitian Snackout's picture

Poco Banco Impopular.

foxenburg's picture

The underlying problem with Popular, as with most European banks, is familiar: the bank has been unable to sell €37 billion of soured property loans fast enough, and is racing to find a partner after Spain's Economy Minister Luis de Guindos declined to consider a public bailout, while a capital increase has faced resistance from existing shareholders

 

I live in Spain. The reason they are "unable to sell" is because they refuse to accept the  true market value. They pretend the properties are still worth what they loaned on them 10 years ago. They could auction them with no reserve - I'd be there as a cash buyer. But on the other hand, if they marked their repossessed properties to market, then they'd all be bust.

floosy's picture

I too would love the opportunity to buy a load of Spanish repos at their correct valuation, but the banks are refusing to sell them for anything near that even though they have been told to offload them by the government.

youngman's picture

They do not mark to market over there

bankbob's picture

I did not realize the Spain had 6 banks left.

My guess is they won't for long.

BritBob's picture

I wonder if  the Spanish government will play the Gibraltar distraction card?

 

Spanish king uses the address of the UN demand to Great Britain return Gibraltar(RT 22 Sep, 2016 )

PM  Rajoy- Gibraltar "this is the such territory in Europe and that affects to our own integrity territorial", said the Mr Rajoy, saying that Britain had "ignored the mandate" of the Assembly General of the UN. (Daily Telegraph, 26 September 2013)

Foreign Minister Dastis: « I am for "Gibraltar, Spanish", but you have to be smart. (8 feb, 2017 copeaxarquia.es).

Gibraltar - Some Relevant International Law: https://www.academia.edu/10575180/Gibraltar_-_Some_Relevant_Internationa...

 

 

Ah well.

SmittyinLA's picture

Spain has decided to designate all their banks bad banks

One thing is for sure this isn't Abengoa related https://defence.pk/pdf/threads/spanish-solar-energy-firm-abengoa-facing-...

Jtrillian's picture

Troika is here to SAVE THE DAY!!!

 

Cozy Vanilla Sugar's picture

Someone once paid par or close for the perpetual bonds of a Spanish bank. How does one pitch those with a straight face to an investment committee?

Ignorance is bliss's picture

Banco Popular used to be a big client of mine in...Puerto Rico. No shit. Bonco Popular is big in P.R. I gotta think their expsoure to  the island default and cascading crises is going to be big.

Bank_sters's picture

contained- the bernank

Larryonlineforex's picture

You can imagine what Germany thinks of the latest calls for the banking union.

Maybe one day when all the skeletons are out of the cupboards of the southern Med countries.

So dont hold your breath