Just four days after Banco UnPopular chairman Emilio Saracho told his employees "don't panic" as a result of the company's crashing stock price, on Wednesday morning the ECB confirmed that the sixth largest Spanish bank was indeed on the verge of collapse and ordered it to be sold, which is what happened when Santander acquired the bank for €1.00 after Santander's equity and riskiest debt instruments were bailed-in, i.e. wiped out, imposing losses of about €3.3 billion on the bank’s securities holders.
This transaction was bad news for the company's equity and holders of contingent convertible AT1 and AT2 holders, who have the distinction of holding the first major bank capital bonds to be bailed-in/wiped out under new EU regulations. While Banco Popular senior debt is 12 points higher this morning, the AT1 perps are trading at 5%, down 50 points. As Mint's Bill Blain notes, "we’ve not seen crashes like that since 2008."
The ECB forced the transaction, blaming what it called a "significant deterioration of the liquidity situation of the bank in recent days" in concluding that it "would have, in the near future, been unable to pay its debts or other liabilities." Elke König, Chair of the Single Resolution Board, an EU agency that winds down stricken banks, said that intervention had been needed overnight.
The mechanics: in the first use of Europe's newsly adopted bail-in mechanism, Popular would see shares resulting from the conversion of its riskiest debt and Tier 2 instruments wiped out, imposing losses of about 3.3 billion euros on the bank’s securities holders. Concurrently, Popular would be acquired by Spain's biggest bank, Santander for a nominal €1.00. To fund the deal, Santander will raise €7 billion through a rights offer to bolster Popular’s balance sheet, it said in a filing. The lender will acquire Popular for 1 euro after its stock and shares resulting from the conversion of its riskiest debt and Tier 2 instruments were wiped out, imposing losses of about 3.3 billion euros on the bank’s securities holders.
The rescue, which followed a declaration by the ECB that Banco Popular was set to be wound down, marks the first use of an EU regime to deal with failing banks adopted after the financial crisis. It breaks the mould of using taxpayers' money, instead imposing steep losses on shareholders and some creditors of the bank, a step two debt investors described as unexpected. As we had reported over the past month, Popular, Spain's sixth biggest bank, has long struggled and repeatedly asked shareholders for fresh money. Popular’s 37 billion euros of non-performing assets, the legacy of real estate-linked lending before Spain’s property crash, drained profit and capital, forcing new Chairman Emilio Saracho to say in April that the bank would need to sell new shares or find a buyer. The situation had deteriorated in recent days, with its market value falling by about half in a week to 1.3 billion euros. The most recent acceleration in the company's bank run compounded its funding problems, triggering its sale.
It is unclear if today's "rescue" will stem the deposit withdrawal.
As Reuters notes, unlike Italy, which has been grappling for years with the problems of its lenders, the Spanish reaction to the problem lender was prompt. Furthermore, and in contrast to the banking crisis that unfolded in 2008, the move in Spain was also accepted with calm on stock markets and European bank shares moved upwards.
"This shouldn't pose any real problems for other banks," said Aberdeen Asset Management Head of Credit Research Laurent Frings. "But it does show that there is real risk in investing in these second-tier names."
In an attempt to ease concerns, Spanish Economy Minister Luis de Guindos said that Santander's takeover was a good outcome for Popular given its situation in recent weeks and it would have no impact on public resources or on other banks.
“It’s a unique opportunity at a very good time in the cycle," Santander Chairman Ana Botin said in a presentation to analysts. Annual cost synergies of almost 500 million euros per year from 2020 will give Santander some of the best efficiency ratios in Spain and Portugal, the bank said. In a separate television interview, Botin said that the bank was notified at 6. a.m. today that it had won the bid for Popular. Santander won an auction carried out by the SRB and Spain’s bank rescue fund FROB to buy Popular without taxpayer support, the bank said. Adding Popular’s business will create the biggest banking business in Spain with 17 million customers.
Santander fell as much as 3.4 percent to 5.6 euros, before paring declines to 5.77 euros as of 10:42.a.m. in Madrid. Botin presented the business case for the hastily-organized deal, arguing that the combination of the two would strengthen the group's geographic reach as the economy in Spain and Portugal improved. "We welcome Banco Popular customers," she said. However, Banco Popular's customers, having come this close to losing their money, may just decide to keep it in the mattress instead.
And while the transaction has yet to be fully digested, here are some initial sellside reactions, courtesy of Bloomberg.
BLOOMBERG INTELLIGENCE (Scott Mc Evatt)
- Santander’s opportunistic acquisition of Popular fits into group’s strategy to boost SME exposure
- However, doubt over deal is likely to center on Popular’s sizable non-performing assets
- Santander’s plans to boost coverage on real-estate NPAs should provide some comfort, though target of reducing these assets appears bold
MIZUHO (Roger Francis)
- Deal is probably “excellent” for Santander in medium term, though it may weigh on earnings in the first or second year
- Takeover adds significant business to Santander in terms of SME-lending and credit-card clients albeit with considerable real-estate exposure and non-performing loans that are largely behind Popular’s capital writedowns
- Sees little impact on wider European banking sector as investors now recognize the situation poses no new dangers to the financial system
KEPLER CHEUVREUX (Carlos Garcia)
- Santander downgraded to hold vs buy and removed from Spanish top picks on risks from acquisition
- Limited time for due diligence on Popular’s real-estate exposure and bad loans and other potential risks and costs involved in breaking up the joint ventures raises doubts on whether the measurement of risks has been adequate
- Combined entity will lose market share; Kepler says doubtful that Popular will be easy to integrate given its “different” risk management
- Kepler expects litigation for “mis- selling” will require reimbursement of amount invested, given that most of the Tier 2 is held by retail clients; would not rule out litigation from AT1 holders
NATIXIS (Robert Sage and Alex Koagne)
- Santander’s acquisition of Popular in a deal approved by European regulators shows that weaker parts of region’s banking system are being addressed; fall in systemic risk is positive for wider industry
- Sees Popular as containing attractive retail/SME franchise with higher returns and margins
- Santander will need to convince investors Popular’s non-performing assets are properly marked after the takeover
- Rates Santander neutral with PT EU6