Banco Popular Espanol SA will seek to raise as much as 2.5 billion euros ($3.2 billion) from a stock sale and suspend its October dividend as the Spanish bank tries to cover a shortfall found in stress tests. The shares plunged.
The bank expects to book a 2012 loss of 2.3 billion euros, compared with a previous estimate for a profit of 400 million euros, as it speeds up recognition of loan impairments and relies less than it previously planned on capital gains, Chief Financial Officer Jacobo Gonzalez-Robatto said on a webcast for analysts today. The lender agreed to the capital increase and reaffirmed its commitment to remain independent at a board meeting in Madrid yesterday, the bank said in a filing.
The capital increase may be equivalent to 80 percent of the bank’s current market value. Popular, founded in 1926, is aiming to avoid taking state aid after a stress test of the Spanish banking system by consultant Oliver Wyman published on Sept. 28 showed the country’s sixth-biggest lender by assets had a capital shortfall of 3.22 billion euros in an adverse economic scenario.
“Every man and his dog has known for a long time that Popular would need to raise capital, but it seems the only ones who didn’t were Popular’s management,” Simon Maughan, a financial industry strategist at Olivetree Securities in London, said by phone today.
Gonzalez-Robatto had said in July that Popular would do “whatever is in our hands not to ask for any penny” from the government.
Popular slid 10.5 cents, or 6.2 percent, to 1.60 euros at the close in Madrid, paring earlier losses of as much as 14 percent. The company has a market value of about 3.3 billion euros.
Before today, the stock had plunged 52 percent this year, compared with a 15 percent drop for Banco Sabadell SA, a similar-sized lender that had no capital shortfall in the Spanish stress test.
The share sale may go ahead at a discount of about 40 percent, Gonzalez-Robatto told reporters in Madrid today. If Spain seeks a European bailout, that would help the sale because it would remove some uncertainty for investors, he said.
“We are going to be generous in the rights issue, because that money is from our shareholders,” Gonzalez-Robatto said on a webcast. “We are going to invite our shareholders basically to join us in an extremely bright future for Banco Popular.”
The bank’s biggest shareholders include Allianz SE, Europe’s biggest insurer, which holds a 6.3 percent stake, and Portuguese billionaire Americo Amorim, who owns 4.1 percent. The board decision to approve the capital increase was unanimous, Gonzalez-Robatto said.
Popular will set up a so-called internal bad bank to manage soured real estate as it writes down 9.3 billion euros in 2012, an increase from the 7.7 billion euros in its business plan given in the second quarter of this year, Gonzalez-Robatto said.
The bank now estimates capital gains from asset sales during 2012 and 2013 will be 545 million euros, down from the 2.3 billion-euro estimate in its business plan, because it “doesn’t have time” to count on that income, Gonzalez-Robatto said. The bank has also shelved any plans to buy other lenders for now, he said.
Popular expects to earn 547 million euros in 2013 and 1.41 billion euros the following year, based on its ability to generate 7.2 billion euros of operating profit from 2012 to 2014, Gonzalez-Robatto said. Popular aims to restore its dividend policy in the first half of 2013 and will seek a dividend payout of 50 percent next year, he told analysts.
Gonzalez-Robatto said as many as 12 banks had come forward to offer underwriting services for the share sale and the bank had received underwriting commitments of 7.5 billion euros. He said it would take about five weeks to prepare the transaction.
The stress tests reported a capital deficit for the industry of 59.3 billion euros. By showing how banks would stand up to an extreme scenario -- three years of economic contraction in a row -- the tests are designed to highlight the strong and weak links in Spain’s banking industry.
The tests of 14 lenders showed seven, including Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA, had no capital shortfall, while those with deficits included the Bankia group, Catalunya Banc and Popular.
Banks that need to bolster capital by more than 2 percent of their risk-weighted assets have to issue convertible bonds to be bought by the government’s rescue fund as a precautionary measure to cover the shortfall. The 3.22 billion-euro deficit was equal to 3.9 percent of risk-weighted assets, putting pressure on Popular to raise funds quickly or face having to take state aid.
Investors must make clear their willingness to quickly relax financing terms for Spain’s stronger banks to show that the stress-test process is credible, Jose Manuel Campa, a former deputy finance minister, said in an interview.
“If we don’t see over the next month or six weeks a significant improvement in the ability to tap the markets by the banks that are considered solvent, regardless of the capital needs, I think that would be a major failure,” said Campa, who is now a professor at the University of Navarra’s IESE business school in Madrid.
The stress-test process may also unleash a fresh bout of banking consolidation by pushing lenders to shrink their business or seek mergers if they’re short of capital, said Campa. Santander Chief Executive Officer Alfredo Saenz said in a Sept. 25 presentation that as many as 15,000 of about 40,000 bank branches in Spain would close in coming years and that “subscale” banks would be absorbed by stronger ones.
“Although in the current context it’s understandable that the big Spanish banks don’t have the appetite to increase their market share in Spain, it’s not easy to imagine an effective bank-restructuring process without the contribution of their great financial capacity,” Francisco Uria, a partner responsible for the banking industry at audit firm KPMG’s Spanish unit, said by e-mail.