• Spanish bank seeking $2.8 billion in capital to cover losses
  • Lender may suspend dividend as mops up from property bust

Banco Popular Espanol SA plunged after disclosing plans to sell about 2.5 billion euros ($2.8 billion) of new stock to cover losses from Spain’s decade-old property bubble as regulators press European banks to clean up their balance sheets.

Popular will offer 2 billion shares at 1.25 euros, a 47 percent discount from its closing price Wednesday of 2.356 euros, the Madrid-based lender said in a filing to regulators Thursday. The bank said it may post a loss for 2016 and suspend its dividend as “certain uncertainties” could lead to 4.7 billion euros in provisions in 2016.

"This is brutal,” Renta 4 banking analyst Nuria Alvarez said by phone. "It’s an enormous dilution for shareholders.”

The news put a spotlight on southern European lenders saddled with bad loans and sent some Spanish banks lower. Regulators are pressing banks to clean up their balance sheets and build up their buffers against losses. Popular already sold shares to close a capital deficit uncovered during Spanish stress tests in 2012, before the European Central Bank took over that function. The ECB will conduct fresh tests in the third quarter, the first since its 2014 asset review.

“Regulators are probably starting to guide banks on bad loan coverage,” ahead of the stress tests, said Antonio Guglielmi, head of equity research at Mediobanca SpA. “Regulatory uncertainty is affecting the industry and adding pressure on banks with a high portion of bad debt or low coverage ratios, like the Italian lenders.”

Failed property

Popular is seeking to reduce the burden of failed property assets that built up on its balance sheet after Spain’s construction boom turned to bust at the end of the last decade. The bank wants to sweep 15 billion euros of unproductive assets linked to real estate off its balance sheet by 2018 and increase its capacity to cover losses on assets to at least 50 percent from 38 percent at present.

“Popular was below its peers in terms of coverage, and the capital increase will put them on relatively similar levels,” said Karim Bertoni, a portfolio manager at Bellevue Asset Management AG in Switzerland.

Popular shares fell as much as 26 percent to their lowest since 1989 in Madrid trading before paring losses to trade down 24 percent at 1.80 euros at 2.53 p.m. Banco de Sabadell SA was down 5 percent, while CaixaBank SA dropped 4 percent, among the biggest decliners in the benchmark Stoxx Europe 600 Banks Price Index. UniCredit SpA, one of the region’s most thinly capitalized banks, fell as much as 5 percent in Milan trading.

“Other Spanish banks will have to keep building up provisions but they have capacity,” said Javier Bernat, an analyst at Beka Finance SV in Madrid who downgraded Popular on Thursday from buy to neutral. “The problem with Popular was that it was more vulnerable since it has been slower in cleaning up its real estate.”

The bank’s 750 million euros of 8.25 percent additional Tier 1 notes, the first debt securities to take losses if a bank runs into trouble, rose 5 cents to 87 cents, according to data compiled by Bloomberg. Banks may be forced to skip coupon payments or impose losses on AT1 bonds if capital levels fall below regulatory minimums.

UBS Group AG and Goldman Sachs Group Inc. will run Popular’s share sale, with existing shareholders given preferential rights to the new stock.

Set of uncertainties

“We see a set of uncertainties which worry us and we have anticipated with a solution that we think covers all of them,” Chairman Angel Ron said by phone. “By straightening out our capital today we know we can face better whatever comes next. ” Among uncertainties he mentioned regulatory pressures and low interest rates.

Popular estimates it will have a fully-loaded capital ratio of more than 10.8 percent in 2016 after its provisioning effort, the lender said in a presentation for analysts filed with regulators. That measure of financial strength stood at 11.1 percent as of March.

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