Popular Defying Oliver Wyman Tests Allianz’s Spain Appetite
The stress test by consultant Oliver Wyman showed Popular had a capital deficit of as much as 3.22 billion euros ($4.15 billion) and would earn 5.8 billion euros in pre-provision profit from 2012 to 2014 or 4.2 billion euros in its worst-case scenario. Popular, Spain’s sixth-largest lender by assets, said yesterday it would have an operating profit of 7.2 billion euros over that period as it unveiled plans for a share sale of as much as 2.5 billion euros to boost capital.
The lower the bank’s future earnings, the more the lender will have to raise capital from investors, diluting existing shareholders and increasing the likelihood it will have to seek a government bailout.
“Oliver Wyman has reduced our pre-provisioning profit by 42 percent -- obviously we don’t share that,” Jacobo Gonzalez- Robatto, Popular’s chief financial officer, said in a webcast for analysts yesterday. “Time will tell that we are right, and they are wrong.”
After concerns about real estate losses helped push Madrid- based Popular’s shares down 90 percent from their 2007 peak, the bank risks further straining its credibility by challenging the results of stress tests that the government says are the most detailed analysis yet of Spain’s lenders. Popular was Spain’s only publicly traded bank that hasn’t been nationalized to have a capital shortfall in the tests.
“You’d think meekness would be preferable to valor in Popular’s case, especially when they seem to have the whole range of opinion lined up against them,” said John Raymond, a banking analyst at CreditSights Ltd. in London. “It would probably go down better if they just acknowledged the numbers because in fact it’s hard to say what will happen.”
An Oliver Wyman spokeswoman in Madrid declined to comment.
Spain published the results Sept. 28 of the firm’s independent stress test of the banking system that showed seven banks, including Popular, out of 14 that were analyzed had a combined capital shortfall of 59.3 billion euros. Spanish banks face a capital shortfall that could climb to 70 billion euros to 105 billion euros to absorb losses and keep capital ratios above regulatory thresholds, Moody’s Investors Service said in a report yesterday.
Popular will ask major shareholders, including Allianz, which has been an investor for 25 years, and Credit Mutuel Group to buy shares in its capital increase, Gonzalez-Robatto said. Allianz, Europe’s biggest insurer, holds a 6.3 percent stake while a shareholders’ syndicate has 9.7 percent and Credit Mutuel Group 4.5 percent, regulatory filings show.
“We’re not going to build a rosy picture just to mislead investors,” Gonzalez-Robatto said. “We want to be entirely realistic. Why? Because our shareholders trust us.”
Popular’s shares slid 1 percent to 1.58 euros at the close of trading in Madrid today, extending yesterday’s 6.2 percent decline. The stock is down 55 percent this year.
“We like the fact that they are cleaning up their balance sheet and accelerating that whole process,” said Carlos Joaquim Peixoto, an analyst at Banco BPI SA (BPI) in Porto, Portugal. “The profitability targets look ambitious.” The bank’s estimate of a 1.4 billion-euro profit in 2014 is 20 percent higher than BPI’s, said Peixoto, who recommends reducing Popular holdings.
It’s unclear why an investor such as Allianz would want to participate in a share sale, said Stefan Bongardt, an analyst with Independent Research GmbH in Frankfurt, who has a hold recommendation on Popular’s shares.The bank’s share increase could be equal to 75 percent of its current market value.
“To invest money in a Spanish bank is not a good idea when everyone is reducing their exposure to the south,” he said. “Allianz should have better investment opportunities than a Spanish bank.”
Allianz declined to comment on whether it will take part in the share sale because Popular hasn’t made a formal approach, Stefanie Rupp-Menedetter, a spokeswoman for the Munich-based insurer, said in a phone interview. A spokesman for Paris-based Credit Mutuel, a customer-owned bank, declined to comment.
Popular combined its decision to seek as much as 2.5 billion euros from investors with a new business plan that confirms its operating profit predictions, speeds up recognition of loan losses and relies less on anticipated one-time gains from asset sales. The bank will suspend its October dividend and take 9.3 billion euros of writedowns in 2012 as it predicts a loss for the year of 2.3 billion euros, it said in a filing.
The plan is to clean up the balance sheet, restore its dividend next year and return excess capital to shareholders in 2014, Gonzalez-Robatto said. Popular wants to avoid taking state aid because as a private company its should resolve the concerns related to Spain’s property boom by itself, he said.
Banks that need to bolster capital by more than 2 percent of risk-weighted assets must 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 equals 3.9 percent of risk-weighted assets, putting pressure on Popular to raise funds quickly or face taking state aid.
Popular can generate revenue by re-pricing loans to customers more quickly than competitors and also has “floors” on mortgage loans that limit declines in income when interest rates fall, said Gonzalez-Robatto. Popular, which has 2,714 branches and 109 billion euros in loans, made 1.18 billion euros in pre-provision income in the first half of this year compared with 1.13 billion euros for CaixaBank SA (CABK), which has 6,541 branches and 229 billion euros of loans, he said.
“These guys have been taken out by the crisis, and they have shown they do not know what is coming down the line at them,” Simon Maughan, a financial industry strategist at Olivetree Securities in London, said in a phone interview. “They’re still telling people what they’ll be making two years out when they’ve shown that they don’t know.”
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