Spanish lender Banco Popular's plan to sell about 2.5 billion euros ($2.8 billion) of new shares has dealt a brutal lesson to investors trusting past efforts by regulators and management to clean up European bank balance sheets. The stock fell to a 26-year low after the offering was announced on Thursday.
The fact is that Banco Popular was supposed to already be in the clear. It passed the European Central Bank's flagship 2014 study of over 100 banks' asset quality and resistance to economic shocks, and the Spanish Prime Minister said at the time the country's banks were in "stupendous" shape.
As recently as last month, Banco Popular Chief Executive Francisco Gomez said the bank had a very comfortable core capital level above the regulatory minimum and one of the best leverage ratios in the sector.
The credibility of all involved has taken a fair hit.
The capital raising, which Banco Popular presented as a way to speed up the reduction of bad loans on its books and improve future profits, suggests that the regulator is looking for more on lingering losses from Spain's decade-old property bubble.
That's welcome -- but why will this clean-up be different from the last? Popular's current coverage ratio, or its ability to absorb potential losses from bad loans, is 38 percent. That's far lower than the Spanish bank average of around 56 percent, according to RBC analysts.
Even beleaguered Italian bank Monte Paschi, one of the worst-valued banks in Europe, reported a bad-loan coverage ratio of 49 percent in the first quarter. Yet Popular's end-2016 target is still only 50 percent.
If transparency over the past is lacking, the future's also a worry: analysts reckon the bank's target of 9 percent return on tangible equity in 2018 is much too optimistic, with some betting on 5 to 7 percent instead. In the world of clean-ups, this looks like a tentative wipe rather than a hose-down.
The worry is that the full cost of Spain's past boom-and-bust cycle was never realized -- and investor doubts over the value of assets seized as collateral won't help dispel that fear. Spanish banks have booked 240 billion euros of provisions against bad debt since December 2007, according to Berenberg, or about 10 percent of pre-crisis balance sheets. That's less than Ireland or Japan.
Sure, Spain has less of an overall bad-loan problem than Italy and its economy has clearly turned a corner, growing at the fastest pace in eight years in 2015. But loan growth is still feeble and bad debts remain a drag.
While Banco Popular may be an outlier in Spain, it has problems that are fairly common across banks in the euro area: questionable balance-sheet strength, a rough revenue outlook and governance that some shareholders reckon needs strengthening. The ECB is doing its best to restore investor confidence, but that, and trust, are in short supply. Expect battered euro zone banks to remain so for some time.
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