The Spanish lender has tapped shareholders for new capital three times in the last five years and is now racing to find a buyer who can help plug an estimated 5 billion-euro capital gap. The bank has survived Spain's real-estate bust, but it's definitely not the fittest.
The question now is whether Banco Popular Espanol SA can actually sell itself or find funding from elsewhere. If it can't, then its fate starts to look much like that of Italy's Banca Monte dei Paschi di Siena SpA, which failed in a last-ditch attempt to raise capital last year and was forced into a bailout (or "precautionary recapitalization"). The Spanish government sees no reason to go down that road, judging by its recent moves to defend Popular's creditworthiness and tout its attraction to potential buyers.
But after so many false dawns, it's a definite risk.
Investors reckon there's an increasing likelihood of an acquirer waiting in the wings -- a small comfort, perhaps, given the 98 percent fall in the stock since its 2007 high. Banco Santander SA has hired Citigroup Inc. to advise it on a potential bid, according to Bloomberg News. Shares of Popular jumped almost 10 percent on Friday, though it's worth remembering this is basically a penny stock that is also heavily shorted. Popular's contingent convertible debt, which has sold off in recent weeks on fears the bank might stop paying coupons to save cash, also rallied.
Finding a buyer should by no means be impossible. The Spanish economy is a poster child of reform and recovery since it exited recession in 2013. Banks like Santander or BBVA might see Popular as a chance to capture more domestic growth at a bargain price. Banco Popular also has a strong franchise in small-to-medium-sized business lending. The 3-billion-euro price tag, a 70 percent discount to book value, might be just cheap enough to compensate for loan losses that still need to be taken.
But even interested parties will find it hard to get their own shareholders on board for the ride. A deal would likely push Santander into a capital increase of its own, given that its 10.6 percent core Tier 1 ratio is one of the lowest in its peer group, according to Bloomberg Intelligence.
There would likely be restructuring and other clean-up costs to come on top of the estimated loan-loss provisions. It's not clear what other skeletons are lingering in Popular's closet after years of mismanagement. The bank's last CEO, Pedro Larena, stepped down just seven months into the job after an internal audit uncovered more losses.
Even in this environment of renewed investor appetite for euro-zone banking shares, with Deutsche Bank and Unicredit successfully raising capital, it seems a tough story to sell to BBVA Chairman Francisco Gonzalez Rodriguez or Santander's Ana Botin -- who has yet to oversee a big acquisition since taking the helm in 2014.
Without a buyer, the options look limited for Popular. Shareholder patience has been stretched to the limit. Asset sales will only delay the pain, not end it. And if no large-scale solution is in sight, regulators and financial markets will keep ratcheting up the pressure. Governments elsewhere have managed to kick the can down the road to avoid taking hits: Even now, five months after Monte Paschi's request for state assistance, Italy is still haggling with the ECB over its rescue plan.
Spain may prove to be yet another test of financial Darwinism against political expediency. This saga is far from over.
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