By Jeannette Neumann
MADRID -- Banco Santander SA has acquired Spanish rival Banco
Popular Español SA in an overnight auction for the nominal amount
of EUR1 ($1.13) after the European Central Bank determined the
ailing lender was near collapse, providing a test of Europe's
banking rules enacted after the financial crisis.
The overnight rescue of Banco Popular marks a swift and decisive
response by the European Union to stop the downward spiral of
Spain's most troubled big bank.
While the Spanish banking sector is largely healthy, Banco
Popular has proved a weak link. The lender's balance sheet is
weighed down by around EUR37 billion in foreclosures and other
nonperforming assets accumulated since the country's real-estate
boom went bust.
The sale of Banco Popular also marks the first major move by the
Single Resolution Board, the European body charged with dealing
with failing banks and ensuring that taxpayer money doesn't go to
bailing out troubled lenders.
Instead, shareholders and junior debtholders are in line for
losses, along with holders of contingent convertible debt, also
known as CoCos, which European authorities have encouraged banks to
issue in recent years.
Lenders across the region, including Banco Popular, have used
this kind of debt to raise billions of euros of capital. The
securities pay coupons like normal bonds, but convert to shares if
the bank's capital ratios sink below a certain level, thus making
them the first bondholders to be wiped out in a bank failure.
Analysts said the rescue could lead investors to demand greater
premiums on bonds issued by European banks struggling with soured
loans or low provisions.
The Single Resolution Board's initiative in Spain follows
criticism that Italy last month sidestepped Europe's new rules by
using a loophole to approve the injection of public money into
troubled lender Banca Monte dei Paschi di Siena SpA.
Banco Popular has been floundering for months though in recent
weeks its crisis deepened as investors became increasingly
concerned it wouldn't be able to sell assets, raise capital or find
a buyer.
Like other troubled lenders in Italy, Portugal and Greece and
elsewhere in Europe, the bank hasn't been able to generate strong
enough profits to help shore up its balance sheet. Banco Popular's
share price had plummeted more than 50% in the past week alone.
The ECB had become increasingly concerned about the
deterioration of Banco Popular's finances, before determining on
Tuesday "that the bank was failing or likely to fail," according to
a statement.
After recent attempts by Banco Popular to find a buyer in a
private sale failed, EU banking authorities launched a rapid-fire
auction Tuesday night, with Santander emerging as the buyer early
Wednesday morning, Santander Executive Chairman Ana Botín said. She
declined to say how many other banks were involved in the
auction.
One of the banks invited to the Tuesday auction was Spain's
Banco Bilbao Vizcaya Argentaria SA, people familiar with the
process said separately. But Spain's No. 2 bank by market value
decided against bidding for Banco Popular, those people added.
"Our approach is to turn the bank into a digital house, so when
we look at a physical asset like Popular, we are extremely
demanding on pricing, " BBVA Chairman Francisco González said at an
event in Madrid. The sale, he added, was "good news from the
economic point of view because there was a problem in the system
and that problem was fixed."
The rescue imposed steep losses on junior bondholders and wiped
out shareholders, while senior bondholders were spared.
Questions remain over whether senior debtors will necessarily be
off the hook in future bank rescues if a buyer isn't found, for
instance, or if the rescued lender is in worse shape than Banco
Popular. "There will be occasions when senior debt will suffer,"
said John Raymond, an analyst with CreditSights in London.
The transaction also spared taxpayers, fulfilling a major
objective of EU banking rules that were enacted after a number of
European governments used public money to shore up teetering banks
during the financial crisis.
A private solution for a teetering bank "is great news for
Europe," Ms. Botín said during a news conference in Madrid. "This
is a strictly private operation." The speed with which Banco
Popular was rescued belies the image of EU institutions as
lumbering and inefficient, Ms. Botín said.
The assertiveness by the European authorities in the Spanish
case may quiet some criticism of how they have handled the Italian
banking crisis. However, it remains to be seen how the new banking
regime responds to situations more complicated than that of the
Banco Popular, where authorities had a financially sound buyer in
Santander and the Spanish banking sector is generally in rude
health.
The combination of Banco Popular and Santander creates Spain's
largest bank, with 17 million customers, leapfrogging rivals Banco
Bilbao Vizcaya Argentaria SA and CaixaBank SA. Santander also
acquired Banco Popular's unit in Portugal, where Santander has a
large market share. Santander, which was already one of Europe's
largest lenders, now plans to raise EUR7 billion in a rights issue
before the end of summer to fund a cleanup of Banco Popular's
balance sheet. Santander shares closed down 0.9% in Madrid.
Santander can benefit from Banco Popular's strong franchise in
lending to Spain's small- and medium-size businesses. Spanish banks
have tried to boost their loans to small- and medium-size companies
as their bread-and-butter business of selling mortgages has been
less robust amid Spain's economic recovery from a deep crisis.
Santander said the transaction is expected to generate a return
on investment of 13% to 14% in 2020 and would boost earnings a
share by 2019.
Santander will book EUR7.9 billion in provisions for Banco
Popular's nonperforming assets. That will increase coverage for
real-estate assets and nonperforming loans to 69% from 45%, which
was the lowest coverage ratio among major Spanish banks.
Citigroup Inc. advised Santander. Jefferies International Ltd.
and Spain's Arcano Partners advised the Spanish bank bailout fund
known as FROB, which helped orchestrate the rescue.
-- Julia-Ambra Verlaine and Ben Dummett contributed to this
article.
Write to Jeannette Neumann at jeannette.neumann@wsj.com
(END) Dow Jones Newswires
June 08, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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