Banco Popular 5


What was bound to happen has now finally happened; a major European bank has collapsed. Despite not being one of the largest banks, Banco Popular definitely was one of the better-known names in Spain and Southern Europe as a whole.

Right after last weekend, the ECB – which now is the supervising regulator – decided Banco Popular was either failing or likely to fail. As part of the renewed ‘rescue plan’ for the financial system, the ECB sought a quick and fast solution to avoid any disruptions in the market which could also put a bullseye target on the back of other banks.

Banco Santander will be the ‘hero of the day’, and has agreed to purchase Banco Popular for a symbolic euro. Yes, indeed. One euro. Quite a shock, knowing the bank was worth 1.3B EUR before trading was halted, and in excess of 7B EUR just 24 months ago.

Banco Popular 1

Source: company website

Regulators are patting themselves on the back for a ‘job well done’, and the financial analysts agree a potential systemic crisis has now been nipped in the bud. Great news, right?

It depends on your point of view. Did Banco Popular collapse? Officially not, as it was bailed out by Banco Santander before it would crash. But it’s impossible to deny the bank was indeed failing. A surprise, as the Spanish economy has been recovering, and Banco Popular’s strong position on the SME market should have put the company in a pole position to benefit from the improving economy on the Iberian Peninsula.

Let’s take a step back, and have a look at Banco Popular’s most recent market announcements.

The company did confess a small net loss in the first quarter, but this was entirely due to recording provisions for its poor performing real estate division which contained almost 40B EUR in bad loans.

Banco Popular 2

Source: quarterly report

At the end of the first quarter, Banco Popular had a CET 1 ratio of  10.02%, a total capital ratio of 11.91% and a book value of 2.64 EUR per share.

All three ratio’s or results are good. Sure, the numbers aren’t ‘top of the class’, but perfectly acceptable. Also keep in mind the shareholders of Popular subscribed to a 2.5B EUR rights offering last year, so Banco Popular didn’t ignore its capital position problem at all.

Banco Popular 4

Source: company presentation

Unfortunately the problem got worse. Whereas it reported 17.8B EUR of non-performing loans on 140B EUR in risk assets at the end of Q1 2016, the total value of the NPL’s actually increased in the past 12 months to 19.1B EUR, whilst the total amount of assets decreased to 128.2B EUR. This caused the percentage of non-performing loans as part of the total portfolio to increase from 12.68% to 14.91%. Indeed, one in seven loans made by Banco Popular was non-performing.

Banco Popular 3

Source: quarterly report

Despite the fact the total allowance for credit losses increased by 44% to 10.3%, which boosted the NPA coverage ratio from 36.5% to 45%, Banco Popular was actually trying to grab itself together, under the impulse of its new CEO.

It’s actually surprising to see Banco Popular being forced to go bankrupt (officially ‘selling itself’). Yes, the total size of the bad loans was a real headache, but let’s not forget the bank was generating 2B EUR per year in net interest income, and in the first quarter alone, it reported a net operating income of 309M EUR.

The entire operating income was subsequently used to continue to boost the coverage ratio of the non-performing assets, and if the bank would have kept up this pace, the NPA coverage ratio would have increased from 45% to in excess of 50% by the end of the year, whilst it could continue to advance the sale process of foreclosed real estate to boost its capital position.

It sure sounds and looks like a lot of details aren’t being shared with the market. Was there a run on the bank? Would the ratio of non performing assets continue to increase?

We will never know, but we do know Banco Santander is getting a ‘Jamie-deal’. For just 1 EUR, it’s acquiring the assets which will generate approximately 1B EUR in net income by 2020. So even if you’d throw in  the additional 7B EUR Santander will pump into the Popular-division, the return on investment will be high, at 13-15%.

This begs the question what else was going on in the background?

Did Popular really not have any chance whatsoever of pulling itself together? Or is this a coup from the regulating body to force an intrinsically well-performing bank to ‘sell’ itself to Santander in order to boost Santander’s profitability?

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