Spanish banking giant Santander needs to raise €7 billion after buying stricken Banco Popular for just €1


A pedestrian stands beside a logo for Spain's Banco Santander in London January 28, 2009. Spain's Santander will compensate all individual clients who suffered losses in the alleged Bernard Madoff fraud, the bank said on Tuesday.The bank plans to issue 1.38 billion euros ($1.82 billion) in preferential shares with an annual 2 percent coupon to compensate its clients, it said.
A
pedestrian stands beside a logo for Spain's Banco Santander in
London.

REUTERS/Toby
Melville

 

MADRID/FRANKFURT — Spain's biggest bank Santander is
to buy struggling rival Banco Popular for a nominal one euro
after European authorities determined the lender was on the verge
of insolvency.

Santander will ask investors for around 7 billion
euros ($7.9 billion) of fresh capital to cover the cost of
bolstering Popular, which has been weighed down by billions of
euros of risky property loans.

The rescue, which followed a declaration by the European Central
Bank that Banco Popular was set to be wound down, marks the first
use of an EU regime to deal with failing banks adopted after the
financial crisis.

It breaks the mould of using taxpayers' money, instead imposing
steep losses on shareholders and some creditors of the bank, a
step two debt investors described as unexpected.

The owners of so-called AT1 and AT2 bonds suffered roughly 2
billion euros of losses, while shareholders lost everything.
Senior bondholders were spared.

Popular, Spain's sixth biggest bank, has long struggled and
repeatedly asked shareholders for fresh money. But a recent
acceleration in the withdrawal of deposits compounded its funding
problems, triggering its sale.

The ECB had blamed what it called a "significant deterioration of
the liquidity situation of the bank in recent days" in concluding
that it "would have, in the near future, been unable to pay its
debts or other liabilities."

Elke König, Chair of the Single Resolution Board, an EU agency
that winds down stricken banks, said that intervention had been
needed overnight.

The Spanish reaction to the problem lender was prompt when
compared to Italy, which has been grappling for years with the
problems of its lenders.

In contrast to the banking crisis that unfolded in 2008, the move
in Spain was also accepted with calm on stock markets and
European bank shares moved upwards.

"This shouldn't pose any real problems for other banks," said
Aberdeen Asset Management Head of Credit Research Laurent Frings.
"But it does show that there is real risk in investing in these
second-tier names."

Botin sees benefits

Spanish Economy Minister Luis de Guindos said that
Santander's takeover was a good outcome for Popular
given its situation in recent weeks and it would have no impact
on public resources or on other banks.

Santander Chairwoman Ana Botin presented the
business case for the hastily-organised deal, arguing that the
combination of the two would strengthen the group's geographic
reach as the economy in Spain and Portugal improved.

"We welcome Banco Popular customers," she said.

Santander, which was unaffected by the banking
crisis in Spain that forced Madrid to seek international aid,
said buying Popular would accelerate growth and profit from 2019.

It said it would set aside 7.9 billion euros to cover the cost of
so-called non-performing assets – a reference to loans at risk of
non-payment.

Struggling under the weight of 37 billion euros of non-performing
property assets left over from Spain's financial crisis, Popular
had seen its share price slump by more than a half in recent
days.

Popular was among a handful of banks that emerged as vulnerable
to stress, such as an economic downturn, in a simulation carried
out by the European Banking Authority last summer.

Popular remained vulnerable. Its ratio of risky loans is around
three times above the average of its Spanish rivals.

But Popular's small and medium-sized company loan portfolio, the
largest among Spanish lenders, presents an opportunity for
Santander, which said it would now lead this growing
market. 

Read the original article on Reuters. Copyright 2017. Follow Reuters on Twitter.

 

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