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Spain’s Most Italian Bank Still “Solvent,” Claims Finance Minister

Summary:
It just doesn’t let up with this bank. By Don Quijones, Spain & Mexico, editor at WOLF STREET. The future continues to look bleak for Spain’s most Italian bank, Banco Popular, which ironically once bore the slogan “Our Past and Our Present Guarantee Our Future.” Things have gotten so bad that when the country’s Minister of Finance Luis de Guindos was asked by a reporter today about the bank’s state of health, he responded: “the bank is solvent.” Which is kind of like a doctor saying, “the patient is alive.” Not exactly reassuring. Popular just had its worst day of 2017 after seeing its penny stock tumble over 10%, from €0.90 to €0.82. This is a bank that was once ranked among the world’s most profitable by ratings company IBCA and which not so long ago boasted a share price of over €15. That was before its management decided to bet the farm on risky real estate investments at the height of an insane property bubble and then took too long to clean up afterward. Even now, nine years after the the bubble’s crash, roughly a quarter of Popular’s total loan portfolio is still concentrated in the real estate and construction sectors. In November last year. it had over €30 billion worth of bad loans and non-performing assets on its books, which it continues to struggle to offload without incurring fatal losses.

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It just doesn’t let up with this bank.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

The future continues to look bleak for Spain’s most Italian bank, Banco Popular, which ironically once bore the slogan “Our Past and Our Present Guarantee Our Future.” Things have gotten so bad that when the country’s Minister of Finance Luis de Guindos was asked by a reporter today about the bank’s state of health, he responded: “the bank is solvent.” Which is kind of like a doctor saying, “the patient is alive.” Not exactly reassuring.

Popular just had its worst day of 2017 after seeing its penny stock tumble over 10%, from €0.90 to €0.82. This is a bank that was once ranked among the world’s most profitable by ratings company IBCA and which not so long ago boasted a share price of over €15. That was before its management decided to bet the farm on risky real estate investments at the height of an insane property bubble and then took too long to clean up afterward.

Even now, nine years after the the bubble’s crash, roughly a quarter of Popular’s total loan portfolio is still concentrated in the real estate and construction sectors. In November last year. it had over €30 billion worth of bad loans and non-performing assets on its books, which it continues to struggle to offload without incurring fatal losses. It was also the country’s worst performing bank in the ECB’s last stress test.

In 2016, Banco Popular registered annual losses of almost €3.5 billion after provisioning part of its giant stock of non-performing loans. But according to the results of a new internal audit published today, that was optimistic: the banks’ actual losses were €600 million larger. Hence today’s fresh rout.

Popular didn’t provision enough last year for its “delinquent loans, risks and associated guarantees,” says the auditor, PwC. In response, the bank announced that while it does not see the need to reformulate last year’s accounts, it will make sure that this year’s results reflect the difference.

More damning still, the auditor has unearthed evidence that as part of that €2.5 billion rights issue — its third effort since the crisis to raise capital — Popular’s management offered low-interest loans to clients in order for them to buy the bank’s share offering.




This latest accusation reinforces allegations made at the time by the Spanish investment group Blackbird that the bank was offering customers dirt-cheap loans or refinancing deals, at an interest rate of just 2.5%, as long as they used some of the funds to purchase the bank’s newly issued shares from the bank. From the auditor’s report:

“Certain loans to customers that could have been used to purchase shares in the capital increase carried out in May 2016, the amount of which, if verified, should be deducted in accordance with current regulations of the bank’s regulatory capital, without Any effect on net income or equity.”

Popular’s new president Emilio Saracho, formerly of JP Morgan Chase, estimates that the purchase of at least 205 million shares from a sample of 426 million was financed in this way. This is not just unethical, it’s illegal. Banks cannot lend customers money in order for them to buy the banks’ own shares when it issues them to raise capital. For the moment, the bank’s only punishment is that it will have to deduct the money it lent those customers from its capital base.

As for the bank’s long-suffering investors, they are once again beginning to fret about what might be lurking around the next corner. Within hours of releasing the results of the internal audit, Popular’s management announced that its CEO, Pedro Lorena, formerly of Deutsche Bank, had resigned after just six months in the post — for “personal reasons.”

In the meantime, hedge funds in Connecticut and the City of London, scenting blood, are increasing their shorts against the stock. Combined they now hold 10.7% of the bank’s total capital, eclipsing the total holdings of the bank’s biggest shareholder, Sindicatura de Accionistas, which represents some 5,000 investors.

Another big investor, Unión Europea de Inversiones, was itself on the verge of bankruptcy at the beginning of this year as a result of the constantly plunging value of its holdings. Last week it was forced to cut all ties with Banco Popular following the launch of an investigation into its irregular financing by Spanish market regulators. It turns out that one of its biggest (and most generous) creditors was…  Banco Popular.

In order to stay alive this long, Spain’s sixth biggest bank has repeatedly broken one of the cardinal rules of fiduciary practice: do not finance your own investors. It has also unleashed a string of capital expansions, drastically diluting the holdings of its shareholders. Yet the boat continues to leak. Barring state intervention, the only remaining hope it had of salvation was to spin off €6 billion worth of dodgy assets into a separate investment vehicle optimistically dubbed Sunrise that was to be floated on the stock exchange. That was its Plan Z. And according to its new president, it’s dead.

But apparently a miracle may still happen: Greek property magnate George Logothetis has expressed an interest in buying up some of the toxic assets off Popular’s balance sheets at a big discount. Or else it could merge with a bigger bank. It would certainly have the ECB’s blessing, which would like nothing more than to see bigger banks in Europe. There are plenty of suitors including Spain’s two alpha lenders, Santander and BBVA, but none of them would want to touch the billions of euros of toxic assets festering on Popular’s books. By Don Quijones.

How many banks are insolvent in Italy? Turns out, a lot! But elections are coming up. Read…  Here’s Why Italy’s Banking Crisis Has Gone Off the Radar




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