Short-sellers have a field day with Spain’s “Most Italian Bank”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Things have gotten so serious at Spain’s sixth biggest bank, Banco Popular, that The Wall Street Journal just christened it “Spain’s most Italian bank.” It wasn’t meant as a compliment.
These days the bank’s second biggest block of shareholders are short-sellers. They include some of the biggest hedge funds on the planet, from UK-based Oxford Asset Management, which holds a short position of 0.53% of the banks’ total shares, and Marshall Wace (2.23%) to Connecticut-based behemoth AQR Capital Management (2.92%).
As of Nov 25, short-sellers held 8.6% of the bank’s capital. It was enough to attract the unwelcome attention of Spain’s market regulator, CNMV, which has so far refused to ban shorting of the stock but has launched an investigation into whether a group of insiders led by Mexican billionaire Antonio Del Valle is using underhand tactics to cheapen the stock in preparation for a takeover bid.
It’s certainly the largest short position the bank has ever faced and over four times the accumulated short positions at rival institutions like Banc Sabadell. It’s also just one percentage-point short of eclipsing the total holdings of the bank’s biggest shareholder, Sindicatura de Accionistas, which represents some 5,000 investors, including the powerful religious order, Opus Dei.
Those investors have seen the value of their shares crumble by over 70% so far this year and 96% since the current chairman, Ángel Ron, took the reins in 2004. Today was a rare good day: shares rose over 5% to a whopping €0.83 on renewed speculation that Ron might finally be replaced. He is blamed (though has miraculously not been fired) for pushing Popular, once ranked among the world’s most profitable banks by ratings company IBCA, into risky real estate investments before the financial crisis and then taking too long to clean up afterward.
“Popular’s balance-sheet cleanup continues to drag,” Berenberg Bank analyst Andrew Lowe wrote on Nov. 2. “Its capital position is again in doubt.” It’s estimated that over 30% of the bank’s loans and property assets are nonperforming, compared with around an already catastrophic 15% for Spanish banks as a whole.
The only way for the bank to remain a going concern for the foreseeable future is if it dumps a large part of its toxic baggage. But as The WSJ points out, that’s easier said than done:
Its real-estate assets are of such poor quality that it would have to divert revenue toward more provisions to cover loan losses. Alternatively, it could sell some property assets at a loss. Either way, profits would take a big hit.
With the bank already expected to report losses of around €2 billion this year, as a result of billions of euros of provisions, that is not an option. Instead, what it plans to do is spin off €6 billion worth of dodgy assets into a separate investment vehicle that will be floated on the stock exchange early next year. As things currently stand, the new firm’s capital — whose total amount is yet to be determined — will be provided initially by Popular — this is a spin-off, not an IPO — and will be divvied up among its shareholders.
The plan, which has been under deliberation for over a year and is still not ready for full public unveiling, is far from convincing. Doubts remain over the quality of the assets that would be heaped onto Sunset’s books, many of which will be in rundown barrios (city neighborhoods) or in the ghost towns that blight Spain’s suburban landscape.
The idea has already been panned by a number of major investment banks. In a note to clients Alantra (formerly N+1), one of the banks that underwrote Popular’s last capital expansion, in May, warned that the only way “to save the bank and preserve the franchise” was to appoint a new management team and sell the impaired assets “at market price.” As we said, that’s easier said than done.
To drive the point home, the client note added that if Popular continues with its current policy and management team, it would continue “as a zombie bank… permanently on the brink of collapse.”
Another bank that underwrote Popular’s last capital expansion but has major misgivings about Sunrise is Credit Suisse. On Monday it cautioned that the creation of the real estate vehicle could leave a gaping €2 billion-sized hole on the bank’s balance sheets. Popular’s shares crumbled 7% on the news. Bank of America has also come out against Sunrise, warning that it will not work. And neither of Spain’s two biggest banks, Santander and BBVA, appears to have expressed an interest.
But not everybody’s opposed. According to El Economista, three major global banks have expressed an interest in participating in Sunrise’s launch. They are Morgan Stanley, Deutsche Bank (the former employer of Popular’s recently appointed CEO, Pedro Larena), and JP Morgan Chase, which already has a front-line role in the rescue of Italy’s Monte dei Paschi di Siena, having pipped the more hotly tipped UBS to the job.
Interestingly, the man most fancied to replace Popular’s chairman, Ángel Ron, is Emilio Saracho, who currently serves as global vice president of (yes, you guessed it…) JP Morgan Chase. He’s been at the Wall Street bank for the last 18 years.
If Saracho is made top boss at Popular, it will mean that JP Morgan Chase will be simultaneously involved, both directly and indirectly, in the resolution of two of Europe’s most important banking crises. Whether successful or not, it can expect to extract some very juicy fees along the way, as well as be privvy to some priceless information. To paraphrase my esteemed WOLF STREET colleague, Wolf Richter: bank bailouts can be a profitable business. By Don Quijones, Raging Bull-Shit.
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