Spain’s 6th largest bank: “We have liquidity until the end of the year.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In the world of banking, confidence and trust are a precious currency. The moment a bank loses them, things tend to spiral down quickly. Spain’s sixth biggest and desperately troubled bank, Banco Popular, appears to be well along the process of losing the confidence of its customers, and with it their deposits. Last year the bank lost 6.5% of its deposit base. But now, according to a report by the financial daily El Confidencial, the deposit outflow is swelling from a trickle into a deluge.
The bank responded by making its deposits more attractive. Its deposit rates now range between 0.75% and 4%. With the eurobor at 0%, offering such enticing rates will obliterate Popular’s wafer-thin margins.
Yet the outflow only accelerated. Last week, when the bank reported a quarterly loss of €139 million, it disclosed that deposits had dropped an additional 5%, to €78.8 billion, in the January-March period.
But then came a fresh bombshell yesterday afternoon. El Confidencial reported that the outflow of deposits by private and institutional depositors has reached such proportions that the bank was on the verge of default. Its senior management had contacted the CEOs of Spain’s five biggest banks, Santander, BBVA, Caixabank, Banc de Sabadell and majority publicly owned Bankia, to discuss the urgent need for a quickfire takeover. The report stated that Popular’s new chairman, Emilio Saracho, a former vice-president of JP Morgan Chase, had hired JP Morgan, Lazard and Société Générale to find a buyer.
The bank’s shares plunged 6.6% on Thursday and another 5% on Friday to €0.75.
Popular issued an immediate denial that it was on the verge of default. Its strategy has not changed and it is still exploring a series of options, including a possible capital increase, it claimed.
Today a number of other Spanish media outlets have confirmed certain aspects of El Confidencial’s assertions: Saracho has indeed been in talks with Spain’s biggest banks regarding a possible takeover and has also hired investment banks, including JP Morgan, to oversee the process, and that it was urgent, but not quite as urgent as El Confidencial’s article seemed to suggest.
El Confidencial reported the denial this way: “The urgency to get the sale done by June was due to the fact the bank only has ‘liquidity until December 31.'”
Saracho told El Confidencial that the bank’s situation was “urgent,” but he wanted to point out that the deposits of private and business depositors are not in danger in any case. “We have liquidity until the end of the year. Is this urgent? Yes, because we have to take action quickly. We’ve known that for months.”
El Pais, in reporting the denial, added this, citing “market sources”:
“[Saracho] has said he is calculating how much capital he needs to cover Popular’s provisions, but time continues to drag on and the messages he conveys to the market are far from clear. Saracho has been president since January, but says he needs until the summer to work out the numbers. It’s too long for an entity that’s in the eye of the hurricane.” The sources also find it contradictory that the president is holding talks with competitors “if he does not know the true size of the hole on the bank’s balance sheet.”
For its part, Spain’s Ministry of Economy has tried to sooth depositors’ nerves by assuring them that the Spanish financial system is “credible” and will not be affected by whatever is happening to Banco Popular.
But neither the bank’s customers nor its investors have much confidence left in what the bank’s management say or do, having already been deceived on a number of occasions.
In April last year, then-CEO Francisco Gomez breezily reported that the bank had a very comfortable core capital level above the regulatory minimum and “one of the best” leverage ratios in the sector. Shares soared on the news. A month later, Popular announced it was urgently seeking to raise €2.5 billion in capital in order to shore up its finances. The shares crumbled by over 30% in three days.
Then, in April this year, an internal audit by PwC revealed that the €3.5 billion loss Popular registered in 2016 — its biggest annual loss ever — had been understated and was actually some €600 million larger. Some investors are now suing the bank in the U.S. for being intentionally misled.
By now Banco Popular’s true value is almost certainly in negative territory, its balance sheet still burdened with over €30 billion of toxic real-estate-related assets that nobody wants to touch. If there is a prospective buyer out there, it won’t want the bad stuff; it will just want the good stuff. One of the ways this could happen is if Popular’s balance sheet is given a thorough spring cleaning, paid for, of course, with government funds.
It’s a sad demise for an institution that for years had been conservatively run, with focus on lending to small businesses. But that all changed in 2004 when new management, led by the recently deposed Chairman Ángel Ron, pushed Popular into risky real estate investments just before Spain’s property bubble burst. They then took way too long to clean up afterward – and it’s still not cleaned up.
Popular’s managers have since walked away with millions in their back pockets, including a $24 million pension payout for Ron. He has even threatened to sue the bank over his lack of severance pay. Meanwhile, the multi-billion euro mess he and his cohorts leave behind will eventually be cleaned up by Spain’s long-suffering taxpayers. By Don Quijones.
And there’s a new remedy in Spain: Taxpayer-funded subsidies to benefit banks, real estate agencies, construction companies, PE firms, and landlords. Read… Spain’s Government Presses Property-Bubble Rewind Button