The Next Spanish Bank Teeters, at Worst Possible Time

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It just doesn’t let up with these banks.

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

The timing could not have been worse: just as Spain faces its biggest constitutional crisis in over 40 years with Catalonia’s independence vote, another bank has begun to wobble.

Liberbank, Spain’s eighth largest lender, was spawned in 2011 from the shotgun marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria. The new bank’s shares were sold to the public in May 2013 at an IPO price of €0.40. By April 2014, they were trading above €2, a massive 400% gain.

But by April 2015, the stock had started sinking. By May 2017, it was trading at around €1.20. Then came the collapse of Banco Popular in early June, which took many investors (but not WOLF STREET readers) by surprise, triggering a further crash in Liberbank’s stock as shareholders feared they would be next.

Scenting blood, short sellers began piling in, and just as the stock entered free-fall, the government intervened by imposing a temporary ban on short selling. The stock stabilized and even began to recover. By mid-July it had recrossed the psychological €1-threshold. Rumors began circulating that the short-selling ban would soon be lifted.

But in late August, after reaching €1.07, the stock’s progress began to waiver. At the beginning of this week Liberbank’s shares once again became a penny stock. Someone knew something…

Indeed. On Wednesday evening, the bank announced that it would expand its capital by €500 million, and these brave shareholders would be diluted. The response was to sell: shares plunged over 12% on Thursday and a further 5% on Friday.

The fear is understandable. Spanish investors are still smarting from Santander’s hurried takeover and bail-in of Banco Popular. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers. Speculators were shocked and appalled.

Before its collapse, Banco Popular undertook three capital expansions, to the tune of almost €5 billion. These operations merely forestalled the inevitable, at great cost to the bank’s gullible investors. Now, Liberbank is about to follow the same path.




Global banks and rating agencies have already lent their blessing to the operation, much as they did to Popular’s previous rights issues. On Thursday the financial daily Cinco Dias reported that analysts overwhelmingly “applaud the operation,” despite the stock market rout. By Friday the tune had changed:

Citi sees Liberbank’s goal of reducing its nonproductive assets (NPA) and expanding its capital base by €500 million as “ambitious but achievable.” Moody’s chose to leave Liberbank’s B1 rating unchanged after the bank’s announcement of the capital expansion, reasoning that the rights issue will help to “rebalance the bank’s persistent risk profile.”

Here’s what that profile looks like:

  • The bank’s capital expansion will represent 55% of its operating capital, based on Wednesday’s share price, which has crumbled 20% in the last two days.
  • Liberbank’s non-performing loans ratio is a staggering 22%. Worse still, the vast bulk of the bank’s unproductive assets are real estate investments. After the now defunct Popular, it is the Spanish entity with most exposure to toxic real estate assets, according to the financial daily El Confidencial — a remarkable feat given the bank already had the lion’s share of its impaired real estate assets transferred onto the balance sheets of Spain’s “bad bank,” Sareb.
  • By the close of the first quarter of 2017, Liberbank’s default rate had reached 13%, compared to the national average of 9.8%, while its unproductive asset coverage rate was just 43%, compared to 47% for Banco Sabadell, 48% for Bankia, 50% for CaixaBank and 55% for Unicaja.

If the bank is able to raise the €500 million of fresh capital, it will increase the coverage of its toxic assets from 43% to 50%, which should help facilitate the sell off of impaired real estate assets at prices that don’t destroy its balance sheet. This will enable it to reduce its NPL ratio from 22% to 18% by the end of 2017, and then to under 12.5% by the end of 2018. According to the bank’s projections, its NPL ratio will be less than 6.5% by 2020.

Banco Popular made similarly optimistic projections before each of its rights issues. None of the projections came to fruition. If investors continue to sell off their shares at the current ratio, Liberbank, much like Italy’s Monte dei Paschi di Siena last year, won’t even get the chance to raise new capital.

Shareholders’ ire is understandable. Not only are their holdings about to be massively diluted but there’s no guarantee that the bank’s financial health will actually improve after the operation. If nothing else, Banco Popular’s demise and the dubious bail-out of MPS and bail-ins of the two Veneto-based banks were a stark reminder that Europe’s banking woes are far from resolved, despite the piles of euros thrown at them.

And lest we forget, Liberbank will have to pull off this highly ambitious operation at a time when investors, both foreign and domestic, are likely to be parking their money in safer havens, at least until the political storm engulfing Spain’s richest region, Catalonia, has passed — assuming it does! By Don Quijones.

Tourism in Spain is now bigger than construction was during the real estate bubble. Read… Spain’s New Big Bubble Begins to Wobble




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  41 comments for “The Next Spanish Bank Teeters, at Worst Possible Time

  1. Hiho
    Sep 10, 2017 at 4:08 am

    In order to understand the current situation of spanish banks we have to keep in mind that here in Spain we have had one of the worst real estate bubbles in the entire world. Banks joined the part eagerly, especially the small “cajas de ahorros”.

    They financed new construction and mortgages like no tomorrow, as nobody wanted to be left behind. When the bubble bursted lots of real estate developers went bankrupt and disappeared, banks then were left with millions of finished and unfinished new buildings in their books. If you make a tour around Spain you will be able to see plenty of unfinished constructions abandoned and rusting away.

    It is estimated that, there are around 3 millions of empty houses in Spain… over a population of 45 millions, just do the math. I bet that in relative terms we have more empty housing here than in China.

    Last but not least, a lot of people defaulted in their mortgages and banks forfeited their properties.

    So there you have your toxic mix: immense stocks of iliquid Real Estate and loans that will never ever be repaid (the debtor companies disappeared long ago or in the case of personal loans, those people will never again be able to rejoin the labor market).

    • Joan of Arc
      Sep 10, 2017 at 4:37 am

      A couple of notes from a non Spaniard who has never been in Spain. There are two things that are consistent in Spain. 1) The rain in Spain does not stay mainly on the plane. 2) Spaniards grow olives. Olives are good for health. If all else fails, the Spaniards who have olives can eat them.

      • Cynic
        Sep 10, 2017 at 4:47 am

        Olive trees are subject to a new disease.

        In any case, the poor in much of Spain used to eat chestnuts.

      • Joan of Arc
        Sep 10, 2017 at 4:54 am

        A side note: Not only does the rain in Spain not stay mainly on the plane, it also does not stay mainly in the plain.

        • Joan of Arc
          Sep 10, 2017 at 4:58 am

          Before the Spaniards ate chestnuts, did they roast them on an open fire?

      • Timothy Julian
        Sep 10, 2017 at 5:51 am

        Unless you buy your olive oil from Mercadonna! Olive oil in name only!

      • 5.56
        Sep 11, 2017 at 6:03 am

        Plane???

        • Joan of Arc
          Sep 11, 2017 at 6:17 am

          Yes plane. Planes carry a lot of drinking water. It is quite plain that the plane carries water as it lands on the plain in Spain where it does not rain much.

    • Bobber
      Sep 10, 2017 at 10:10 am

      There’s was a bubble in Spain, but has it fully popped yet? I not sure it has, based on the attached chart. If there is still an oversupply, housing prices could start dropping again.

      https://tradingeconomics.com/spain/housing-index

  2. d
    Sep 10, 2017 at 4:31 am

    How can any sane business person, expect to take there pieces of decaying garbage, join them, and not end up with anything, but a big piece of decaying garbage.

    Thats before you consider the issues raised by Spains real estate bubbles, which others, and the article, have clearly outlined.

    Anybody who puts money into this a disaster, waiting to occur, deserves all that befalls them.

    Undoubtedly many of Spains “Insiders”. Have made a great deal of money, on the recent gyrations of this stock.

    Cyprus, Popular, The writing is on the wall, in letters ten feet tall, read, or suffer the consequences of not reading.

  3. Cynic
    Sep 10, 2017 at 4:46 am

    In our ‘rich’ northern province, in 2008 some 5,000 people aged 16-24 worked directly in construction .

    In 2017 the total is…….0.

    Construction is well and truly stuffed in most Spanish regions, due to the incredible over-build in the boom years.

    Wages in this province have fallen 20% in most sectors.

    • Joan of Arc
      Sep 10, 2017 at 5:02 am

      None of that matters because the richest man in the world today is a Spaniard who designs women’s dresses. How can that be? It can also lead some people out of Spain to conclude that most people in Spain are well off.

      • Bob
        Sep 10, 2017 at 5:47 am

        Government policies and bankers have destroyed this world.

      • Álvaro
        Sep 11, 2017 at 4:33 am

        His dresses are cheap due to slave workers, that’s the reason why so many people buy his crap.

  4. Gershon
    Sep 10, 2017 at 9:06 am

    But…but…stress tests!

    • Álvaro
      Sep 11, 2017 at 4:40 am

      Stress test only test the credibility of the system.

  5. Gershon
    Sep 10, 2017 at 11:27 am

    Any and all losses in these banks should be borne by shareholders, not taxpayers or account-holders. Although after the EU and ECB sanctioned the legal theft of depositor’s money with the Cyprus bail-ins, account holders in the PIIGS banks might be more skittish about yanking their money out at the first sign of trouble – causing cascading bank runs.

    Looks like the ECB’s extend-and-pretend is running out of road. When the first central bank domino topples, the rest will follow in quick succession.

  6. Sep 10, 2017 at 11:30 am

    Well, this is interesting, but us here in the rest of the EU can only hope Catalonia does us all a favour and votes for Independence in a few weeks!

    Obviously this will have the great consequence of weakening the Spanish Football team and hopefully taking them out of calculations for winning the Euros in 2020! (Or the World Cup in 2018!)

    We can only hope eh.

  7. nick kelly
    Sep 10, 2017 at 11:55 am

    How many times of ‘here we go again’ in Italy, Spain and Portugal before trying something different?
    Like the baseball manager says when he pulls a struggling pitcher: why lose with the same guy when you can lose with anybody?
    When a doctor sees a limb with gangrene, he doesn’t fool around.

    Spain, Italy and Portugal are already wards of the ECB.
    So you could make the case that the banks in all three countries should be rolled into one trans- national bank: Euro Bank.

    But doesn’t that take a bunch of big problems and create their sum?
    In bad assets, sure, but you are better off dealing with one large problem than death by a thousand cuts. There are only so many competent trouble shooters and work out managers to go around.
    A fire department would rather deal with one large fire than ten scattered small ones.

    I’m too timid to make that case. It may not be politically possible.
    But consideration should be given in each country to a single nationalized bank or at least a drastic reduction in the number of banks.

    BTW: I’m basically a right winger, who normally abhors government enterprise, but in an emergency like these banking systems there is no alternative.

    If a single national bank is out, the next stop in the flow chart is consolidation.
    Santander may be the only large bank in Spain strong enough to take on these basket cases one at a time. Why not do it ten at a time, with all banks unable to meet whatever stress test or capital requirement is deemed necessary?
    The zombie banks in all three countries need to be euthanized.
    At once, not one every month.

    Basket case Italy needs 500 banks??
    Canada has an economy roughly the size of Italy’s, in much better shape with only six large banks. (Ya I know there are few second tier, a bunch of credit unions and on-line banks etc. but the vast majority of business is with the six.)

    But what about job losses in the banking sector?
    Jobs doing WHAAAT?

    The main job losses will be in the ranks of upper management that created these disasters. .
    A single trans- national bank or a single national bank will still need
    thousands of branches with tens of thousands of cashiers, loan officers etc.

    • Joan of Arc
      Sep 10, 2017 at 12:33 pm

      What is your point? The ECB is doing just fine the last I checked.

      • nick kelly
        Sep 10, 2017 at 1:22 pm

        Read the post by DQ. Then read mine.
        Yes the ECB is solvent thanks to Germany.
        My post was about what the ECB should do about the ongoing crises
        This is known as ‘the topic’

      • d
        Sep 10, 2017 at 1:27 pm

        The ECB is doing fine, until it has to pay back its debt to Germany at 25 + Eur to the DM when the debt was originally swapped at 1 to 1.

        A situation that Potentially, is not to far away, unless the ECB ceases to be the “Bank of, france, club-med and greece” in disguise, quite soon.

        The ECB owns that much italian debt, that one wonders what purpose the bank of Italy really serves.

        Now italy talks, of a dual currency system.

        If that happens, the italian debt the ECB holds, becomes worthless, as italians will take any euro they can get their hands on, and buy imports with it, not pay it to the ECB. As will the french who talk of the same thing (a little).

        The Euro nations, need to hive off france, greece, and all of club med. Apart from Cyprus, or the behavior of the southern profligates will shatter the Eur. Just as the last currency union in that region was shattered.

        • Joan of Arc
          Sep 10, 2017 at 10:01 pm

          You seem to have it wrong. The ECB holds Germany’s debt. They can buy up everything with money printed out of nothing. Germany has to pay the ECB interest on German debt that the ECB holds.

        • d
          Sep 11, 2017 at 11:26 am

          You missed the biggie.

          Target 2.

          EVERDODY owes Germany, under Target 2, Hugely. Way way more, than German Debt to the ECB.

          Draggi has said, anybody who leaves the Eur, MUST SETTLE Target 2, in Eur, at time of exit.

          So Germany MUST BE PAID its Target 2 credit balance, at time of exit.

          They rest dont have it, so it will be converted to debt, in DM, Held by Germany, Owed by the Target 2 debtors. At the conversion rate agreed at the time. Which will undoubtedly be 1 -1.

          As these are the only ways to resolve the problem, which will leave the ECB with a huge DM bill, against a rising Mark, and a falling EUR.

          Germany will not take paper from these deadbeat club-med nations. So it will be ECB paper, in DM, used to settle Target 2.

          Which is why the best way to deal with the france greece club-med problems in the Eur, is to hive it off, into a second Euro, Eur II, Eur South, or some such.

          If they did that, the whole European Economy would Jump ahead. The current Eur with F, G, C-M, in it, is Europe’s own created Millstone. It is drowning it, as it dosent work the same for everybody.

          It never could or will, as there is no fiscal union, and the economies it joins, are not equal. In the current situation there will be NO fiscal union. As the surrender of “the power of the purse” is the surrender of national sovereignty.

          Aggressive nationalism in a poor economic period, with no visible end (for the man on the street), will not allow this.

          The Target 2 imbalance, will get to the point where it will brake the Eur if something else does not happen first, Probably italy or greece.

          The Euro Zone, can carry 1 sick man, it can not carry france, greece, and the rest of Club-Med, for much longer

        • willie
          Sep 13, 2017 at 6:39 pm

          If you visit Italy, you will see goods and services still priced in Italian Lira.
          Italy realises that it’s citizens still think of expenditure and taxes in terms of liras, and not Euro’s.

        • d
          Sep 14, 2017 at 10:59 pm

          And they price their houses in USD.

        • Jack
          Sep 16, 2017 at 2:27 am

          Willie – I’ve been in Italy for over 5 years, travelled about extensively and I’ve never seen anything priced in lire.

    • d
      Sep 10, 2017 at 1:11 pm

      Was not the resolution of popular something a little different than the “taxpayer makes everybody whole” model of previous times.?

      The die is cast in Spain.

      If Liberbank, needs to be resolved, at the least the same level of bail in/Shareholder/Bondholder/Depositor losses as popular will apply (Consider the lawsuits if they don’t). Probably more, as this is an incrementally increasing bite on Bondholders, and Depositors, as was intended, since the successful trial in Cyprus.

      • Stevedcfc72
        Sep 11, 2017 at 5:28 am

        Agreed d, that’s exactly the issue now facing Liberbank, any future Spanish bank intervention will have to go down the same route as Popular.

        Just looked at the accounts for Q2 June 2017 and its showing the typical bank signs of being in trouble, turnover down 15% year on year, staff FTE’S down 6% in the first two quarters, number of branches down by 10% in the first two quarters. As Don Quijones stated their NPL provisions for bad debts are miles behind the rest.

        The warning signs are there.

        Brave investors to put in another 500 million euro’s.

        • d
          Sep 11, 2017 at 2:00 pm

          What forced the issue with popular was effectively a bank run and the ECB response to it.

          In the 30’s bank runs involved huge visible ques which instigated a larger panic.

          Today the process is much more electronic and a little slower but the result is the same. Depositor confidence in an institution fail’s. Then they take back their money. Banking still can not function without Trust and Depositor Confidence.

          Banks effectively hate their retail customers, and abuse them terribly, however they can not survive without their support.

          Prediction.

          Liber will be felled by a loss of Depositor confidence, like Popular was.

          If the regulators let it get that far this time. Every incidence like this in Spain, will send shudders throughout the entire Spanish system.

          So they need to be shut down early. Possibly a little earlier than Popular was.

  8. Tom Kauser
    Sep 10, 2017 at 11:59 am

    Mr. Bean in a Citroen full of euros on a roundabout holiday!

    • Joan of Arc
      Sep 10, 2017 at 12:37 pm

      In a self driven Citroen.

      • Realist
        Sep 10, 2017 at 1:28 pm

        Wouldn’t a SEAT be more appropriate than a Citroen ? After all SEAT started out as a domestic Spanish brand manufacturing licenced FIAT models.

  9. Gershon
    Sep 10, 2017 at 2:45 pm

    I’m watching the Spanish 10-year bond, which has a remarkably low risk premium reflecting complacent investors in light of the systemic problems in Spain’s banking system. If yields suddenly start to surge, that could be a leading indicator that the wheels are starting to come off the bus.

    Unlike Greece and Portugal, Spain and Italy are too big to be bailed out. If either one goes into a full-blown financial crisis, contagion throughout the EU and beyond seems highly likely, especially since the Fed and central banks have basically used up all their ammo after nine years of “emergency” measures (while assuring us proles that all is well and our robust “recovery” is well underway – but “the data” won’t allow our central planners and central bankers to normalize interest rates). Hmm….

    http://www.marketwatch.com/investing/bond/tmbmkes-10y?countrycode=bx&mod=MW_story_quote

  10. Jim Graham
    Sep 10, 2017 at 5:34 pm

    The NPL ratio has no way to go but worse and even more worse.

    IF I were a cash rich wealthy person I would buy all the property / buildings / unfinished projects the banks are holding at a max of 10% of their “value”.

    I would then wreck the resale and rental markets by selling what can be sold quickly to the average Joe (and carry the paper) – fix what is worth fixing and rent what can’t be sold fast – and finish the worthwhile unfinished projects and turn the rest of the junk into green space for public parks…..

    Pity I am not a member of the 1%….

  11. michael w Earussi
    Sep 10, 2017 at 6:37 pm

    I have difficulty visualizing anyone willing to lend any bank in
    Spain 500 million peanuts much less Euros. If they don’t want S. Europe to wind up like Japan and its lost decades they should just bite the short term bullet and let them go bankrupt.

  12. Maximus Minimus
    Sep 10, 2017 at 8:10 pm

    My local credit union just sent me an offer to buy class E shares with a mouthwatering “intended” dividend rate (compared to a new normal fixed investment returns). I live in the hot real estate market on the west coast. Why did the CU think this was a good idea after almost ten years of interest rate repression, and when the interest rates are already rising?
    But I am off, this offer won’t last long…

  13. Sep 11, 2017 at 12:54 am

    Same old, same old. UBS estimates ‘liar loans’ have hit $500b, warning the impact of a housing downturn will be more severe than Australian banks expect

    • d
      Sep 11, 2017 at 11:41 am

      UBS must have some problems it’s palying “dont look here look over there” beat on the Aussie, again.

      How much of that 500B in liar loans does UBS (the only Swiss Bank to get stung in the US sub prime fiasco) Hold ???????.

      Au Banks have been tightening loan criteria for some time now. most of that LIAR Portfolio, is in chinese speculation loans Based on unproven Foreign earnings (You cant get these loans any more haven’t been able to for close to 18 months + now)) which are in apartments, so only the foreign speculator apartment sector of the market again. Again How much of this, does greedy UBS hold????

      Let that sector crash, then we can clean house, and move on.

      UBS should try telling us something, we dont already know. And the Au system, isnt already dealing with.

      Maybe they are trying to push anther short on Au banks and the Au dollar. The last Au bank short trade, was a widow maker. Maybe they are set up for the long side of that trade, and are trying to create a dip???

      UBS is a Swiss bank in name only. The 1St thing’s, it is not, are, trustworthy or honest..

  14. QQQBall
    Sep 11, 2017 at 10:18 am

    Those default rates are staggering…

    How could you have any capital left, particularly if they reserve for NPLs?

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