Banco Santander SA has acquired Spanish rival Banco Popular Español SA in an overnight auction for the nominal amount of EUR1 ($1.13) after the European Central Bank determined the ailing lender was near collapse, providing a test of Europe's banking rules enacted after the financial crisis.
The overnight rescue of Banco Popular marks a swift and decisive response by the European Union to stop the downward spiral of Spain's most troubled big bank.
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While the Spanish banking sector is largely healthy, Banco Popular has proved a weak link. The lender's balance sheet is weighed down by around EUR37 billion in foreclosures and other nonperforming assets accumulated since the country's real-estate boom went bust.
The sale of Banco Popular also marks the first major move by the Single Resolution Board, the European body charged with dealing with failing banks and ensuring that taxpayer money doesn't go to bailing out troubled lenders.
Instead, shareholders and junior debtholders are in line for losses, along with holders of contingent convertible debt, also known as CoCos, which European authorities have encouraged banks to issue in recent years.
Lenders across the region, including Banco Popular, have used this kind of debt to raise billions of euros of capital. The securities pay coupons like normal bonds, but convert to shares if the bank's capital ratios sink below a certain level, thus making them the first bondholders to be wiped out in a bank failure. Analysts said the rescue could lead investors to demand greater premiums on bonds issued by European banks struggling with soured loans or low provisions.
The Single Resolution Board's initiative in Spain follows criticism that Italy last month sidestepped Europe's new rules by using a loophole to approve the injection of public money into troubled lender Banca Monte dei Paschi di Siena SpA.
Banco Popular has been floundering for months though in recent weeks its crisis deepened as investors became increasingly concerned it wouldn't be able to sell assets, raise capital or find a buyer.
Like other troubled lenders in Italy, Portugal and Greece and elsewhere in Europe, the bank hasn't been able to generate strong enough profits to help shore up its balance sheet. Banco Popular's share price had plummeted more than 50% in the past week alone.
The ECB had become increasingly concerned about the deterioration of Banco Popular's finances, before determining on Tuesday "that the bank was failing or likely to fail," according to a statement.
After recent attempts by Banco Popular to find a buyer in a private sale failed, EU banking authorities launched a rapid-fire auction Tuesday night, with Santander emerging as the buyer early Wednesday morning, Santander Executive Chairman Ana Botín said. She declined to say how many other banks were involved in the auction.
One of the banks invited to the Tuesday auction was Spain's Banco Bilbao Vizcaya Argentaria SA, people familiar with the process said separately. But Spain's No. 2 bank by market value decided against bidding for Banco Popular, those people added.
The rescue imposed steep losses on junior bondholders and wiped out shareholders, while senior bondholders were spared.
Questions remain over whether senior debtors will necessarily be off the hook in future bank rescues if a buyer isn't found, for instance, or if the rescued lender is in worse shape than Banco Popular. "There will be occasions when senior debt will suffer," said John Raymond, an analyst with CreditSights in London.
The transaction also spared taxpayers, fulfilling a major objective of EU banking rules that were enacted after a number of European governments used public money to shore up teetering banks during the financial crisis.
A private solution for a teetering bank "is great news for Europe," Ms. Botín said during a news conference in Madrid. "This is a strictly private operation." The speed with which Banco Popular was rescued belies the image of EU institutions as lumbering and inefficient, Ms. Botín said.
The assertiveness by the European authorities in the Spanish case may quiet some criticism of how they have handled the Italian banking crisis. However, it remains to be seen how the new banking regime responds to situations more complicated than that of the Banco Popular, where authorities had a financially sound buyer in Santander and the Spanish banking sector is generally in rude health.
The combination of Banco Popular and Santander creates Spain's largest bank, with 17 million customers, leapfrogging rivals Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA. Santander also acquired Banco Popular's unit in Portugal, where Santander has a large market share. Santander, which was already one of Europe's largest lenders, now plans to raise EUR7 billion in a rights issue before the end of summer to fund a cleanup of Banco Popular's balance sheet. Santander shares closed down 0.9% in Madrid.
Santander can benefit from Banco Popular's strong franchise in lending to Spain's small- and medium-size businesses. Spanish banks have tried to boost their loans to small- and medium-size companies as their bread-and-butter business of selling mortgages has been less robust amid Spain's economic recovery from a deep crisis.
Santander said the transaction is expected to generate a return on investment of 13% to 14% in 2020 and would boost earnings a share by 2019.
Santander will book EUR7.9 billion in provisions for Banco Popular's nonperforming assets. That will increase coverage for real-estate assets and nonperforming loans to 69% from 45%, which was the lowest coverage ratio among major Spanish banks.
Citigroup Inc. advised Santander. Jefferies International Ltd. and Spain's Arcano Partners advised the Spanish bank bailout fund known as FROB, which helped orchestrate the rescue.
-- Julia-Ambra Verlaine and Ben Dummett contributed to this article.
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(END) Dow Jones Newswires
June 07, 2017 12:50 ET (16:50 GMT)