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Banco Popular faces investor impatience over its turnaround plans

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Banco Popular faces investor impatience over its turnaround plans

Banco Popular Español SA is under increasing pressure to speed up its plans to find a buyer or raise capital if it wants to regain market confidence, according to industry observers.

The bank's shares tumbled to historic lows June 1, while its riskiest debt fell to distressed levels amid concerns about its ability to turn itself around.

Fears over the bank's capital position have been growing in recent months due to heavy losses as it had to provision against bad real estate loans. Concerns were heightened after a May 31 Reuters report stated that the Single Resolution Board had issued "an early warning" about the bank and that it may need to be wound down if it cannot find a buyer. The bank watchdog denied the report.

"The SRB never issues warnings about banks; preparing and drafting resolution plans is our usual and daily core task," it said in a statement on its website.

However, Popular's shares fell almost 20% at one point June 1, as investors became increasingly nervous about the bank being wound down.

'No time to lose'

"Popular is facing a crisis of confidence — the environment surrounding the bank is very negative," said Javier Santacruz, an economist at the Instituto de Estudios Bursátiles who specializes in research on the Spanish banking sector.

Santacruz said the bank still had the same underlying position, with the option of being taken over or raising capital, but that it had to quicken the pace, especially as its additional Tier 1 bonds, which can be converted into equity if certain capital thresholds are breached, had fallen sharply.

"It is very important for them to find a solution," he added. "They have no time to lose."

The bonds, which are written off or converted into equity when a bank's capital ratio falls below a predetermined trigger level, are designed to ensure governments do not have to pay for costly bailouts of failing financial institutions. Popular's 8.25% AT1 has lost half of its value in the last three months, according to data by M&G Investments.

Unlike its Spanish peers, Popular is struggling with the legacy of the Spanish real estate crisis in the late 2000s. In 2016, the lender wrote down nearly €6 billion in bad real estate loans, resulting in a restated full-year loss of €3.61 billion. At the end of the first quarter of 2017, the bank was saddled with €36.8 billion in gross nonperforming assets. Chairman Emilio Saracho told shareholders in April that Popular would need to raise capital to meet capital requirements or find a buyer.

Provisioning

At the end of the first quarter, the bank's common equity Tier 1 ratio, a key measure of capital strength, stood at 10.02% on a transitional basis, against an ECB minimum threshold of 7.875% for 2017. On a fully loaded basis, which takes into account of capital rules as they will stand when fully implemented, the ratio was 7.33%.

The bank raised €2.5 billion in additional capital in 2016, the second such operation in four years, and had planned for a fully loaded CET1 ratio of 10.8%, but it ended the year with a ratio of 8.17%. The prospect of the bank tapping the market for additional capital has left many investors cold, as analysts have estimated that the bank may have to raise as much as €4 billion.

Banco Santander SA, Bankia SA and Banco Bilbao Vizcaya Argentaria SA have oft been cited as potential buyers in the Spanish press. According to El Pais, Popular extended the deadline for potential bids until the end of June from June 10. A spokesman for the lender declined to comment.

If Popular is taken over, a potential buyer may require the bank to clean up its balance sheet first, which could potentially trigger the AT1 bonds.

"It's hard to put a percentage on it, but it could be a possibility," said John Raymond, president and senior European bank analyst at CreditSights. If the bank had to provision billions of euros against real estate loans, "it could get down to the trigger levels, that certainly could happen," he added.

Popular is also trying to off-load nonstrategic assets in a bid to shore up capital levels and said June 1 that it would sell its 49% stake in Targobank SA for €65 million, but noted that the deal would not have a significant impact on its capital ratios or its profits.