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Banco Popular expects to revise 2018 financial targets after posting huge loss

Spain's Banco Popular Español SA is planning to revise its 2018 financial targets after posting higher-than-expected losses for 2016 and following a decision to replace its chairman, the lender's CEO said Feb. 3.

Banco Popular posted a €3.49 billion loss for 2016, hit by €4.2 billion in loan provisions, €229 million in provisions for potential claims over mortgage interest floors and a €240 million impact from lower profitability at Targobank SA, of which Popular owns 49% in a joint venture with Crédit Mutuel Group. Popular had warned in May 2016 that its efforts to clean up toxic real estate loans would dig a €2 billion hole in the bottom line.

"If we talk about the targets, there is no doubt now that they are even more challenging to achieve," CEO Pedro Larena told an analysts call. "This, coupled with the fact that we will have a new chairman, suggests that the most prudent position now is to put these targets under revision." He did not provide any further details.

The bank is targeting a return on tangible equity — a key profitability ratio — of 9% in 2018. ROTE for 2016, adjusted for payments on Additional Tier 1 bonds, was negative 5.3% at the end of 2016. Popular is also targeting a fully loaded common equity Tier 1 ratio, a key measure of financial strength, of 12% in 2018. The fully loaded CET1 ratio stood at 8.17% as of Dec. 31, 2016, as the heavy loss hit capital levels.

Executives said the bank would boost its capital ratios as it returns to profit and reduces nonperforming assets.

"We have several levers to boost capital in the following quarters starting with ... the fact that we will start to report profits," CFO Javier Moreno told the call. He also said the bank would consider sales of noncore businesses, which could add 1 percentage point to Popular's capital.

Madrid-based Popular has been seeking ways to deal with its large stock of problem real estate loans, accumulated as it lent aggressively in the years before the 2008 property crisis. In July 2016, the bank replaced CEO Francisco Gómez with Larena and announced a restructuring plan, which included the creation of a special-purpose vehicle to off-load impaired real estate assets.

In December 2016, the bank's board voted to oust long-term Chairman Angel Ron over reported differences of opinion between shareholders over the real estate plan. Ron will be replaced by JPMorgan Chase & Co. executive Emilio Saracho at an extraordinary shareholder's meeting Feb. 20. The bank's real estate and capital woes have made it the subject of takeover rumors.

Larena said the bank is continuing its plans to spin off its bad real estate loans and is awaiting regulatory approval.

"It is taking longer than expected due to the strong interest generated," he said.

Popular's 2016 net interest income fell 7% year over year to €2.10 billion, as the bank, along with many of its peers, was hurt by the low interest rate environment.

Moreno said he expected net interest income growth in 2017 of "low single digits" amid flat lending volumes and lower funding costs. He also said a potential rise in interest rates would have a positive effect on the net interest margin.

"We are positively positioned to benefit from increases in interest rates … for every 100 basis points parallel run increase in interest rates, our net interest margin will grow roughly 10%," he said.

In June 2016, the bank raised €2.5 billion in a share issue, its second in four years, and to put its coverage ratio on nonperforming assets to 50% from around 38%, in line with peers.

The nonperforming loan ratio ratio stood at 14.61% as of Dec. 31, 2016, up from 12.86% a year ago, while the NPL coverage ratio rose to 46.24% from 39.42%. Excluding write-offs, the coverage ratio reached 52.26% at 2016-end, compared to 42.50% a year ago.