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Spain's Banco Popular likely to be takeover target in 2017

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Spain's Banco Popular likely to be takeover target in 2017

Banco Popular Español SA, Spain's sixth-largest bank in terms of assets, may finally find a suitor in 2017, when a new chairman is due to take over and the bank will look to off-load its bad-debt portfolio.

The lender has often been the subject of takeover rumors and been linked in the past with Banco de Sabadell SA and CaixaBank SA. But speculation has intensified after a boardroom battle at the end of November, which led to the ousting of its long-time chairman Ángel Ron.

Spanish financial daily Expansión reported at the beginning of December that Popular was in talks with the country's second-largest bank, Banco Bilbao Vizcaya Argentaria SA, while Bloomberg said the freshly nominated chairman, JPMorgan Chase & Co. executive Emilio Saracho, had received a mandate from the board "to be open to strategic options, including a sale" once he has been formally appointed in early 2017.

"It is a possible takeover target," Carlos Peixoto, analyst at BPI Online, told S&P Global Market Intelligence. "That will be a theme for 2017."

Weak share price

After a wave of consolidation in the wake of the 2008 financial crisis, Spain now has 14 banking groups compared with 55 less than a decade ago, and the time could be ripe for more tie-ups in the sector. Low interest rates have been putting pressure on profits, and banks have been responding by cutting branches and staff.

"Our view has been that we are likely to see more consolidation in the banking sector," Jefferies banks analyst Benjie Creelan-Sandford said in an interview, adding that Banco Popular is a potential target because of its weak share price.

The lender's share price has fallen by two-thirds this year. In June, the bank raised €2.5 billion in a share issue — its second in four years in an effort to increase its coverage ratio on nonperforming assets to 50% from around 38%, putting it in line with peers. For 2016, Banco Popular expects to take a provision hit of €4.7 billion and to post losses of up to €2 billion.

The bank's real estate assets totaled about €27.7 billion at the end of September, and this part of its business ran up a loss of €723 million during the first nine months of the year. Net real estate loans totaled €15.52 billion, with nonperforming loans comprising almost half of these. Meanwhile, the lender's main business had €128.93 billion in assets and posted a profit of €817 million for the first nine months.

In an effort to clean up its balance sheet, Banco Popular is planning to spin off its toxic real estate assets into a separate unit, reducing its real estate assets by €6 billion. This will be key to finding a potential suitor for the bank, according to Peixoto.

"The potential buyers are too concerned about the bank's real estate exposure to be willing to buy it," he said in an interview.

Banco Popular has yet to say what form the new real estate entity will take, and disagreements about the plan were one of the reasons for Ron's departure, Reuters reported, with Mexican billionaire Antonio del Valle, who owns 4% of the bank, believing the plan did not go far enough.

"If Banco Popular follows this idea, it could be a good strategy in becoming more attractive for an investor," Javier Santacruz, economist at the Instituto de Estudios Bursátiles, told S&P Global Market Intelligence.

Spanish banks interested

A number of large Spanish banks would likely be interested in snapping up the lender, including the country's two largest banks, Banco Santander and BBVA, who would have the financial power to buy the banks easily. Santander has a whopping €1.3 trillion in assets, while BBVA has €725 billion.

"All the top banks would look at Popular," said Creelan-Sandford. "There could be a number of interested parties."

Ron acknowledged in June that the bank had been in merger talks, but that the discussions had gone no further than a cup of coffee. CaixaBank and Sabadell have been linked to the bank a lot largely because of their size and the potential synergies a deal could bring, especially at a time when banks are trying to reduce branch networks. CaixaBank has €343 billion in assets and Sabadell €206 billion.

"Sabadell is a long soap opera, so everybody is talking about that possibility," Peixoto said. "It will have to be a local buyer because the scope for synergies will be much higher. A foreign buyer would make it more difficult to justify the deal."

Santacruz, however, said a large foreign bank may be willing to take a stake in the lender, giving the potential buyer a strong foothold in Spain and Popular a new strategic outlook. Spanish banks, he added, need to become more efficient and boost their profitability, and mergers could help in that respect by bringing in new flows of capital.

"[Spain's banking industry] needs to recapitalize to help the sector face the future," Santacruz said. "In Spain, the banking sector has a great weight on the economy."