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Santander to capitalize on Spanish, Portuguese recovery with Banco Popular buy

Banco Santander SA's takeover of its failing rival Banco Popular Español SA should enable it to capitalize on an ongoing economic recovery in Spain and Portugal, according to analysts, who said a better macroeconomic climate and an improving property market should also help with the formidable task of selling off Banco Popular's stock of toxic real estate loans.

Santander announced June 7 that it was buying Banco Popular for the symbolic sum of €1 and that it would launch a €7 billion rights issue to bolster the ailing lender's balance sheet. The deal comes shortly after the European Central Bank said Popular was "failing or likely to fail," as it still struggles with around €37 billion of soured real estate assets, the result of the rapid expansion of its property lending book in the years leading up to the financial crisis.

The deal will create the largest bank in Spain, with more than 17 million clients and a credit-market share of around 20%. The combined business will have a 25% market share in lending to small and medium-sized enterprises in Spain. In Portugal, the integration of Banco Santander Totta SA with Banco Popular Portugal SA will create a lender with 4 million customers, taking Santander's share of the Portuguese lending market to 17.5% from 14.7% and its share of deposits to 15.5% from 13.3%.

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Favorable timing

For Tom Kinmonth, fixed-income strategist at ABN AMRO, the Portugal angle is a positive for Santander from an operational point of view because "the country is slowly coming round."

"I really like Portugal at the moment — I think it can provide good returns," he said in an interview, arguing that the country's bankruptcy laws have improved because European authorities have focused on its banking system in recent years. "Santander will have a bit of trouble on costs for the next few years, but long term, the deal is positive."

The increased footprint in Spain would also be broadly positive, even though the outlook for the local banking sector there is "rather static" due to the high levels of deleveraging still occurring in the market, Kinmonth said in a June 7 note.

A team of analysts at GVC Gaesco Beka said in a June 7 note that the acquisition is well-timed in terms of the Spanish economic cycle. "The timing favors the deal because the Spanish economy grows above the European average, the delinquency continues to fall and also due to the prospects of [an] interest rates rise," they wrote.

According to Carlos Peixoto, banking analyst at BPI, Santander's acquisition of Banco Popular is a vote of confidence for the Spanish economy and an "opportunity to gain scale" in the Spanish market. He added that in terms of shifting Banco Popular's real estate loans, Santander should not encounter too much difficulty.

"There will be a market for it — it's just a matter of valuation," he said in an interview, adding that most of the demand was likely to be from private equity buyers.

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Kinmonth agreed that Santander should be able to take the task of reducing Banco Popular's property exposures in its stride, especially since Spanish house prices are expected to increase in the coming years. However, Santander's objective of reducing Banco Popular's stock of nonperforming real estate loans to "non-material levels" within three years, as outlined in a June 7 presentation, may be "optimistic" if the bank wants to attract good prices, he said.

Yet, there is still a reasonably strong level of demand from private equity buyers for portfolios of distressed Spanish real estate, according to Paul Lewis, head of loan advisory at CBRE Loan Services.

"There is still a lot of capital chasing that kind of product," he said in an interview. "There are a lot more funds looking at Spain than there were a few years ago."

While demand for Spanish real estate debt portfolios from international private equity giants and buyout firms — who were highly active in the early years of the Spanish recovery — has started to tail off, midsize private equity firms and investment banks are showing a good level of interest in the market, he said.

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