The Banking Crisis in Spain is Back

28 May 2016

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

http://wolfstreet.com/2016/05/28/spain-banking-crisis-is-back-banco-popular-capital-npl/

 

After three years of relative calm and one month before yet another round of do-or-die general elections, the words “banking” and “crisis” are back on the front pages of Spain’s newspapers. Despite the untold billions of euros of public funds lavished on “cleaning up” their balance sheets and the roughly €240 billion of provisions booked against bad debt since December 2007, the banks are just as weak and disaster-prone as they were four years ago.  Francisco González, the President of Spain’s second biggest financial institution, BBVA, was the first to raise the alarm, warning a few days ago that the ECB’s negative interest rate policy “is killing” European banks.

Now, it seems González’s prophecy is already coming true.  Spain’s sixth largest financial institution, Banco Popular, on Wednesday evening announced that it was urgently seeking to raise €2.5 billion in capital in order to shore up its finances. The news took many of the firm’s investors by surprise given that just a month ago the bank’s CEO Francisco Gomez had breezily reported that the bank had a very comfortable core capital level above the regulatory minimum and “one of the best” leverage ratios in the sector.  The market’s response to the latest news was emphatic. The bank’s shares plunged 25% Thursday morning. There was not even the barest flicker of a recovery on Thursday afternoon. On Friday, the stock dropped another 8.2%, to close at €1.59 per share, its lowest in 26 years. Over the three days, the stock plummeted 32%.

For the bank’s shareholders, it’s the second time this has happened in the last four years. In 2012, the bank’s management — virtually man-for-man the same management team as today — pulled the exact same stunt in an effort to stabilize the bank’s finances. The slogan the bank chose to sell that capital increase was “Our Past and Our Present Guarantee Our Future.”

The guarantee didn’t last very long. Now, Banco Popular has laundry list of problems:

  1. Recent financial regulations raising the minimum capital buffer have had the effect of tightening the operating margins of many institutions, including Banco Popular.
  2. The ECB’s “magic people” have coaxed interest rates in Europe to the lowest point in human history. Already tight margins have got even tighter. As Gónzalez says, it’s “killing” banks.
  3. According to an auspiciously timed report from JP Morgan Chase, Banco Popular would need to provision up to €6.7 billion to comply with the new accounting rules, a lot more than the €2.5 billion it hopes to raise. And Popular has already seen €1.3 billion wiped off its share value in the last two days’ trading alone.
  4. Despite the so-called cleansing of Spain’s financial sector, Banco Popular’s books are still jam-packed with toxic junk, primarily consisting of non-performing loans (NPLs) connected to the real estate sector. At a staggering 12.6%, the bank’s bad debt ratio is the highest of any Spanish bank; 26% of its total loan portfolio is concentrated in the real estate and construction sectors.
  5. Popular’s current coverage ratio, or its ability to absorb potential losses from bad loans, is 39%, far lower than the Spanish bank average of around 56%.
  6. Popular is heavily implicated in Spain’s floor clause scandal. If upcoming lawsuits go against the banks, Popular will have to shell out some €700 million in customer reimbursements. The bank has warned that it could end up booking losses worth €2 billion in 2016.

Whether it gets its second €2.5 billion capital expansion or not, Banco Popular problems are likely to get worse. And its management should be beyond salvation, for ruthlessly hanging shareholders out to dry not once, but twice.  “There are already clear signs of ethical misconduct when Popular announced positive-sounding results three months ago,” says independent analyst Alberto Iturralde. “The bank gave good news back then because its shares were about to break through key resistance levels. And they just made the latest announcement at a most propitious time, with the shares back at €2.20 a piece,… and without giving [investors] any time to get out.”  Instead of facing the ire of investors, the bank’s senior management was in London courting global investment funds at the Savoy Hotel. Popular was able to find 14 international banks willing to underwrite its capital expansion. In effect, they guarantee they will find all the investors Popular needs, despite the bank’s track record of capital destruction.

At the top of the list is UBS, which has committed to underwrite 22% of the new shares, followed by everyone’s favorite financial cephalopod, Goldman Sachs (16.4%), Spain’s two biggest banks, Santander and the no-longer too-big-to-fail BBVA (16.4% between them), Barclays, Citi, Deutsche Bank, Morgan Stanley, HSBC, Credit Suisse, Société Génerale and Nomura. The two boutique firms Fidentiis and N+1 will also participate in the launch as co-managers. They can already taste the juicy fees and invaluable insider information.  As Bloomberg notes, Popular has problems that are fairly common across banks in the euro area: “questionable balance-sheet strength, a rough revenue outlook, and weak governance.”

It is certainly not the only Spanish bank to still have massive exposure to Spain’s troubled real estate sector. The last thing Spain — and by extension, Europe’s — financial sector needs is for people to begin questioning just how fixed these banks really are, especially mere weeks before make-or-break elections in Spain and the mother of all referendums in the UK.  “Europe is caught in a trap,” said BBVA’s Executive Chairman González. The ECB is trying to boost growth potential, but it’s these “negative interest rates which are killing us.” Read…   NIRP is “Killing Us,” Wheezes Spain’s Second Biggest Bank

 

NIRP is “Killing Us,” Wheezes Spain’s Second Biggest Bank

by Don Quijones • May 24, 2016

http://wolfstreet.com/2016/05/24/nirp-is-killing-us-spanish-bank-bbva-gonzalez/

 

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

In Europe, banks are beginning to feel the side effects from the ECB’s negative interest rate policy (NIRP), which (among other things) is meant to weaken the euro, fuel inflation, force banks into riskier lending, and prevent Eurozone economies from buckling under the sheer weight of their sovereign debt.  But it doesn’t work. Inflation remains much lower than the ECB’s target headline rate of 2%, European sovereign debt continues to grow at an alarming rate, and bank lending remains anemic in most countries. And it could actually end up killing the patient, Europe’s biggest banks.  That’s what Francisco González, Executive Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership Meeting of the world’s most powerful financial lobby organization, the Institute of International Finance (IIF).

“Europe is caught in a trap,” he said. “It has to do something to boost its growth potential. But expansive monetary policy has led to negative interest rates, which are killing us.”

For BBVA, like most other European banks, the main problem with NIRP is the shrinking effect it has on its operating margins, which in turn puts unbearable pressure on its balance sheets. For example, when the Euribor is at zero, interest rates on variable rate mortgages are at next to zero. And these variable-rate Euribor-linked mortgages predominate in Spain’s mortgage market.

Until not so long ago, Spanish banks were insulated from this problem by the floor clauses they discreetly inserted into their mortgage contracts. These set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure. That meant the banks enjoyed all the benefits of low-interest rate living with none of the drawbacks, which were exclusively reserved for Spanish mortgage holders.

All that changed in April when a Spanish judge ruled that the clauses were both abusive and lack transparency. The 40 banks implicated, including BBVA, now must reimburse clients all the money they’ve overcharged them since May 2013, and perhaps even since 2009. That could be as much as €10 billion. Also, as WOLF STREET reported at the time, in a delicious irony, all the banks that applied the floor clauses will now have to learn to survive without the one mechanism that protected them from the profit-shrinking effects of the ECB’s NIRP — just when the Euribor goes negative!

Cue Gonzalez’s public meltdown!