Banco Popular’s Complex RE Clean Up Continues

24 November 2016 – Expansión

Popular was the most profitable bank in Spain’s financial sector until it decided that it did not want to get left behind in the real estate development business. The problem is that it joined the party too late, when the real estate bubble had already begun to burst (….). The result is that, several years after the outbreak of the crisis…Popular is the bank with the highest proportion of toxic real estate assets on its balance sheet. It also has one of the lowest levels of coverage. The bank’s total real estate exposure amounted to €25,376 million in September, with a coverage ratio of 35%.

In this context, the essential axis of Popular’s clean up plan, designed by the heads of the bank and approved by the supervisory bodies, placed the emphasis on the €2,500 million capital increase that was carried out in June (to reduce the bank’s installed capacity by closing branches and reducing the staff), and, above all, on increasing the coverage for toxic assets to bring the entity in line with the rest of the sector, in such a way that it would make it easier for it to divest these assets.

That is what the entity is looking to carry out with its project to create a separate real estate company using some of its assets. Ownership of those assets will transfer from the bank directly into the hands of the financial institution’s shareholders.

But now, data provided by Popular, when it presented its results for the third quarter, has revealed that the net debt of the real estate and associated businesses amounted to €15,518 million in September and that the provisions amounted to €9,858 million. The total exposure therefore amounted to €25,376 million and the coverage afforded by those provisions stood at around 35%. The rest of the financial sector has provisions to cover up to 50% of their respective exposures.

The bank’s plan is to reduce its non-profitable assets by 45% by 2018 and for the coverage of its toxic assets to increase to 50%. In fact, sources at the bank say that the latter was fulfilled at the end of October (…).

The constitution of these new provisions should facilitate both retail sales, as well as the sale of portfolios of toxic real estate assets, because the entity will be able to sell at more competitive prices in the market without incurring fresh losses in its income statement. The new provisions should also allow the headline figures to be outlined for the real estate company that is pending approval by the financial supervisors and the CNMV. Undoubtedly, when authorisation is granted and the bank ceases to be the owner of real estate assets amounting to €6,000 million (book value), it will represent a huge relief for the bank’s future quarterly results.

However, the question is whether that will be sufficient, or not, for investors to consider that Popular is undertaking the clean up process at the right pace and will ever return to profitability.

Whilst decreasing the volume of toxic assets by €6,000 million involves significant effort, even once that hard work has been completed, the entity will still have a high volume of problem assets on its balance sheet, between €19,000 million and €20,000 million, according to its own accounts. The bank will have two years to reduce its exposure to the real estate and associated sectors by €5,400 million if it is to achieve the established objective of reducing this caption of its balance sheet by 45% with respect to its current level.

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake