14 July 2017 – Expansión
Santander will make a profit from the clean-up of Popular’s balance sheet. The bank may earn up to €630 million from the sale of its foreclosed assets and doubtful real estate loans, which have a gross value of €30,000 million. The bank’s real estate risk, according to the European authorities, amounts to almost €37,000 million, including the stakes in real estate companies, which amount to around €7,000 million.
These profits will be obtained in the best of the possible scenarios considered by Citi in a report published this week. The North American investment bank was responsible for advising Santander during its purchase of Popular, which ended up being closed for the symbolic price of one euro.
Santander plans to divest all of Popular’s non-performing assets within three years. But Citi thinks that it will have to offer discounts of between 15% and 20% on the net value of the assets to incentivise bids from investment funds and private equity firm, amongst others. The net value of the assets amounts to around €9,300 million with a provisioning level of 69%.
Financial sources believe that Santander will accelerate the sale of Popular’s more impaired properties to clean up that part of the balance sheet before the end of this year. In this way, it may recognise juicy accounting profits, according to the sources. Popular’s real estate portfolio contains €10,500 million in land, hotels and more than 25,000 homes, according to the latest available figures. Half of the properties are located in Andalucía and Valencia.
Ana Botín has set the goal of getting rid of half of Popular’s non-performing assets within a year and a half.
To clean up Popular’s toxic assets, Santander is undertaking a capital increase amounting to €7,072 million. The bank will recognise a provision against €7,900 million of Popular’s non-performing assets to increase the coverage level of the real estate risk from 45% to 69%. The average coverage level in the sector is 52%, which is why financial sources say that Santander is likely to mark a milestone that has not been seen in the Spanish banking sector for years: it looks set to sell property at a profit.
Santander is negotiating with the funds to divest Popular’s non-performing assets. It is studying the possibility of creating one or more vehicles to separate the risk linked to property from the acquired entity. Morgan Stanley is advising the bank on the clean-up plan. Some funds, such as Blackstone, Apollo, Bain Capital and Lone Star have approached the bank to understand its strategy.
Santander forecasts that its purchase of Popular will generate cost synergies of around €500 million from 2020 onwards, although Citi elevates that figure to €606 million. The investment bank considers that Santander is being too conservative in its calculations of the return on investment and its impact on earnings per share.
According to Citi, the purchase of Popular will generate a return of 24% for Santander in 2020 in the best-case scenario, above the 13-14% forecast by the entity. And it estimates that the operation will allow Santander to increase earnings per share by 6% in three years, compared to the forecast of 3%.
Leader in Spain
The resultant entity will rise to the top of the market in terms of assets (almost €470,000 million), deposits (€255,000 million) and loans (€249,000 million). (…).
Original story: Expansión (by R. Sampedro)
Translation: Carmel Drake