Popular Plans To Create Its Own Bad Bank

7 October 2015 – El Confidencial

Banco Popular is trying to shed weight in leaps and bounds given its enormous exposure to property. To this end, it has made contact with the Ministry of Economy and the Bank of Spain with a view to creating its own real estate bad bank, as a prelude to carving out (and transferring) a portfolio of its own assets worth no less than €5,000 million. The operation would represent a significant easing of pressure in the face of the new capital requirements imposed by the European Central Bank, since it would allow an effective reduction in the volume of risk-weighted assets (RWA) on the institution’s balance sheet.

The creation of the future bank bad aims to establish a clear dividing line between the activities of the financial business and those relating to unexpected operations that Banco Popular has had to assume as a result of the crisis. The entity has accumulated property amounting to more than €16,000 million and wants to take advantage of the current recovery in the market to launch an independent company that would be managed by renowned experts and would be completely detached from the bank led by Ángel Ron (pictured above).

Initially, Banco Popular’s shareholders will be the owners of the new real estate subsidiary, but the project involves a carve-out plan and the external financing of the eventual bad bank, which would ultimately ensure that the majority of its financial liabilities were placed in the hands of external investors. In recent weeks, the operation has been presented to the various supervisory bodies, including the Bank of Spain and the ECB. The decision by the Ministry of Economy will be instrumental when it comes to the approval of any agreement, which in any case, would have to be endorsed by Banco Popular’s Board of Directors and General Shareholders’ Meeting in the coming months.

The release of assets worth €5,000 million would allow the entity to reduce its risk profiles with a view to future stress tests and would diminish the volume of debt it holds, at the same time as increasing its profitability. Banco Popular hopes that it would also improve its rating in the market, which would help to reduce its financing costs at a particularly critical time for the banking sector, in the context of the dramatic fall in interest margins. The operation would also guarantee that the bank could maintain the new capital ratios required by the ECB; these have now been established for Banco Popular at 10.6%, including 1.4 points of deferred tax assets (DTA).

The definition of a new business structure in the real estate segment, with its own independent and specialised governing bodies, would provide a different way of managing the business with its own distribution channels that would not be affected by the restrictions imposed on financial activities. At the end of 2013, Banco Popular transferred most of the share capital it held in Aliseda, its real estate manager, to the US firms Värde Partners and Kennedy Wilson, in an operation that generated profits of more than €700 million for the bank. Soon after, it also sold 51% of its credit card business to Värde for a profit of €400 million.

The proposal now on the table is much more ambitious for the bank from a strategic point of view, given that it is seeking to permanently deconsolidate some of its least liquid assets. The entity has not ruled out the option of constituting a Socimi…but that is not its preferred choice. (…). The aim is to ensure a project that is financially neutral for Banco Popular, at least in the beginning, and that eventually reduces the clean-up requirements left over from the property crisis. (…).

Original story: El Confidencial (by José Antonio Navas)

Translation: Carmel Drake