Popular suspends dividend payment to meet capital requirement

Banco Popular’s shares plunged on Monday after the bank announced a deeply discounted rights issue to cover the shortage in its capital identified Friday by independent consultant Oliver Wyman.

Popular, Spain’s sixth-biggest financial group, is asking its shareholders to subscribe to up to 2.5 billion euros in new shares at a discount of between 40 and 60 percent to its share price. According to the results of the stress tests carried out by Oliver Wyman on 14 Spanish lenders, Popular requires a capital hike of 3.223 billion euros to meet capital adequacy requirements under an adverse economic scenario.

The eventual size of the issue will be determined by the level of demand. Popular has named Deutsche Bank as one of the main underwriters of the issue, which it plans to launch in mid-November. The capital increase could be as much as 80 percent of the bank’s current market value.

After trading in its shares was briefly suspended by the National Securities Commission (CNMV), Popular returned to the market at a discount of some 12 percent to its closing price on Friday. At 4.10pm, its shares were down 10.35 percent at 1.525 euros.

At a presentation on Monday, Popular said it would also suspend dividend payments for the rest of the year and plans to set up its own bad bank to manage its toxic real estate assets.

The bank also reiterated plans to sell off assets to avoid the state having to take a stake in the bank to cover its solvency needs. Popular estimates it is sitting on unrealized capital gains of 1.8 billion euros.

Oliver Wyman on Friday said the banking sector as a whole requires additional capital of €53.745 billion euros to clean up balance sheets, the bulk of which will go to four banks that have been nationalized. The Eurogroup has granted Spain a loan of up to 100 billion euros to recapitalize the banks.

“Banco Popular will maintain and speed up the process of the sale of non-productive assets, managing its real estate assets and loans separately,” the bank said in a statement issued Monday. In a subsequent presentation to analysts, chief financial officer Jacobo González-Robatto said the bad bank would be set up “as soon as possible.”

González-Robatto said Popular is not ruling out accepting an injection of funds from the state in the form of contingent convertible bonds, although that is not the preferred way for the bank to go. “Popular wants to be responsible with its future,” he said.

Apart from the rights issue and asset sales, Popular is also relying on the “strength of its operating earnings and provisions that have already been made in order not to have to rely on capital gains to reach the levels of capital required.”

Popular is aiming to make provisions for possible impairment in its real estate portfolio of 9.3 billion euros this year, which it believes will cover a loss in the value of its portfolio of 35 percent next year. It is aiming for a coverage ratio for potential losses on foreclosed property of 56 percent.

Popular expects to generate annual gross earnings of 400 million euros and capital gains of 300 million from the sale of non-strategic assets and the recovery of loans currently deemed non-performing. It said earnings could be considerably higher given that the worst-case scenario envisaged by Oliver Wyman of an accumulated decline in Spain’s GDP over the period to 2014 of 6.5 percent is highly unlikely.

The bank said that a one-percentage-point improvement in that scenario would boost gross earnings by 185 million euros. Popular is hoping to dedicate 50 percent of its earnings to dividend payments next year.

Popular said the recapitalization plan aims to increase the bank’s core Tier 1 ratio to 12 percent by 2014, by which time it “will be one of the most solid lenders in the Spanish financial system.”

If Popular manages to secure 1.1 billion euros in fresh capital from private investors before the end of the year, it will have until June to find the additional 2.223 billion euros Oliver Wyman has identified that it needs.

Popular’s current main shareholders include European insurance giant Allianz, with a 6.3-percent stake, and Portuguese billionaire Américo Amorim with 4.1 percent.