Spanish Banks in Search of Capital
September 17th, 2009
When Santander launched its mammoth E7.2bn rights issue last year, rivals rushed to deny they needed to follow suit. Yet for the last six months, they have all been quietly raising their capital ratios – through asset sales, repurchase of their own bonds at a discount and the sale and leaseback of offices.
But these back-door methods of capital-raising are now exhausted, so the banks are tapping the capital markets. Last week BBVA launched a E1bn convertible, followed by Banco Popular’s own convertible and share sale this week, which should raise up to E1.2bn in capital. Chances are that more will follow.
The timing may be opportunistic. Popular’s share price has more than doubled since March, and BBVA’s has nearly tripled. But the need is real.
A deep recession in Spain – the unemployment rate is heading towards 20% and the Spanish property market remains paralysed – will push up non-performing loans. Banco Popular, the country’s third-largest bank, is entirely focused on Spain. The bank´s ratio of provisions to bad debts, or coverage ratio, has fallen below 50%.
Also, the banks are acting in anticipation of tighter capital rules. This week, the Basel committee of central bankers has asked banks to improve the quality of their core Tier 1 capital. The Bank of Spain is unlikely to be a laggard in regulation, so Spanish banks are moving trying to get ahead of a possible traffic jam in the capital markets.
There is no single target ratio, but as usual Santander appears to be setting the standard. Its core Tier 1 ratio was 7.5% in June. Depending on where it prices the forthcoming IPO of its Brazilian subsidiary, the ratio could climb over 8.5% by the end of the year. After its capital raising, Banco Popular should be in the same league.
In contrast, the core Tier 1 ratio of the smaller but less recession-afflicted Bankinter stood at 6.5% in June. And BBVA, following the convertible bond, will be at 7.5%, according to analysts. That may still be on the low side, particularly if the bank wants to do any more shopping in the US. (Spain’s Banco Popular raised E500m by selling shares to investors on September 10, and plans to raise another E500-E700m in a four-year mandatory convertible bond aimed at retail investors.
After the share and bond issues, Popular said its core capital ratio would reach betwen 8.5% and 8.7%. BBVA launched a E1bn in a mandatory convertible bond on September 4.
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