Banco Popular: from profitability king to bankruptcy

Back in the 90’s IBCA credit rating agency (later on merged with Fitch) said about Banco Popular being among the most profitable banks in the world: “…Banco Popular’s consistently exceptional profitability and excellent asset quality, its strong retail deposit franchise and its adequate capital…” adding: “…this performance record has been maintained throughout various economic cycles and the Group remains one of the world’s most profitable banking groups, a favorable reflection of its management.”

Last Tuesday (June 6th 2017) European regulators (see FT’s article on the matter) took control of a bank that burnt through €3.6bn of emergency central bank funding in merely two days of this same week. Shareholders and junior bondholder lost everything (at this moment the last trading value was somehow around €1.3bn); and the bank was handed over to a buyer bank (Banco Santander) for a symbolic amount of €1.00. From king of profitability to bankruptcy. Could this be explained?

Let’s start from the last day of Banco Popular. Mr Saracho, appointed to lead the bank back in February, went to see ECB officers with the aim to continue receiving liquidity aid. Situation was dramatic, €3.4bn were needed in the previous days just to keep the bank alive. Mr. Saracho’s goal, former executive of JP Morgan,  was to survive at least through the week-end. The main reason behind the liquidity needs were the massive deposit withdrawals by depositors due  to high levels of uncertainty about the bank real situation and its future. Confidence was crucial (the lack of), and Mr. Saracho’s hope was to gain time to recover it in a last minute magician trick. Bad news was that there were not sufficient cash in the bank to even open the street bank commercial branches. ECB, now with a new empowerment regulation in place, said enough is enough. According to ECB, viability of the bank is not possible, the new regulation must be executed and the trigger was pulled. End of story. Really?

Mr. Saracho was appointed back in February after a bank reported annual loss of €3.5bn. Former first executive, Mr. Angel Ron, was released from his duties (diplomatic way of saying “you are fired”). During the previous year, Mr. Ron led a capital increase of around €2.5bn. By the time Mr. Saracho  took over, the Market Capitalisation of the the bank was around  €3.4bn. What was the main goal of Mr. Saracho? Don’t forget he was appointed by the biggest shareholders of Banco Popular. They didn’t want to dilute themselves further. They want to recover its investment. Additional capital increase was not among its desires. Unfortunately, the bank needs required additional support of something between €4-5bn. Therefore, if capital increase was not an option, the only way out was a sale. And a sale happened, but of €1.00.  What does it tell you about Mr. Saracho’s performance? 

Anyone in the bank sector will tell you very clearly. A bank is, above all matters, a question of truth. Bank industry, no matter how you measured it, is among the most leverage industries in the world, if not the most. This is on its own nature. Under Basel III, the minimum tier 1 capital ratio is 10.5%, which is calculated by dividing the bank’s tier 1 capital by its total risk-based assets. In plain english, this means that out of every €100, the bank contributes only with €10.5 of its own shareholders’ resources. The remaining €89.5 are not from them, and therefore, with different degrees, subject to be forced to be returned to its real owners. This situation will be triggered if the owners of these €89.5 are uncertain about the security of its assets being under custody by the bank. Therefore, a bank is a question of truth, a question of confidence. As plain as this. Did Mr. Saracho’s actions go in this direction? 

Mr. Saracho’s signing bonus was €4.0 million. Fix salary of €1.5m per year, plus moving financial help from London to Madrid, and a significant contribution to his pension fund. He came from JP Morgan. His profile associated to Investment Banking gave him a good image to find the proper buyer at the best price. Furthermore, many people thought that this process would be a fast track process. He was selected by shareholders at the end of 2016, much earlier than the official start of his mandate this February. Therefore, it should not be strange to think that the buyer and the initial agreement could be in place even before its formal mandate started. Many people thought that even in its first official declaration this would be heard. A clear statement, a clear road map that will remove uncertainties and reinforce credibility. Not even close. Mr. Saracho’s declarations were more in the mood of “we will see”, “analysis will be have to be done”, “capital increase has to be done or the alternative will be to sell the bank”. Months later, no clear path was set. A month ago Mr. Asiain, a reputed Spanish banker, was appointed to help Mr. Saracho. Market was expecting a clear path statement from him. Clear it was, but not in right direction. He said that the situation of the bank was critical. He blamed on the “brick crisis” (real estate toxic investments), and in external players  dumping the market (Spanish bad bank called SAREB). In summary, not immediate actions to be taken, more news will follow in the coming future. Problem was that future was probably the most scarce resource Banco Popular had. Market said enough is enough and the path was properly paved for short selling investors. Share price went down like a rock. Company value flight away by billions. Depositors were scared and, as obvious result, money was taken away from deposits. Self fulfilled prophecy at its glory. 

Mr. de Guindos, Spanish Economy Minister, said back in April: “Banco Popular is solvent and its future will be decided by its shareholders”. Last week ECB took over the bank from its shareholders, and accept the only offer available: €1.00 payment in cash and a compromise to inject €7bn in the coming months to guarantee Banco Popular viability. This has been the accepted offer from Banco Santander. Given the present circumstances, perhaps is the best possible solution. Quick, understandable and with a purpose. It does not mean that this final output was the most desirable one. Not for the former shareholder of course. More than 300,000 shareholders lost all they have invested into the bank. Do they deserve it? Were they investing based on transparent information? Did regulators act properly and accurately protecting minority investors? Did Spanish economical authorities manage this process with the general interest of the people in mind? These questions are already blowing in the wind. Legal demands are already being prepared against participants in this process. I’m afraid these will be first of many. Legal firms are smiling about it. Probably the only real beneficiaries of this situation.

Back in 1990’s in the noble area of Bank of Spain offices 7 big Spanish banks used to have lunch together. There are only two remaining: Santander and BBVA. Do you wonder why?

Francisco Canós

Article printed on 12th June 2017 at: