Written By: Steven Winter – Corporate Finance
Banco Santander of Spain is looking for a partner to handle a major cleaning. This is to get rid of the toxic assets, nonperforming buildings and credits that it inherited from Spanish Banco Popular, acquired last June for 1 euro symbolically when the latter was on the brink of bankruptcy. Santander has not been long tackling the issue of Banco Popular’s toxic assets. Indeed, just a few weeks after the rescue of the bankrupt Spanish bank, Santander is looking for buyers interested in the fair value of the nonperforming loans portfolio.
European authorities sealed in the beginning of June the sale of Banco Popular for 1 euro to Santander.
Spain’s sixth-largest bank, Banco Popular, had 1,700 branches and 11,000 employees and was still supposed to be worth €1.3 billion. However, its liquidity situation was critical and its financial statements burdened by €37 billion in toxic assets, inherited from the housing bubble and crisis. Its 2016 losses stood at €3.5 billion, with more expected future losses in absence of other banks interested in a possible buyout. Markets had started to react strongly, and Banco Popular’s market value plunged by half in one week.
Its situation had been considered as critical and “in a state of bankruptcy or likely bankruptcy” by European authorities. “The significant deterioration in the bank’s liquidity in recent days has led to the determination that the entity would have been unable in the near future to repay its debts or to respect other commitments by their due date,” the European Central Bank (ECB) had said. The ECB then decided to apply for the first time the Single Resolution Mechanism (SRM), created in 2014 to avoid the contagion of banking crises to the states. This mechanism has been operational since January 1, 2016.
In order to avoid contagion, the European Single Resolution Fund (SRF) and the Spanish banking restructuring fund (FROB – Fund for Orderly Bank Restructuring) launched a “call for tenders” to find a buyer. Santander, one of Europe’s leading banks, was selected after it pledged to realize a €7 billion capital increase to cover the deterioration of assets. The ECB decided to accept the buyout for €1 from Santander. The approximately 300,000 shareholders of Banco Popular, as well as the holders of subordinated and hybrid debts, lost their entire investments. But the deposits and savings of customers were preserved. Activity was maintained without any government or taxpayer help. Santander’s president, Ana Patricia Botin, welcomed a “transaction that makes Santander the first bank in Spain, with the largest share of the credit and deposit market, with 17 million customers”. She gave herself a month to realize the promised capital increase and 18 months to dispose of half of the real-estate portfolio of Banco Popular.
Santander had realized already its promise to increase its capital by €7 billion to cope with the integration of Banco Popular, and it mobilized €7.2 billion to cover provisions and unpaid liabilities related to the real-estate sector.
Next step now: Santander is looking for a partner to handle a major cleaning.
Less than two months after Banco Popular’s absorption, the Santander Group president, Ana Patricia Botin, started the cleaning process. Her promise was to get rid of the toxic assets her bank just inherited in 18 months. And markets already knew that Santander could be quick. The bank indeed has already proven to be able to drastically reduce its exposure to the real-estate sector. This exposure has decreased by 60 percent since 2012, with the bank even getting rid of buildings with a discount of up to 70 percent rather than keeping them. This was precisely what Banco Popular had refused to do for years, resisting selling off cumbersome patrimony in the hope of an upcoming recovery of the sector, before being destroyed by its real-estate burden.
Santander seems determined to apply the “sell” method, selling the buildings it inherited from Banco Popular with discounts of 40 percent or more if necessary. Santander is targeting receiving return from its purchase by 2019, with an investment return of 13 or 14 percent by 2020. Santander is now looking for a professional partner to accelerate the clean-up process. It is demanding €5 billion in exchange for 51 percent of the doubtful assets and credits portfolio, the total value of which is estimated at €30 billion. Any precise assessment of the fair value of toxic assets is probably difficult—according to some totals, 130,000 buildings and past-due credits are involved. But Santander is also clear on this: At the time of the opening of the capital increase on July 4, the bank warned of possible “hidden risks” on the entity’s accounts. Candidates for the redemption of the real-estate portfolio are confronted with the same vagueness. For these candidates, bad surprises are possible with their purchases—even if the recovery of the Spanish property market should help to decrease losses.
Markets are certainly trusting Santander’s practice and Ana Patricia Botin’s word.
Although the situation is not totally clear, it seems the ECB was right in entrusting Santander to save Banco Popular: Santander has already received three offers from the investment funds Lone Star, Blackstone and Apollo. Santander announced that it would study the offers and decide in the coming weeks. And it certainly will!