Spanish banking group Santander has stepped in to rescue struggling smaller rival Banco Popular Español, after the European Central Bank (ECB) said that it had assessed that Popular was “failing or likely to fail” due to its deteriorating liquidity.
Popular’s share price has fallen by more than half in recent days on fears over its future and ability to fill a capital shortfall after potential bidders dropped out of an auction to buy it. Credit ratings agency (CRA) Moody’s downgraded Popular’s unsecured debt and deposit rating.
A statement issued by the ECB read: “The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due.
“Consequently, the ECB determined that the bank was failing or likely to fail and duly informed the Single Resolution Board (SRB), which adopted a resolution scheme entailing the sale of Banco Popular Español SA to Banco Santander.”
The European Commission also approved the deal, commenting that the acquisition would mean “customers of Banco Popular will continue to be served with no disruption to the economy”.
“All depositors continue to have uninterrupted access to the full amount of their deposits”, added Brussels.
The ECB’s green light for the deal allows Santander to acquire all of Popular’s shares and debt for a token price of €1. The group said that it plans to launch a €7bn (US$7.9bn, £6.1bn) share-raising to “cover the capital and the provisions required to reinforce the balance sheet of Banco Popular”, while the deal would have a “neutral” impact on its core capital ratio (CET1).
A stronger presence
Santander’s chairwoman, Ana Botin, hailed the deal as “really great news” for Europe, the financial system, for Spain and for the group’s shareholders. It was “a transaction that is very good for our franchise in Spain and Portugal. It creates the best bank in both markets.”
Botin told Bloomberg TV that Santander had not experienced any pressure from the regulators to rescue Popular. An opportunity had arisen to present an offer to the SRB – the body set up in 2015 as part of a wider effort to establish a European banking union and charged with the orderly winding down of failing banks – and she was impressed by the speed with which the deal was agreed.
Botin did not say whether job cuts or branch closures would follow, but stressed that Santander’s financial targets for 2017 and 2018 would not be affected, while those for 2019 be improved. As the proposed €7bn capital injection will come from a rights issue, the group’s capital reserves will not be depleted.
Elke König, the SRB’s chair, commented: “The decision taken safeguards the depositors and critical functions of Banco Popular. This shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers’ money from bailing out banks.”
The acquisition increases Santander’s market share in Spain by around 7%, increasing it to 20% and making it the country’s leading bank with 17m customers, while in Portugal it will now have more than 4m clients.
The timing is also fortuitous for the group. Popular was a major lending to small and medium-sized enterprises (SMEs) and both the Spanish and Portugese economies have recently showed a strengthening recovery. Santander said the combined group would command a 25% market share in SME lending in Spain.
Markets have reacted calmly to the news of Popular’s rescue, in part due to the fact that a state-backed rescue backed by taxpayers is not involved. Instead, shareholders in the failed bank, along with its riskier bondholders, will bear the financial impact.
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