TEXT-Fitch:Banco Popular rights issue gives approach immediacy
(The following statement was released by the rating agency)
Oct 04 - Banco Popular Espanol's plan to raise most of its capital shortfall through a rights issue means the bank can plug the gap identified in Friday's Spanish stress test report more quickly than through asset sales and earnings retention, says Fitch Ratings. The Oliver Wyman stress test on Spanish domestic lending reported that Popular has a EUR3.2bn post-tax capital shortfall under its adverse scenario.
While clearly challenging, we continue to believe that Popular has the ability to increase its capital without seeking bailout funds. However, the Viability Rating is sensitive to any change in our assessment of the bank's ability to improve its solvency, as we already stated in our 21 September downgrade.
Popular's decision to raise the bulk of the capital through a EUR2.5bn rights issue will improve its capital significantly before a June 2013 deadline. This represents more tangible new capital for the bank than other measures it might have considered. The bank expects the rest of the capital will come from EUR300m of asset sales and EUR400m in retained profits.
The poor macro-economic and banking environment means Popular will find a large rights issue and asset sales challenging. However, Popular said on an analysts call on 1 October that it has already identified 12 investment banks that might underwrite the offering, and expects to complete it by year-end.
Popular has two advantages over former savings banks: it is already listed, and has a well-developed SME franchise. Most other banks with capital shortfalls, such as Liberbank, Banco Grupo Caja 3 and Banco Mare Nostrum, are not listed - so cannot raise capital through a public rights issue. Our recent report, 'Spanish Bank Ratings', splits the country's banks into four groups. Popular is in group three - it is a bank that we expected to have a shortfall, but that can meet the demand on its own.
Banco Popular has a strong SME business, with over a 10% market share in this segment. The SME business has supported sound pre-provision earnings over the years, which should help the bank sell its case to investors.
The success of measures being taken in Spain to strengthen capitalisation, clean up loan books and improve funding profiles - and by the EU authorities to alleviate the broader eurozone crisis - are ultimately the critical issues that will determine the extent to which Spanish bank ratings, including Banco Popular's, can improve over the medium term.
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