UBS Warns: Spain’s “Most Italian Bank” Runs Out of Options
The bank-bailout business rages on.
During the first week of 2017, Spain’s “most Italian bank”, Banco Popular, got off to a flying start as its stock outperformed all other major Spanish banks. By Jan 5th its shares had even crossed the €1-line for the first time in nearly a month. But Popular’s New Year fairy tale was not made to last.
Its upward momentum, if that’s the right term, was brought to a halt by a bombshell report from UBS that concludes that Popular’s stock, which already lost three-quarters of its value last year and is down over 90% since 2008, is still overvalued by 20%. In less than an hour, Popular’s shares were back under a euro. That’s life in the penny-stock lane.
According to the report, Popular has a provision deficit of €1.9 billion. In other words, it has nonperforming loans and other toxic assets on its books whose losses would amount to €1.9 billion. But it has not yet booked (or “recognized”) those losses. If it did finally recognize those losses, it could end up with a €2.4 billion capital gap. That’s the equivalent of roughly 60% of its current market cap.
The UBS analysts acknowledged that their previous forecast of the bank’s capacity to absorb loss provisions had been “too optimistic”, with the new estimates showing a lower coverage ratio (46% compared to the previous 50%) and capital ratio (10% instead of 10.8%).
UBS also poured cold water on the idea of Banco Popular further expanding its bad-debt provisions, since doing so would “permanently depress” its profitability, limiting its capacity to create new capital and increasing its regulatory risk. This is bad news for a bank that continues to drown in its own toxic soup eight years after the burst of Spain’s mind-boggling real estate bubble.
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