LET’S REWIND. EQUITY of €10.777bn, capital 53bp above minimum requirements; earnings generating a 17% annualised return; lower wholesale funding costs; €77.5bn in deposits; group costs 10% down year-on-year; gross NPL entries down 24%, recoveries up 7%; a non-core asset sale programme under way.
If I sold you that as a recovery narrative, you’d buy it. You know you would.
Well, that was Banco Popular Espanol at the end of the first quarter. Regulators and supervisors have engaged in a lot of smug self-glorification since they judged Popular had hit its point of non-viability on June 7 and shopped it to Santander without recourse to bridge institution or asset-separation tools.
BUT HERE’S THE issue: how on earth can authorities have let a bank – yes a bank with a sizeable legacy overhang of dud real-estate exposure but a bank with a valuable core retail, consumer and SME franchise – sink into a deposit-flight death spiral that wiped out 305,000 shareholders and bondholders, including a huge number of retail investors and staff? And all in a matter of weeks.
Fact: Popular had 13.8% of Spain’s SME market versus Santander’s 11.1%. Santander is crowing now that it has a 25% market share. For Ana Botin getting Popular was Christmas come early; having her takeover subsidised by a capital bail-in and shareholder wipe-out was icing on the cake.
No, this was supervisory negligence pure and simple. Authorities should have acted long before the self-feeding conflation of deposit withdrawals, share price collapse, ratings downgrades and plummeting collateral values scuppered Popular’s chances of survival in those final weeks.
So hell-bent were supervisors and regulators to prove that the bail-in system was going to work that they missed the wood for the trees. What happened to Popular is tantamount to a control group tracking someone running blindfold towards a cliff-edge and observing them plunge over the edge to test the consequences, when they could have warned them to veer off into another direction.
THIS WAS NO systemically-dangerous previously unforeseen gone-capital shock insolvency situation. It was a forced sale of one bank to another after regulators and supervisors had allowed the situation to spiral out of control. A sale to a bank that – conveniently – had scrutinised the books as part of Popular’s going-concern rehab strategy.
Santander knew that waiting until all other solutions had been exhausted and Popular was in its death throes before pouncing on an asset it wanted was the optimal strategy.
Call me a conspiracy theorist, but I don’t like it.
POPULAR’S DITHERING MANAGEMENT hardly comes out of this well. Recently appointed president Emilio Saracho certainly lacked the clinical engagement and urgency of Jean Pierre Mustier, who faced a similarly uphill struggle when he took over as UniCredit CEO.
But we should nonetheless demand full transparency regarding the nature, timing and sequencing of official discussions around the Popular saga, including what really happened at this supposed “auction”.
IF THE SUBORDINATED debtholder wipe-out proved anything beyond supervisory torpor, it’s that maximum distributable amount, available distributable items, coupon-stoppers, high trigger, low trigger, distance to trigger, trigger events and all of those innovative post-financial crisis AT1 features are pointless techno-babble once a bank hits the skids.
The market was clearly not expecting the ECB and the Single Resolution Board to move when they did. On the day before the intervention, Popular’s AT1s were marked at around 50 and Tier 2 close to 70. They went to zero in a day? Not even SRB chief Elke Koenig’s early warning (reported by Reuters on May 31) that Popular might need to be wound down if it failed to find a buyer had dislodged the notion that the bank was working on salvaging itself rather than nursing a fatal wound.
The sequencing that market participants had been expecting around capital securities features failed to materialise as events accelerated. On the basis that Popular was current on its AT1 coupons and had capital buffers way above the 5.125% and 7% triggers in its two AT1 lines, the instruments to all intents and purposes failed other than as that final step into extinction.
SO WHAT ARE the lessons? I’ve long argued that the market needed a significant bank collapse to test the resolution paraphernalia put in place by regulators. This test demonstrated a lot:
1. AT1 and Tier 2 might have done their job as bail-in fodder but AT1 features are valueless in a violent and accelerated downdraught. And if a bank enters a death-spiral, Tier 2 is just as likely to get taken out too. Investors take note.
2. Given the latitude that resolution authorities have in subjectively judging PoNV and the supremacy of PoNV in blasting AT1 features to kingdom-come, future AT1s should include much more explicit language to this effect in documentation. Lawyers take note.
3. In the light of the Popular fiasco, the market has to review the pricing of capital and funding buckets. Analysts, originators and syndicate take note.
4. In moving when and how it did, authorities have thrown the fate of other Spanish banks (Liberbank, Unicaja Banco and Banco de Credito Social Cooperativo) and troubled EU banks in general into doubt.
5. There is no regulatory consistency bearing in mind the (likely) bail-out of BMPS retail investors and only partial bail-in of institutional AT1 holders.
6. To prevent banks entering a death spiral, authorities must urgently address the devastating impact that ratings actions, share price, collateral values and deposit flight have on each other. Plus, their aggregate impact on efforts to secure positive outcomes.
7. Resolution authorities must be pro-active in using pre-emptive tools such as short-selling bans, ratings freezes, corporate deposit withdrawal suspensions, etc.
Banco Popular staff have asked for advice on dealing with angry, desperate and potentially destitute retail shareholders and bondholders. Institutional investors won’t take this lying down: expect lawsuits. I guarantee we haven’t heard the last of this.
Keith Mullin is founder of KM Capital Markets. He has spent more than 25 years covering capital markets. Keith was editor-at-large of IFR until early 2017 and editor of IFR magazine 1996–2007.
This dark narrative will form a basis for discussion at IFR’s autumn Bank Capital Conference, which Keith will be moderating. Last year, the event hit over-capacity so book your place early. Check www.ifre.com for details.
