The Next Spanish Bank Teeters, at Worst Possible Time


by Don Quijones, Wolf Street:

It just doesn’t let up with these banks.

The timing could not have been worse: just as Spain faces its biggest constitutional crisis in over 40 years with Catalonia’s independence vote, another bank has begun to wobble.

Liderbank, Spain’s eighth largest lender, was spawned in 2011 from the shotgun marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria. The new bank’s shares were sold to the public in May 2013 at an IPO price of €0.40. By April 2014, they were trading above €2, a massive 400{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} gain.

But by April 2015, the stock had started sinking. By May 2017, it was trading at around €1.20. Then came the collapse of Banco Popular in early June, which took many investors (but not WOLF STREET readers) by surprise, triggering a further crash in Liderbank’s stock as shareholders feared they would be next.

Scenting blood, short sellers began piling in, and just as the stock entered free-fall, the government intervened by imposing a temporary ban on short selling. The stock stabilized and even began to recover. By mid-July it had recrossed the psychological €1-threshold. Rumors began circulating that the short-selling ban would soon be lifted.

But in late August, after reaching €1.07, the stock’s progress began to waiver. At the beginning of this week Liderbank’s shares once again became a penny stock. Someone knew something…

Indeed. On Wednesday evening, the bank announced that it would expand its capital by €500 million, and these brave shareholders would be diluted. The response was to sell: shares plunged over 12{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} on Thursday and a further 5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} on Friday.

The fear is understandable. Spanish investors are still smarting from Santander’s hurried takeover and bail-in of Banco Popular. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers. Speculators were shocked and appalled.

Before its collapse, Banco Popular undertook three capital expansions, to the tune of almost €5 billion. These operations merely forestalled the inevitable, at great cost to the bank’s gullible investors. Now, Liderbank is about to follow the same path.

Global banks and rating agencies have already lent their blessing to the operation, much as they did to Popular’s previous rights issues. On Thursday the financial daily Cinco Dias reported that analysts overwhelmingly “applaud the operation,” despite the stock market rout. By Friday the tune had changed:

Citi sees Liberbank’s goal of reducing its nonproductive assets (NPA) and expanding its capital base by €500 million as “ambitious but achievable.” Moody’s chose to leave Liberbank’s B1 rating unchanged after the bank’s announcement of the capital expansion, reasoning that the rights issue will help to “rebalance the bank’s persistent risk profile.”

Here’s what that profile looks like:

  • The bank’s capital expansion will represent 55{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of its operating capital, based on Wednesday’s share price, which has crumbled 20{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in the last two days.
  • Liderbank’s non-performing loans ratio is a staggering 22{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Worse still, the vast bulk of the bank’s unproductive assets are real estate investments. After the now defunct Popular, it is the Spanish entity with most exposure to toxic real estate assets, according to the financial daily El Confidencial — a remarkable feat given the bank already had the lion’s share of its impaired real estate assets transferred onto the balance sheets of Spain’s “bad bank,” Sareb.
  • By the close of the first quarter of 2017, Liberbank’s default rate had reached 13{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, compared to the national average of 9.8{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, while its unproductive asset coverage rate was just 43{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, compared to 47{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for Banco Sabadell, 48{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for Bankia, 50{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for CaixaBank and 55{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for Unicaja.

If the bank is able to raise the €500 million of fresh capital, it will increase the coverage of its toxic assets from 43{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 50{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}, which should help facilitate the sell off of impaired real estate assets at prices that don’t destroy its balance sheet. This will enable it to reduce its NPL ratio from 22{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 18{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} by the end of 2017, and then to under 12.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} by the end of 2018. According to the bank’s projections, its NPL ratio will be less than 6.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} by 2020.

Banco Popular made similarly optimistic projections before each of its rights issues. None of the projections came to fruition. If investors continue to sell off their shares at the current ratio, Liderbank, much like Italy’s Monte dei Paschi di Siena last year, won’t even get the chance to raise new capital.

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