by Don Quijones, Wolf Street:
Short-sellers have a field day with Spain’s “Most Italian Bank”
Things have gotten so serious at Spain’s sixth biggest bank, Banco Popular, that The Wall Street Journal just christened it “Spain’s most Italian bank.” It wasn’t meant as a compliment.
These days the bank’s second biggest block of shareholders are short-sellers. They include some of the biggest hedge funds on the planet, from UK-based Oxford Asset Management, which holds a short position of 0.53% of the banks’ total shares, and Marshall Wace (2.23%) to Connecticut-based behemoth AQR Capital Management (2.92%).
As of Nov 25, short-sellers held 8.6% of the bank’s capital. It was enough to attract the unwelcome attention of Spain’s market regulator, CNMV, which has so far refused to ban shorting of the stock but has launched an investigation into whether a group of insiders led by Mexican billionaire Antonio Del Valle is using underhand tactics to cheapen the stock in preparation for a takeover bid.
It’s certainly the largest short position the bank has ever faced and over four times the accumulated short positions at rival institutions like Banc Sabadell. It’s also just one percentage-point short of eclipsing the total holdings of the bank’s biggest shareholder, Sindicatura de Accionistas, which represents some 5,000 investors, including the powerful religious order, Opus Dei.
Those investors have seen the value of their shares crumble by over 70% so far this year and 96% since the current chairman, Ángel Ron, took the reins in 2004. Today was a rare good day: shares rose over 5% to a whopping €0.83 on renewed speculation that Ron might finally be replaced. He is blamed (though has miraculously not been fired) for pushing Popular, once ranked among the world’s most profitable banks by ratings company IBCA, into risky real estate investments before the financial crisis and then taking too long to clean up afterward.
“Popular’s balance-sheet cleanup continues to drag,” Berenberg Bank analyst Andrew Lowe wrote on Nov. 2. “Its capital position is again in doubt.” It’s estimated that over 30% of the bank’s loans and property assets are nonperforming, compared with around an already catastrophic 15% for Spanish banks as a whole.
The only way for the bank to remain a going concern for the foreseeable future is if it dumps a large part of its toxic baggage. But as The WSJ points out, that’s easier said than done:
Its real-estate assets are of such poor quality that it would have to divert revenue toward more provisions to cover loan losses. Alternatively, it could sell some property assets at a loss. Either way, profits would take a big hit.
With the bank already expected to report losses of around €2 billion this year, as a result of billions of euros of provisions, that is not an option. Instead, what it plans to do is spin off €6 billion worth of dodgy assets into a separate investment vehicle that will be floated on the stock exchange early next year. As things currently stand, the new firm’s capital — whose total amount is yet to be determined — will be provided initially by Popular — this is a spin-off, not an IPO — and will be divvied up among its shareholders.
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