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 Spanish stress test report, more quickly than through asset sales and earnings retention, according to rating agency Fitch.
The Oliver Wyman stress test on Spanish domestic lending reported that Popular has a ?3.2bn 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,” the agency said.
According to Fitch, Popular's decision to raise the bulk of the capital through a ?2.5bn 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 ?300m of asset sales and ?400m in retained profits,” Fitch added.
The poor macro-economic and banking environment means Popular will find a large rights issue and asset sales challenging.
Popular said on October 1 that it has already identified 12 investment banks that might underwrite the offering, and expects to complete it by year-end.
Spain's Banco Popular can quickly plug capital shortfall with rights issue
“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,” the firm said.
Fitch’s 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,” Fitch said.