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The quarterly results were characterised by ongoing asset quality issues in a context of an-already depleted capital position and the discovery of doubtful loan collateral.
Banco Popular Espanol
The group announced that it will have to restate past accounts with an impact in Q1 translating into a sharp deterioration in its already weak reported capital position notwithstanding the lack of provisions.
The group posted a stronger-than-expected quarterly loss, largely driven by the recognition of an understated exposure to problematic assets. Last’s year capital increase was not commensurate to this un-planned clean-up effort, leaving the group with a revived strong equity shortage issue.
Like in the previous quarter, the group posted no profit in Q3, in line with its objective to devote all its pre-provision earnings to increasing the NPA coverage this year. The bulk of the effort will be made in Q4 with consensus (and AV) expecting around €2.5bn of losses. Management changed its earnings presentation, separating core and non-core assets. Unfortunately, this resulted in an unwelcomed reduction in data disclosure.
The group has launched an unexpected €2.5bn rights issue with pre-emption rights at a €1.25 issue price. The operation will enable the group to align its NPA coverage with its peers and thus to enjoy a similar trajectory in terms of asset quality, cost of risk and profitability normalisation. Above all, the group will comply with the Bank of Spain’s new circular. However, we see the capital increase as under-calibrated leaving some equity shortfall and above all, the group’s structural profitability issue remains un-addressed.
The first quarter results showed top-line pressure driven by the strong competition on SMEs loans and the market’s turmoil. The rapid normalisation of trading income generation expected over the coming quarters will not help. Although the reduction in operating costs is on track with the balance sheet downsizing, the cost of risk normalisation continues to be seen as only very progressive in spite of a confirmed reversal in asset quality trends. As a positive, the ongoing capital generation should enable the group to rapidly meet its equity requirements.
Quarterly results suffered strong competitive pressure and elevated cost of risk. The cost of risk normalisation is a major profitability lever but visibility on the pace of reduction remains low, especially if the current global turmoil and the domestic political instability turn into economic slowdown.
