It will be difficult for Banco Popular’s shareholders to forget the date May 26th. The bank’s share price plummeted over 26%, the biggest fall in its history, after it announced plans for a 2.5 billion euros capital increase. It will also temporarily suspend paying a dividend.
The record slump in Popular’s stock price affected the rest of the financial sector, but particularly Sabadell (-5%) and Caixabank (-4.3%). As a result, the Ibex closed down 0.50%, without losing the 9,000 level.
In the words of its chairman Angel Ron, Popular believes that the capital hike will allow it “to get back to normal as fast as possible.” This “normality” includes increasing the coverage of property-linked toxic assets and have some room to manoeuvre ahead of future regulatory requirements.
Popular’s top management team has defended its decision because it “will eliminate uncertainties” and “add value for shareholders in the medium term.” Analysts, on the other hand, think that this capital hike will be insufficient and that the bank will have to make another cash call in the near future. Along with the capital hike, the bank also announced a new strategic plan until 2018, with a Rote target of 9%, an efficiency target of 45%, bad loans coverage of 50% and a top quality capital ratio of 12%.
The strategic proposals are good, but investors have to believe in them. And that doesn’t seem to be the case. Both the market and a large number of banking sector voices think that the solution to Popular’s problems lies in a merger with another lender. Up to now, any attempt at integration has failed because Popular has always put as a condition that it leads the operation. But now its chairman is not closing any door: “If the opportunity comes along, we will look at it as long as it fits in with our business model and is not a risk to the bank.”