Popular in Fight to Survive as Bank Updates ECB on Situation

(Bloomberg) -- Emilio Saracho’s plan to turn around Banco Popular Espanol SA has become a struggle for survival.

The troubled lender has been exploring ways to bolster its cash and short-term funds and held discussions about its options with the European Central Bank in recent days, according to a person familiar with the situation. A meeting in Frankfurt with the ECB planned for Tuesday was canceled after the talks, the person said.

It’s not clear if additional liquidity was granted. The ECB is “perfectly informed” of the bank’s situation, a spokesman for Popular said by phone Tuesday, declining to comment on the specific discussions. Spanish newspaper Expansion earlier reported the meeting was canceled.

Popular’s shares have plunged to the lowest in almost three decades and its bonds have tumbled, increasing pressure on Chairman Saracho to shore up the balance sheet, burdened by more than $40 billion of soured property loans. So far, Saracho has failed to find a buyer for the ailing firm.

“Events are coming to a head at Popular,” said Roger Francis, an analyst at Mizuho International Plc in London. “There’s still a chance that the bank gets enough time to sell more assets or attracts a bid from another bank, but fear of the downside is escalating and a critical moment seems to be approaching.”

In a sign of growing concern, the cost of insuring Banco Popular’s senior bonds against losses for three months jumped to 720 basis points on Monday, according to data from CMA. The contracts, which were quoted for the first time last week, were at 646 basis points on Tuesday. Short-dated swaps still cost more than longer-term contracts, another sign of stress. A basis point is a hundredth of a percentage point.

The shares dropped as much as 11 percent on Tuesday and closed 6.2 percent lower at 31.7 euro cents in Madrid, valuing the bank at 1.3 billion euros ($1.5 billion).

Popular had considered seeking oversight from central bank officials to guide the board’s decisions should it fail to obtain the extra funds, the person familiar said earlier.

Commercial banks can obtain loans from the ECB by pledging collateral such as their own debt, or other assets, like pools of mortgages. In exceptional situations, national central banks in the euro area can provide credit to solvent but cash-strapped financial institutions through what’s called emergency liquidity assistance.

Popular set aside 5.7 billion euros last year to cover losses for items including loans, real estate and excess interest charged to mortgage clients. Its losses left the company with one of the lowest common equity tier 1 ratios among European banks, at 8.17 percent. That measure of financial strength slumped to 7.33 percent in the first quarter.

Chairman Ousted

The losses prompted the bank to oust Chairman Angel Ron -- who had led the company for more than a decade -- and turn to Saracho, who previously headed JPMorgan Chase & Co.’s Europe, Middle East and Africa business. His mandate was to stabilize the lender and put an end to the losses.

Under Ron, Popular declined to take state aid five years ago when a stress test uncovered a capital shortfall. Instead, it wound up tapping investors for funds three times, raising a total of 5.5 billion euros. The lender may need a further 3 billion euros to 4 billion euros to offset possible losses, Algebris Investments CEO Davide Serra said Monday.

Spain turned to the European Union in 2012 for 41 billion euros to rescue its weakest lenders. At the time, banks’ mounting real-estate losses were undermining confidence in the country’s government bonds, aggravating the region’s sovereign-debt crisis. This time, the troubles are so far limited to Popular.

Popular has been offloading assets to bolster its financial position, raising at least 209 million euros in recent weeks by selling a remaining stake in Targobank -- a joint venture with France’s Credit Mutuel -- as well as a minority holding in real estate company Merlin Properties Socimi SA. The lender is also in talks to sell its U.S. unit TotalBank to Chile’s Banco de Credito e Inversiones, people with knowledge of the matter said in April. The unit could be valued at about $500 million, they said.

In a letter to staff on Friday afternoon, Saracho said the bank has a number of alternatives, while telling Popular directors that it’s important to remain calm.