Popular Said to Meet ECB as It Weighs Options for Liquidity

(Bloomberg) -- Banco Popular Espanol SA, racing to sell assets and find a buyer, is reviewing how to improve liquidity and plans to meet with regulators this week, according to people familiar with the matter.

The Madrid-based bank will discuss options with the European Central Bank on Tuesday, the people said, asking not to be identified as the plans are private. The lender may request additional central bank loans, one of the people said.

Popular is running out of time to repair its balance sheet, battered by soured real-estate loans that are eroding capital. Chairman Emilio Saracho on Friday appealed to the bank’s managers to go about their business as normal and continue to instill confidence in clients, assuring staff the lender remains solvent. The shares fell as much as 19 percent on Monday, following a 38 percent plunge in the stock last week.

The bank is also considering seeking oversight from central bank officials to guide the board’s decisions should it not obtain the extra liquidity, the person said. The bank won’t confirm or comment on its meetings with the ECB, which have no specific agenda, a spokesman for Popular said by phone on Friday.

“At this stage, either someone buys Popular or it’s headed for a process of bank resolution, with all the difficulties that would bring,” said Ignacio Cantos, investment director at ATL Capital in Madrid. “The meeting with the ECB is clearly very important and we need to see what comes from that.”

Undermining Confidence

Spain turned to the European Union in 2012 for 41 billion euros in aid to prop up its lenders, some of which were nationalized. Banks’ mounting real estate losses were undermining confidence in the country’s government bonds, aggravating the region’s sovereign debt crisis.

Popular shunned the chance to take state aid five years ago when a stress test uncovered a capital shortfall. Instead, it embarked on a series of share sales that so far have raised 5.5 billion euros. Still the lender may need a further 3 billion euros and 4 billion euros to offset possible losses, Algebris Investments CEO Davide Serra said Monday.

The firm, which is seeking a buyer, has also been selling assets to bolster its financial position. The company has raised at least 209 million euros ($234 million) in recent weeks by selling its remaining stake in Targobank -- a joint venture with France’s Credit Mutuel -- as well as a minority stake in real estate company Merlin Properties Socimi SA.

Riskiest Debt

Popular shares were down 16 percent at 0.347 euros at 3:02 p.m. in Madrid, valuing the lender at 1.47 billion euros. Banco Popular’s riskiest additional Tier 1 debt securities fell. Its 11.5 percent bonds plunged 7.25 cents on the euro to 54.07, while its 8.25 percent notes fell 6.89 cents to 48.07 cents.

Credit derivatives insuring Banco Popular’s senior bonds against losses for one year jumped 17 basis points on Monday to 600 basis points, according to data from CMA. The swaps cost more than five-year contracts, a sign of credit stress that has emerged for the first time since 2012.

Banco Popular has sold treasury shares, along with additional Tier 1 notes issued by itself and other lenders, people with knowledge of the matter said in late May.

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, the people said. Credit Mutuel on Monday gave up its board seat at Popular. The step follows its purchase of the Targobank stake, the Spanish lender said in a regulatory filing.

Pledging Collateral

Commercial banks can raise loans from the ECB by pledging collateral such as the lender’s own debt. The central bank applies a discount over the market price according to a set of criteria including the credit rating of the collateral. The ECB also can accept other lender’s assets such as pool of mortgages. 

Under exceptional situations the national central banks that belong to the euro can provide so-called Emergency Liquidity Assistance.

Saracho is on a mission to salvage the stricken lender and was also considering a share sale to raise funds as an alternative to an outright sale of the bank. The lender has seen its capital eroded by mounting losses on the 37 billion euros of non-performing assets still piled up on its balance sheet. Still, deposits only fell 1 percent in the first quarter, the bank said on May 5.

The sale process is continuing, one person familiar with the matter said, asking not to be named because the matter is private. In a letter to sent 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.