Santander will raise about 7 billion euros through a rights offer to bolster Popular’s balance sheet, it said in a regulatory filing on Wednesday. The lender will acquire all of Popular’s stock plus shares resulting from the conversion of its co-cos and Tier 2 instruments for the 1 euro price, imposing losses on the stricken bank’s shareholders.
Popular’s 37 billion euros of non-performing assets, the legacy of reckless real estate-linked lending ahead of Spain’s property crash, drained profit and capital, forcing new Chairman Emilio Saracho to say in April that the bank would need to sell new shares or find a buyer. The situation had deteriorated in recent days, with the bank losing about half its market value.
The transaction will generate a return on investment of 13 percent to 14 percent in 2020 and add to earnings per share by 2019, Santander said. The bank may also be able to reap the benefit of Popular’s valuable business lending to small and medium-sized companies once the clean-up of its soured assets is complete.
Santander fell as much as 3.4 percent and was down 2.1 percent to 5.68 euros as of 9:15.a.m. in Madrid.
The Single Resolution Board transferred all of Popular’s shares and capital instruments to Santander after the European Central Bank declared it “failing or likely to fail” on June 6, the SRB said in a statement. Santander won an auction carried out by the SRB and Spain’s bank rescue fund FROB to buy Popular without taxpayer support, the bank said. Adding Popular’s business will create the biggest banking business in Spain with 17 million customers.
The forced sale is the first major action taken by the Brussels-based SRB, which was set up in January 2015 to deal with major bank failures in the euro area. Its main job is to ensure that banks can be wound down without disrupting financial stability and at minimal cost to taxpayers.
In the case of Popular, the SRB used only a few of its resolution powers, including the sale of a failed lender to a sound firm for a token price, the wipeout of shares and additional Tier 1 debt and the conversion of Tier 2 bonds into shares. It didn’t have to resort to more drastic measures foreseen in EU law, such as taking over the institution or imposing losses on senior creditors.