The end of Banco Popular, a bail-in under the EU’s resolution mechanism, shows that:
. Belief that EU banks are fine is an exaggeration.
. Euro banks still have €900bn of Non-performing loans and weak margins.
. The Eurozone QE has been disastrous for banks, as margins have collapsed and core capital remains weak.
. Betting on the recovery through hybrids is dangerous. When bail-ins are enforced, CoCos and shares rarely cover capital gaps.
. CoCos, hybrids and DTAs are no solution for poorly capitalized banks. They become accelerators of demise when capital erodes.
. Since the ECB declared that Euro banks are strong, we have had banking crises in Italy, Portugal, Deutsche Bank and, now, Popular.
. The vast majority of failed banks since 2008 had passed the stress tests with good results, showing how little these exercises matter.
Santander does not buy “cheap” for “one euro”. Santander assumes €7bn of debt and needs to make a capital increase of the same amount.
There was not a single competitor offering any or higher price, and not for lack of attempts. The new management team, which inherited a bank that was already in distress, has not stopped looking for any purchase option, but the equity gap far outweighed the attractive assets still held by the bank (as confirmed by the Single Resolution Mechanism itself).
The purchase is not a bargain, but a favour made by Santander to manage and restructure the sunken ship, given the risk that depositors and senior debt would also suffer.
Banco Santander itself explains that the operation, including 7 billion euro capital increase, will not increase its core capital at all . This shows us that, at least, the additional equity gap that Popular estimates is much larger than its market cap, its subordinated bonds and also an additional amount.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)