Saturday, November 10, 2012

Banco Popular selling shares at steep discount as nobody can tell what they are worth

As reported by Bloomberg, Banco Popular is offering a steep discount on its shares in an effort to attract new capital.  The reason for the discount is nobody knows what Banco Popular is worth.

Under current disclosure requirements, banks are 'black boxes'.  Nobody knows what is in them.  As a result, nobody can value them.

Regular readers know that letting market participants know what is in a bank requires having the bank provide ultra transparency and disclose on an ongoing basis its current asset, liability and off-balance sheet exposure details.

Market participants can assess this information and value the bank as they know what the bank's exposures are.

Banco Popular Espanol SA will sell shares at a discount as the Spanish lender seeks to raise as much as 2.5 billion euros ($3.2 billion) to help cover a capital shortfall. 
Popular will issue new shares at 0.585 euros each, excluding the value of subscription rights, Chief Financial Officer Jacobo Gonzalez-Robatto told shareholders in Madrid today. Existing shareholders can pay 0.401 euros and will receive three new shares for each one they own, he said. The bank’s shares closed at 1.118 euros yesterday and 1.701 euros on Sept. 28, the last trading day before the sale was announced. 
“It’s very difficult to say if this is a good price,” said Inigo Lecubarri, who help manage about $400 million at Abaco Financials Fund in London. “But what you can say is the price is good compared to other Spanish banks."
As regular readers know, the investment cycle begins with an independent assessment of the security (in this case, common stock in the bank).  The second step is to compare this valuation with the price being shown for the security.  The third step is to make a buy, hold or sell decision based on the difference between the investor's independent valuation and the price being shown.

Mr. Lecubarri observes that it is very difficult to say if this is a good price.  The reason is that the bank cannot be independently assessed and valued.

Lacking his own assessment, he then compares the price to the prices on other Spanish banks to suggest the maybe the price is 'good'.  This analysis assumes that the prices on the other Spanish banks reflect the value that an independent valuation using each bank's exposure details would set.

In fact, because of the lack of ultra transparency, what he should know is his assumption is false and that the price on all the banks was set by blindly betting.
Popular said on Oct. 1 it would sell shares and suspend its dividend as the Madrid-based lender seeks to avoid tapping state aid to cover a 3.22 billion-euro capital deficit revealed in stress tests that accompanied a European bailout for Spain’s banking system. 
Shares of Popular, the only publicly traded bank with a capital shortfall that hasn’t been nationalized, have declined 68 percent this year.

“It’s a brave step by them because they are raising actual equity,” said Benjie Creelan-Sandford, a banking analyst at Macquarie Bank Ltd. in London, who rates Popular underperform. “In the context of deleveraging and funding costs, it will be tough to grow revenue in absolute terms.”
Excuse me, but after the Bankia preferred securities disaster, other than a gambler, who would buy shares in any Spanish bank in the absence of ultra transparency?
The 15 underwriting banks include Deutsche Bank AG, Banco Santander SA (SAN), UBS AG, Bank of America Corp.’s Merrill Lynch & Co. unit and JPMorgan Chase & Co., which will act as global coordinators, Chairman Angel Ron said. They have guaranteed 2.08 billion euros of the sale with the remainder covered by pledges to buy stock from existing shareholders, he said. 
Deutsche Bank underwrote 400 million euros, Santander 300 million euros with the other global coordinators taking 230 million euros each, Gonzalez-Robatto said in an interview after the event. Commissions were about 2 percent plus a 1 percent success fee, he said....
Who would buy shares in a Spanish bank, why everyone's favorite gamblers:  the large, global financial institutions.

The very same large, global financial institutions that governments unnecessarily bailed out and continue to protect by not requiring them to provide ultra transparency and disclose the losses currently hidden on and off their balance sheets.
Popular is accompanying its pitch for shareholder funds with a new business plan that speeds up recognition of loan losses to produce a 2.3 billion-euro loss this year. The bank is targeting earnings of 1.4 billion euros by 2014, using a predicted operating profit of 7.2 billion euros over the next three years to absorb losses....
In the absence of ultra transparency, why should anyone believe that Popular's new business plan is any more credible than Bankia's plan when it raised preferred shares?
Ron said the stress test process had penalized the bank because its business model focused on small Spanish businesses. 
“Accepting the results of this hypothetical exercise does not mean that we share them,” said Ron, who also highlighted the “torrent” of regulation imposing new capital burdens and provisioning costs on lenders.
Considering how low the bar is to pass the stress tests, recall the number of EU banks that passed a stress test only to be nationalized within 3 months, Banco Popular must be in awful shape.

If Banco Popular was not in such bad shape, it would voluntarily provide ultra transparency and show the world the facts to support its claim it was not in bad shape.

The absence of Banco Popular providing ultra transparency is a very, very large red flag signaling that purchasing its stock is purely blindly betting.

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