Spanish bank Banco Santander (LON:BNC) is paying €1 to rescue its smaller rival Banco Popular from the brink of collapse.
Santander will take over full ownership of Popular’s shares and debt after the European Central Bank said the bank was likely to fail following a deterioration in its liquidity situation.
A €7bn fundraising by Santander will be carried out to cover the capital and provisions needed to boost Popular’s balance sheet.
Popular’s shares have plunged 53% since the beginning of last week over worries about its dwindling cash reserves.
A series of bidders reportedly pulled out of an auction to buy Popular before Santander swooped in to buy the lender.
Santander is Spain's largest bank after Popular takeover....
The deal increases Santander’s market share in Spain by about 7% to 20% and creates the country’s largest bank by lending and by assets with 17mln customers.
Santander chairman Ana Botin said: "The combination of Santander and Popular strengthens the group's geographical diversification at a time of improving economic conditions in both Spain and Portugal."
The European Commission approved the takeover on Wednesday morning and said Popular will continue to operate under normal business conditions.
The Commission said customers of Banco Popular will continue to be served with £no disruption to the economy” and all depositors continue to have “uninterrupted access to the full amount of their deposits”.
ECB says Banco Popular is failing...
The European Central Bank had warned the body tasked with winding down failing banks, the Single Resolution Board (SRB), of its assessment of Popular on Tuesday.
"The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due,” the ECB said in a statement.
“Consequently, the ECB determined that the bank was failing or likely to fail and duly informed the Single Resolution Board, which adopted a resolution scheme entailing the sale of Banco Popular Español S.A. to Banco Santander.”
SRB Chair Elke König said the decision will safeguard the depositors and critical functions of Popular.
“This shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers money from bailing out banks,” König said.
Popular reported a €3.5bn loss last year as it continued to tackle almost US$40bn of toxic property loans. According to analysts’ estimates, it needs €3-5bn in additional capital.
Santander strengthens position in SME lending...
Santander’s acquisition of Popular comes as the Spanish economy is in the midst of a strong economic recovery. The deal will strengthen Santander’s position in lending to small and medium sized enterprises (SME).
Popular’s SME franchise is considered to be the strongest in Spain.
The merged group will have a 25% market share in SME lending in Spain.
Santander is also one of the largest providers of mortgages and savings in the UK. The UK division was formed in 2010 when Abbey National plc was combined with the savings business and branches of Bradford & Bingley plc and renamed Santander UK.
Deutsche Bank said in a note to investors that capital build up will be crucial for Santander.
"The bank targets to be about 20-30 basis points above 11% but not much than that despite pressures from some other fronts. The bank sees capital as the second line of defense after pre-provisioning profit. Their aim is to be slightly above 11% but not accumulate capital for the sake of accumulating. So we think it is unlikely to see them beyond 11.3%, once that level is reached they will decide what the best use of the extra capital is."