Santander to Absorb Popular Bank in Spain

Banco Santander, a 160-year-old Spanish banking institution, is absorbing its rival Banco Popular, itself a 91-year-old institution, for the nominal sum of a single euro. The deal alleviates a concern by Spanish authorities that a rescue at the expense of taxpayers would be needed for the bank. Santander will raise an additional 7 billion euros in equity markets to strengthen its capital ratios following the transaction.

The ten largest Spanish banks by assets. All figures in billions of euros and as of December 31, 2016. Source: El Confidencial.

Because of its strong position throughout Europe and Latin America, the transaction only raises Santander’s overall assets by about 11%, but dramatically strengthens its position within Spain and separates it from rivals BBVA and Caixabank. Santander’s share of Spanish loans will rise from 12.3% to 19.5%, while its share of deposits will go from 13.1% to 18.8%.

The transaction also has consequences for Portugal. While technically a separate bank from Banco Popular, it’s wholly owned Portuguese subsidiary will also go to Santander. That will raise the company’s share of deposits in that country to 15.5% (from 13.3%) and share of loans to 17.5% (from 14.7%). Portugal’s largest bank is Banco Comercial Portugese, through it’s Millenium banking subsidiary.

Banco Popular had been the weakest of the major Spanish banks and a victim of weak lending standards during the country’s real estate boom. Although the bank survived for several years after the downturn in asset quality, a run on the bank took place in recent weeks after its liquidity position weakened and its share price fell by half. The European Central Bank ultimately determined that it couldn’t survive without being acquired or raising capital.

Santander was one of the few banks with a healthy enough balance sheet to absorb Banco Popular. That banks’ strong position in small business lending was one of the prime reasons why Santander found it attractive. According to a press release, Santander told investors that the deal would not be dilutive to its current year earnings forecast and that by 2020 it expected to realize a 13%-14% return on the deal. In morning trading, shares of the bank rose by more than 2%.

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