Bloomberg News

Popular Quarterly Profit Rises on Lower Bad-Debt Charges

February 02, 2012

(Updates with closing share price in fifth paragraph.)

Feb. 1 (Bloomberg) -- Banco Popular Espanol SA, Spain’s fifth-biggest bank, said fourth-quarter profit rose 10 percent after it spent less to clean up real estate than rivals.

Net income increased to 75.6 million euros ($98.8 million) from 68.8 million euros a year earlier, the Madrid-based lender said in a filing to regulators today. That beat the 73.7 million-euro average estimate of 16 analysts surveyed by Bloomberg.

The new government of Mariano Rajoy is preparing to make banks, including Popular, recognize more losses on real estate piled up on their books during Spain’s property crash. The lender said provisions for loans and property fell in 2011 to 1.69 billion euros, including 466 million euros of one-time charges that it took in the first quarter, from 1.83 billion euros a year earlier.

“We have to have the new law that says how we do it and then we will take a decision, but we don’t have any inside information to guess what it is going to be like,” Chief Financial Officer Jacobo Gonzalez-Robatto said on a webcast for analysts today, referring to the new provisioning rules that the government is slated to announce Feb. 3. “We have proven our capacity to set aside provisions and obviously we will keep doing that.”

Popular shares rose 4.6 percent, their biggest gain since Nov. 30, to close at 3.44 euros in Madrid, valuing the company at 4.87 billion euros.

Bad-Loan Provisions

Bad loans as a proportion of Popular’s total lending climbed to 5.99 percent in December from 5.85 percent in September and 5.27 percent a year earlier, the bank said. Net entries into default fell to 570 million euros from 644 million euros in the third quarter.

Popular said it had provisions set aside to cover 34 percent of the value of the net 4.03 billion euros of foreclosed or acquired property on its books. The bank has 16.1 billion euros of loans for real estate, down from 17.8 billion euros at the end of 2010. Of its real-estate loans, 35 percent are in default or at risk of becoming so, Popular said.

Using a “rule of thumb” based on the bank’s market share and comment from the government that the provisioning effort for the industry will be 50 billion euros, Popular expects it may have to take charges of about 3.5 billion euros to clean up its real estate, Gonzalez-Robatto said. It’ll be key to know whether the government orders the cleanup over one year or two, he said.

“We have enough capacity to cope, even with the unexpected,” he said, adding the bank had made 8 billion euros in provisions over the past four years of crisis in Spain.

‘Zombie Banks’

The government must focus on making sure that Spain has banks with robust business models and should avoid sustaining those that aren’t viable through state aid, Chairman Angel Ron said in a news conference in Madrid today.

“The last thing the Spanish financial system needs is zombie banks sustained at taxpayer expense,” he said. “This is a luxury we cannot allow.”

Popular’s net interest income fell 4.5 percent in the fourth quarter from a year earlier to 526.9 million euros. Gross lending rose an annual 0.7 percent and private-sector deposits increased by a similar amount, the bank said. The bank expects net interest income to grow “slightly” in 2012 and “still significant” flows of bad loans this year, Gonzalez-Robatto said.

Popular tapped 8.5 billion euros of funding in the form of three-year loans from the European Central Bank and has 30 billion euros on loan from the ECB, Gonzalez-Robatto said.

The bank is targeting a core Tier 1 ratio, a measure of financial strength, of 10.6 percent in June to comply with European Banking Authority requirements and will use retained profits and other mechanisms such as the conversion of mandatorily convertible bonds and an exchange of preferred shares to do so. The bank expects to generate 0.92 percentage points of capital to help boost its capital ratio under EBA criteria of 7.41 percent in December, Gonzalez-Robatto said.

Related news and information: For Popular business analysis: POP SM <Equity> FA BANK <GO> For news on Spanish banks: TNI SPAIN BNK <GO>

--Editors: Steve Bailey, Jon Menon

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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