In the last quarter of the year, Spain’s Banco Popular Español lost EUR 2.7 billion, which pushed the full-year’s loss to EUR 2.5 billion. Despite having until 2013 to fully comply with government-imposed provisions against real estate losses in Spain, Popular chose to bring forward the remaining balance and booked it in the fourth quarter. Without this charge, 2012’s earnings would have been around half a billion euros.

Although the heavy loss and Popular’s still-declining credit quality definitely merit attention, we find a couple of slightly bright spots in the firm’s results. During the year, the bank’s revenues–both from interest and fees–grew at a 5% rate, excluding the acquisition of Banco Pastor (26% including Pastor’s results). In addition, Popular’s EUR 2.5 billion rights offering in the fourth quarter gave its capital a more solid footing.

Thanks to the new equity inflow, the company’s Tier 1 capital only declined by 30 basis points sequentially after including the EUR 3 billion in provisions, placing it at 10.3% at year-end. Thus, Popular will book some profits (although meager at best) in 2013, which should at least avoid the need for another massively dilutive equity raise in the immediate term.

With Popular’s nonperforming loans still on a rising trend that shows no signs of reversing anytime soon, regular provisions for loan losses will keep eating up a substantial chunk of the bank’s revenues and heavily pressure profitability. At the close of 2012, 9.0% of the firm’s loanbook was in nonperforming status (compared with 7.8% in September and 6.0% in 2011). The positive side of the huge provisions is that nonperforming loan coverage (allowance for loan losses/NPL) increased to 0.7 times, up from 0.4 times in September and 0.3 times in 2011.

This coverage ratio is adequate–albeit barely. With such a substantial and rising number of dud loans, we anticipate that Popular’s regular provisions will be quite high in the coming quarters as the bank strives to maintain its coverage above 0.7 times. It would be very surprising to see returns on equity past 5% in the coming months.


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