Just How Safe is Spain’s Banking System?

Investment bank Mediobanca warns of “clear risk of contagion.”

“The Front Cover of La La Land with a Potential Horror Story Inside” is the title of a report about Spanish banks, authored by analysts at Italian investment bank Mediobanca. The shares of many Spanish banks have surged in recent months, some as much as 50%, hence La La Land. “Banco Popular [the teetering bank we’ve written so much about] seems to be the only exception to a truly happy world, but the current situation could take a nosedive with clear risk of contagion for the rest of the sector.”

Spain’s sixth biggest bank, Banco Popular, remains on the verge of either collapsing or being gobbled up by a bigger bank before it collapses. The bank lost over 60% of its market cap last year and it’s already 30% down so far this year. Popular has become a favorite target of short-selling hedge funds. Moody’s has just downgraded its senior debt two notches to B1 (junk), with negative outlook due to the bank’s “weak solvency levels” and worsening capital position.

For Popular to remain a going concern beyond 2017, it must pull off another capital expansion, this time of around €4 billion. That’s a big ask for a bank with a market cap of just €2.9 billion, and that has already burnt through the lion’s share of the €5.4 billion it raised in its three previous rights issues. Popular’s long-term investors are smarting. Some are even threatening to sue Popular for intentionally misleading them in last year’s rights sale.

It’s not just investors who are unhappy. So, too, are the bank’s depositors, many of whom are voting with their feet by moving their money elsewhere. Last year the bank lost 6.5% of its deposit base. According to a report by the financial daily El Confidencial, the deposit outflow is swelling from a trickle into a deluge

Continue reading the article at WOLF STREET

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