Santander bolsters structured products AUM following Banco Popular acquisition

Banco Santander announced on Friday that it has acquired Banco Popular. The acquisition takes place following an auction conducted by the Single Resolution Board and FROB (Fondo de reestructuración ordenada bancaria, in English known as Fund for Orderly Bank Restructuring) in which Santander was selected as the successful bidder, paying a notional consideration of €1.

As part of the transaction Santander will complete a rights issue for a total amount of €7bn. This will cover the capital and provisions required to strengthen Popular's balance sheet. Existing shareholders will be given preferential subscription rights. The rights issue is underwritten.

The integration of Santander and Popular will significantly enhance Santander's franchises in both Spain and Portugal, stated the bank. In Spain the bank will become the leading bank by both lending and deposits, serving over 17 million customers with a credit market share of c.20%. The combined business, which will operate under the Santander brand, will have a 25% market share in SME (small and medium-sized enterprises) lending in Spain - a key driver of economic growth for the country.

A Santander spokesperson told SRP, that following the acquisition Santander will take over the management of all business lines at Banco Popular including the management, income payments and maturities of the fallen bank's structured products.

Banco Popular has marketed over 152 structured products in Spain of which 22 are still live products. The fallen bank launched last week the Eurovalor Ahorro Rentas II, a capped call/floater income fund linked to the performance of the three-month Euribor with an eight-year term.

SRP data also shows that Santander has marketed over 700 structured products in Spain of which 62 are still live products. The Spanish bank will take over the management of approximately €1.4bn of assets invested in products issued by Banco Popular including its higher seller, the Eurovalor Garantizado Acciones III a digital /worst off capital protected structured fund. This growth product linked to a basket of shares (Nestle, Vodafone and BBVA) will mature in 2022 paying out 2.2% if on every observational date the shares are at or above their initial levels. The 5.7-year product raised over €344m in April 2016.

According to the bank, the acquisition will improve the diversification of business lines in the country and increase exposure to more profitable business segments at a positive stage in the economic cycle.

In Portugal, the integration of Popular with Santander Totta will accelerate growth and strengthen market shares in both lending and deposits, enhancing Totta's position as the leading privately owned bank in the country, with over four million customers. In Portugal, Santander Totta has marketed 300 structured products of which 47 are still live products.

The acquisition is expected to generate a return on investment of 13-14% in 2020, and an increase in Earnings Per Share (EPS) in 2019. The combined business will benefit from increased profitability with strong potential for further revenue growth. The expected cost synergies of close to €500m per year from 2020 will lead to efficiency ratios that are among the best in both Spain and Portugal. Santander was the third most active provider in the Spanish market in 2016 with 18 products brought to market.

To bring Popular's provisions and capital in line with the rest of the Group, Santander is seeking to raise non-performing assets of €7.9bn, including €7.2bn for real estate. This will increase coverage for real estate assets and real estate non-performing loans from 45% to 69%, significantly above peer average (52%). The Group expects to reduce Popular's real estate exposure significantly as it has done at Banco Santander in recent years.

As a result of the acquisition, Banco Popular's junior bonds were written off as part of the deal, including its additional Tier 1 notes (AT1), also known as contingent convertible (CoCo) bonds - which marks the first cancellation of AT1s since regulators developed the bonds as part of efforts post financial crisis to transfer risk to investors from governments, and to ensure orderly recapitalization, or eventual liquidation, of an institution without triggering system-wide distress.

There are 303 structured products linked to the Banco Popular share across jurisdictions of which 23 are still live products including 13 in Germany/Austria, five in Portugal, four in Spain and one in Italy, according to SRP data. These products will have to be modified following the disappearance of Banco Popular's share.

According to Juan Ramon Dominguez Recio, head of equity structured products sales Europe at BBVA, the solution when a product has to be renegotiated or re-issued lies in the dialog between the bank and its clients.

Since the announcement by the FROB, the banking bailout and reconstruction program initiated by the Spanish government in June 2009, BBVA has been in contact with all the clients that have open derivative positions on Banco Popular via de underlying of the product to keep them informed about the possible adjustments/actions to implement, in line with the contractual documentation (...), to seek the alternative that fits best with needs of each client."

According to Dominguez, although the bank had not many live derivative transactions on Banco Popular as an underling asset because of BBVA's global footprint some of these transactions are related to non-Spanish clients.

Following the integration of Banco Popular, the impact on Santander's CET1 capital ratio is expected to be neutral, 'while the transaction will significantly enhance Santander's capacity to generate capital organically going forward'. Santander stated that maintains its commitment to increase its CET1 capital ratio to above 11% in 2018.

Banco Santander Group executive chairman, Ana Botín, welcomed Banco Popular customers 'as part of the Santander Group and will work hard to continue serving them at the highest standards through the transition and beyond'.

'The combination of Santander and Popular strengthens the Group's geographic diversification at a time of improving economic conditions in both Spain and Portugal, and will allow us to continue to deliver for customers and shareholders on all our commitments,' said Botín.

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