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* Liquidity, capital under microscope ahead of results
* Issuer's bonds suffer across capital structure
By Alice Gledhill
LONDON, April 28 (IFR) - Banco Popular's Additional Tier 1 bonds plunged ahead of next Friday's first quarter earnings as concerns around the bank's liquidity position compounded worries over the state of its capital position.
Its €750m 8.25% perpetual non-call 2020s tumbled over five points on Thursday to a cash price of 80, one of only a handful of euro AT1 securities trading below par despite a strong rally across the sector. Even after recovering to 82.4, they are bid at their lowest level since last June.
Popular's AT1s nosedived in late January as it emerged the bank was dipping into reserves to ensure it could pay coupons on the debt, one of a number of recent damaging revelations.
Local press reports that Popular has suffered €6.4bn (8.6%) of deposit outflows since September means its liquidity position is also under scrutiny.
"Accelerating deposit outflows can shorten the amount of time that regulators are willing to give banks to come up with a capital action plan," said BNP Paribas analysts.
"It can also force regulators to put in place preventative measures, such as the cancellation of deferrable coupons on capital securities."
Coupon suspension was already a major risk given Banco Popular's dangerously low capitalisation. The bank has forecast a total capital ratio for the first quarter of 2017 of 11.70%-11.85%, putting it on the brink of breaching its 11.375% supervisory review and evaluation process (SREP) requirement.
That buffer of around 40bp is equal to about €300m, Moody's analysts said. The ratings agency downgraded Popular's sub debt to Caa1 from B2 last Friday, and its senior to B1 from Ba2 (negative).
"The distance to trigger [for AT1 coupons] is calculated every quarter, and the buffer is getting thinner by the day," said Filippo Alloatti, a senior credit analyst at Hermes Investment Management.
Provisioning for a crippling stock of toxic assets - its NPA ratio was 32% at year-end 2016 - has been a major drain on capital, and analysts are now awaiting further guidance after the bank's chairman promised action earlier this month.
"They need capital, either via an asset sale - though the problem is everyone knows they're a forced seller - or via a rights issue," Alloatti said.
Popular's total capital woes stem partly from a measly stock of Tier 2, although a Popular spokesman told IFR in January that it was under no pressure to issue.
The bank sounded investors out for a Tier 2 issue around the end of 2015, according to Alloatti, but broader market volatility thwarted issuance. A Tier 2 sale would now be too little too, too late, said one banker.
"The idea that they could issue Tier 2 now to solve their problems would be like putting a plaster on a broken leg," he said.
The Bank of Spain is said to have given Popular, a black spot in an otherwise much rosier Spanish banking sector, until the summer to come up with an action plan, the BNP Paribas analysts said.
The AT1 rout has spread to covered bonds, among the safest bonds that banks can sell. Popular's last public debt issue, a €1.5bn 1% March 2022 covered bond, has widened almost 20bp since Monday to 51bp over mid-swaps, a drastic move for that asset class.
The market will also be on alert for comments on disposals and additional provisions. Popular said this month that an internal audit had found the need for adjustments to the 2016 accounts.
"Ultimately, this could be a merger/takeover story at the right levels, so I'm also looking out for comments from the other Spanish banks," another analyst said. (Reporting by Alice Gledhill, editing by Helene Durand, Sudip Roy)