MADRID (Reuters) - Banco Popular POP.MC triggered renewed concerns over the health of Spanish banks on Thursday with plans for its second 2.5 billion euro ($2.8 billion) capital increase in less than four years to cope with toxic real estate assets.
Spain's banks reduced their balance sheets after a property bubble burst at the end of 2008, but doubts remain about their profitability, with returns hit by low interest rates and heavily indebted borrowers paying down loans.
Popular, the most exposed of Spain's banks to the troubled property sector, said regulatory uncertainties on capital levels demanded by the European Central Bank meant it needed to make new provisions of up to 4.7 billion euros in 2016.
The mid-sized bank said these would allow it to increase its coverage ratio on non-performing assets to 50 percent from the current level of 38 percent to bring it in line with the average coverage ratio of most listed lenders in Spain.
Banco Popular Chairman Angel Ron told Reuters he expected losses this year but they would not exceed the size of the capital increase, which is equal to around half the bank's market capitalization.
Ron said he did not expect Popular to make a dividend payment in 2016 following the rights issue, although Spain's sixth-biggest bank by assets said it expected to reach a cash-pay out ratio of at least 40 percent in 2018.
"In terms of provisions, we are doing twice as much in one go as analysts were expecting over the next three years and this should clear any doubts over provision necessities and bank coverage," Ron said in the telephone interview.
The bank said it expected the capital increase to allow it to speed up real estate divestment plans and report a fully-loaded core capital ratio of more than 10.8 percent this year and at least 12 percent in 2018.
Popular aims to reduce its exposure to property assets by 15 billion euros between 2016 and 2018.
Banco Popular's shares fell more than 20 percent after its surprise announcement, as it had previously said its coverage levels were sufficient.
As of March, Banco Popular had soured real estate assets of around 25 billion euros, which are proportionally the highest in Spain at around 25 percent of total loans.
However, other Spanish bank shares were also hit by fears they could consider similar new provisioning efforts or capital hikes. Shares in Banco Sabadell (SABE.MC) dropped around 6 percent, while Caixabank (CABK.MC) slipped more than 4 percent and Bankia (BKIA.MC) fell by more than 2 percent.
"From the financial sector's point of view it is what we believe needs to be done," Ron told Reuters.
Some analysts welcomed Popular's move, while others said it would not put an end to the bank's credit quality difficulties.
However, acting Economy Minister Luis de Guindos said that in the long term the news was positive as Popular was addressing balance sheet weakness.
Following the issue of around 2 billion new shares at 1.25 euros per share, a discount of 46 percent from the close on Wednesday, Popular said by 2018 it expects a return on tangible equity of at least 9 percent, from 4.15 percent.
Editing by Alexander Smith