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Salvation Won’t Come Cheap for Spain’s Problem Bank


Spain’s most troubled large bank has some interest from potential bidders, which is good as there seems little hope that

Banco Popular Español


POP -4.16%

will manage to find another route out of its problems.

Shareholders of the country’s sixth-biggest bank by assets shouldn’t hold their breath to get much value for their stock, however. Even the 71 European cents (79 U.S. cents) a share in Wednesday trading, just 27% of reported first-quarter book value, looks like a stretch.

The bank’s main plan is to sell parts of its business that it doesn’t want and raise fresh capital.

The reason that is hard and that any bid is likely to be at a low price is because Banco Popular needs a large amount of equity to repair its balance sheet. It must bolster provisions against bad loans and real-estate assets, and it is very low on capital.

The provisions it has taken against its €19 billion of bad loans and €18 billion of problem property assets are lower than rivals.

By its own numbers, average provision levels among its best three rivals in Spain are 53% for loans and 55.5% for properties. Banco Popular has provisions worth 51.4% of its bad loans and just 38.5% of its problem real estate.

To get both of these portfolios up to the levels of its best three rivals would cost €3.3 billion. To lift coverage to 60%, which might be required for a rival to buy Banco Popular, would cost €5 billion.

The trouble is that the bank’s total common equity Tier 1 capital, the equity that matters to its regulators, is just €6.1 billion. And its capital ratio is going to shrink as the latest rules come progressively into full force by the start of 2019.

A much bigger bank taking over Banco Popular—

Banco Santander

or

BBVA
,

for instance—would likely be able to absorb this progressive capital requirement within its own current surplus.

Even so, the provisions required at Banco Popular leave very little existing capital over, certainly less than its €3 billion market value.

Investors face a stark choice: put more money into a bank that raised €2.5 billion in fresh equity just last year, or take what they can get from a local takeover.

An all-stock offer would at least give them a prospect of enjoying some of the fruits of future recovery. That looks like their best outcome.

Write to Paul J. Davies at paul.davies@wsj.com



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