I don’t follow the Spanish banking sector well enough to know what hidden value Banco Pastor has but I find it curious that it is the subject of a takeover bid at a 31% premium by Spain’s fifth largest bank, Banco Popular.

El Pais reports that:

Banco Popular has confirmed the negotiations to the CNMV and has finalized an offer with an exchange ratio that represents a premium of 31.2% over the current price of Pastor, the bank to be acquired, and of 35.7% on closing prices yesterday. [my translation]

The last time I wrote about Spanish banks it was about how Banco Pastor was one of only five European banks that had failed the stress tests. Banco Popular itself barely passed; and it too has huge exposure to property markets. Remember, Franco-Belgian bank Dexia passed the stress tests and even so, they have basically failed and are to be nationalised and sold off in parts.

Pastor is the Spanish bank with the highest exposure to property risk , according to data from the end of 2010. Its exposure to bricks and mortar is comparable only to the exposure of the cajas that have needed government rescues. [my translation]

Why is this bank getting a 31% premium.

Banco Pastor has above all a problem in real estate. Popular, too, but to a lesser degree. At the end of 2010, Pastor had loans to the real estate developer and building sector amounting to 4813.3 million euros, or about 20% of the total loans to its clientele. Of this figure, 769.2 million corresponded to bad loans and 934.6 million to those classified as substandard, that is, they are considered at risk despite being current on payments. To this figure of payment problems must be added a total of 1.5266 billion in foreclosed assets. That’s a total of 3.230 billion euros that the Bank of Spain classified as "potentially problematic assets," which also have been called toxic assets. Not to mention another 308 million euros in bad loans, that is, loans that have been provisioned for as uncollectable.[my translation]

I am as surprised that this is happening at this premium as I was when Bank of America took over Countrywide. It doesn’t make any sense to me. It reminds me of the Japanese solution in the 1990s and 2000s of jamming together two banks in order to prevent the weaker institution from failing. Does anyone who covers this closely have more insight?

Source: El Banco Popular ofrece 1.362 millones en acciones por el Pastor, El Pais