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Market Monitor: Spain - Will Popular buy BCH?

The David and Goliath story is being re-enacted in the Spanish banking world with Banco Popular - the smallest but most profitable of the big five banks - setting its sights on a much larger takeover candidate, which the market believes could be the stumbling giant Banco Central Hispano (BCH).

Banco Popular fired the first warning shots after the announcement of its results in January, when its chairman, Luis Valls, said he did not rule out the possibility of acquiring or merging with another bank. At the same time, Banco Popular's general secretary, Manuel Martín, said that, in addition to its Pta200 billion ($1.6 billion) in free capital, the bank could raise another Pta400 billion "within 24 hours".

"We realized in January that we needed to assure long-term growth to offset tighter margins that would affect the entire banking system," says Martín. "This implied a shift in strategy."

Not that the bank is under any immediate pressure to embark on a radical shake-up. Last year's results showed that its niche business - as a medium-sized provider of retail services and corporate lending, with a focus on the Spanish hinterland - remains a valid strategy. Banco Popular's pretax profit as a percentage of total assets was 2.94%, about four times that of its closest rival. Return on equity, at 21.42%, was well ahead of the industry average, but reflected the sector's steady decline over the past five years. The bank's ROE has often exceeded 25% in the past decade.


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