A man uses a cash dispenser at a Banco Popular branch in Madrid, Spain, April 29, 2016. REUTERS/Andrea Comas - RTX2C5VC
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Much of the eurozone’s post-crisis playbook was written by Spain. The country was one of the first to establish a “bad bank” to deal with the worst of the pre-crisis property loans. It encouraged consolidation among weaker savings banks. The pay-off was higher capital buffers and richer valuations. So when Spain’s fifth-largest lender by assets announced a plan to raise capital in order to deal with loan losses, is it a deviation from the script or a worrying new chapter?

Banco Popular is raising €2.5bn, nearly half of its market value. It has long been viewed as one of the weakest banks; this is its third capital raising in less than four years. It also has one of the lowest levels of provisions, although its cash call would increase that from 38 per cent of bad loans to 50 per cent, in line with peers.

The broader worry is that Spanish banks — particularly those such as Caixabank, Sabadell and Bankia which have a strong domestic focus — have not written down their bad loans to their true value. According to Berenberg, only a tenth of pre-crisis lending in Spain has been written off or provisioned for, compared with a fifth in Ireland — another country that suffered a property-induced hangover.

Despite Popular’s cash call, the FTSE Spanish banks index has outperformed its pan-European equivalent by 6.8 percentage points so far this year. Contrast that with Italy, where two, much smaller, capital raisings at minor lenders led to a broad sell-off.

Analysts are expecting 20 per cent growth in Spanish bank earnings this year, driven by cost-cutting, resilient fee income and loan growth of 2-3 per cent. That looks optimistic; the Spanish Banking Association points out that many customers are using spare cash to pay down existing loans. They are not yet substantially drawing down new ones.

The price of success is less room for slippage. Trading at an average of 0.9 times tangible book value, Spanish banks no longer look cheap relative to their European rivals.

Email the Lex team at lex@ft.com

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