Banco Popular Espanol SA plans to sell as much as 2.5 billion euros ($3.2 billion) of discounted shares as the Spanish lender bids to close a capital shortfall.

Popular will issue new shares at 0.585 euros each, excluding the value of subscription rights, Chief Financial Officer Jacobo Gonzalez-Robatto told shareholders in Madrid on Nov. 10. Existing shareholders can pay 0.401 euros and will receive three new shares for each one they own, he said. The bank’s shares closed at 1.118 euros on Friday and 1.701 euros on Sept. 28, the last trading day before the sale was announced.

“It’s very difficult to say if this is a good price,” said Inigo Lecubarri, who helps manage about $400 million at Abaco Financials Fund in London. “But what you can say is the price is good compared to other Spanish banks.”

Popular said on Oct. 1 it would sell shares and suspend its dividend as the Madrid-based lender seeks to avoid tapping state aid to cover a 3.22 billion-euro capital deficit revealed in stress tests that accompanied a European bailout for Spain’s banking system. Shares of Popular, the only publicly traded bank with a capital shortfall that hasn’t been nationalized, have declined 68 percent this year.

“It’s a brave step by them because they are raising actual equity,” said Benjie Creelan-Sandford, a banking analyst at Macquarie Bank Ltd. in London, who rates Popular underperform. “In the context of deleveraging and funding costs, it will be tough to grow revenue in absolute terms.”

Underwriting Banks

The 15 underwriting banks include Deutsche Bank AG, Banco Santander SA, UBS AG, Bank of America Corp.’s Merrill Lynch & Co. unit and JPMorgan Chase & Co., which will act as global coordinators, Chairman Angel Ron said. They have guaranteed 2.08 billion euros of the sale with the remainder covered by pledges to buy stock from existing shareholders, he said.

Deutsche Bank underwrote 400 million euros, Santander 300 million euros with the other global coordinators taking 230 million euros each, Gonzalez-Robatto said in an interview after the shareholder meeting. Commissions were about 2 percent plus a 1 percent success fee, he said.

Ron faced questions from 16 shareholders, some of whom criticized management for making failed bets on real estate and leading the bank into a situation where it was forced to raise capital to stave off state aid. Joaquin Molina, a shareholder, told the meeting that the “tsunami” that had engulfed the Spanish economy had also swamped the bank and he trusted it could “reach the beach.”

Shareholders at the Nov. 10 meeting approved the capital increase.

Keeping Independence

“We are aware this means asking for an effort from the shareholder, to our current shareholders, to you,” Ron said, adding that raising capital in the midst of a “huge crisis” was a testament to the bank’s strength. “The capital increase will of course maintain our independence as an entity and give us maximum flexibility to generate value.”

Popular stepped up purchases of its own stock before the meeting, buying shares at 1.20 euros to 1.35 euros each, according to a filing with regulators dated Nov. 2. The bank held almost 4 percent of its stock at that date compared with a 2.14 percent on Sept. 21.

Popular is accompanying its pitch for shareholder funds with a new business plan that speeds up recognition of loan losses to produce a 2.3 billion-euro loss this year. The bank is targeting earnings of 1.4 billion euros by 2014, using a predicted operating profit of 7.2 billion euros over the next three years to absorb losses.

Stress Test

The suspension of dividend payments announced last month will be “transitory” and the bank will maintain a payout ratio of 50 percent, Ron said. Asked about whether the bank had received takeover approaches, he said the best way to preserve shareholder value was through the planned capital increase that will allow Popular to stay independent.

Ron said the stress test process had penalized the bank because its business model focused on small Spanish businesses.

“Accepting the results of this hypothetical exercise does not mean that we share them,” said Ron, who also highlighted the “torrent” of regulation imposing new capital burdens and provisioning costs on lenders.

The lender said Oct. 23 that investors holding a combined 23 percent of its stock had committed to backing the share sale. The bank said it expected a group of five main shareholders, including Allianz SE, the Portuguese investor Americo Amorim and the Barrie de la Maza Foundation, to own 20 percent of the bank after the share sale compared with 24 percent now.

The Bank of Spain said Oct. 31 that it believed Popular was among lenders able to meet capital requirements.

Spain’s stock market regulator will probably approve the share prospectus on Nov. 12 and Popular’s shares will start trading ex-rights two days later, Gonzalez-Robatto said. The new shares will begin trading on Dec. 6.