Bankia Shake-Up No Spain Panacea Without Action on Assets

Bailing out Bankia again after replacing top management may not be sufficient to persuade investors that Spain is doing enough to repair a banking system burdened by bad loans and real estate.

“This is the changing of the guard at Bankia but by itself it’s not enough,” said Ricardo Wehrhahn, a partner at Roland Berger Strategy Consultants in Madrid, in a phone interview. “The real signal will be when they spell out in a credible way how they will clean up the balance sheets of the whole banking system.”

Bankia Chairman Rodrigo Rato said May 7 he was resigning as head of the banking group to be replaced by Banco Bilbao Vizcaya Argentaria SA (BBVA)’s former second-in-command, Jose Ignacio Goirigolzarri, as the government weighs a second bailout of the lender with the biggest Spanish asset base. The Bankia group, formed in 2010 from a merger of seven savings banks led by Caja Madrid and Valencia-based Bancaja, last year listed its banking business on the stock exchange after parking its worst real estate assets in the parent company.

The shake-up is part of Spain’s effort to support a financial industry burdened by 184 billion euros ($239 billion) of what the Bank of Spain terms “problematic” assets linked to property. Questions over how Spain will finance a cleanup of its banking system as bad loans mount has reignited Europe’s sovereign-debt crisis. The gap in yield between Spanish 10-year bonds and German bunds grew to 4.50 percentage points today, the most since November, while the cost of insuring against a Spanish default climbed to a record.

More Provisions

Spain’s cabinet will approve plans on May 11 to boost the provisioning of real estate loans now classed as healthy to about 30 percent from 7 percent, said a person familiar with the situation who asked not to be identified because the decision hasn’t been formally taken. The rules may create additional provisions of about 30 billion euros, the person said.

The Bankia group brought forward to today from May 11 board meetings at which Goirigolzarri’s appointment will be confirmed, a spokesman for the lender said. Goirigolzarri arrived at Bankia’s headquarters in northern Madrid at about 11 a.m.

Shares in Spanish banks plunged as investors gauged the possible impact of the new rules on earnings. Bankia fell as much as 7.1 percent, CaixaBank SA as much as 6.6 percent and Banco Popular (POP) Espanol SA as much as 5.7 percent.

Bigger Losses

Raising the provisioning level for performing property loans to 30 percent may force Bankia into a 3.7 billion-euro loss this year, compared with a previous estimate of a 516 million-euro loss, Keefe, Bruyette and Woods Ltd. analysts Antonio Ramirez and Marta Sanchez Romero said in a report today. Popular may post a 1.93 billion-euro loss and CaixaBank a 1.44 billion-euro loss because of the extra provisions, they said.

Bankia and CaixaBank (CABK) spokesmen declined to comment on KBW’s estimates. Popular can make its real estate provisions over two years and also choose to do so against equity instead of earnings, a spokesman for the Madrid-based lender said, adding it also has the capacity to generate one-time gains.

JPMorgan Chase & Co analysts Jaime Becerril and Axel Finsterbusch cut their recommendation on Bankia today to underweight from neutral and lowered the target price to 1.70 euros from 3.50 euros.

“Risks are too high for us,” they wrote. “We cannot see how significant dilution for Bankia shareholders can be avoided.”

‘Keystone’ of Reform

Of the 38 billion euros of real estate the Bankia group held at the end of 2011, about half was classed as either “doubtful” or at risk of becoming so, according to the group’s annual report.

“It’s really just one big bad bank now,” said Lorenzo Bernaldo de Quiros, an economist who served on a panel that advised Rato when he was economy minister in the government of Jose Maria Aznar, adding that he’d prefer to see the group being broken up by the government. “The problem for the government is that the markets and international organizations have made Bankia the keystone of the whole financial reform in Spain.”

While installing new management at Bankia, which has assets almost a third the size of Spain’s economy, shows the government is serious about fixing the troubled lender, it still must tackle the wider problem of souring real estate and consumer and mortgage loans, said Tobias Blattner, an economist at Daiwa Capital Markets in London.

“Bankia has got to be seen as just the beginning of a turnaround of the whole Spanish banking system,” said Blattner in a phone interview.

Capital Injections

Prime Minister Mariano Rajoy said this week the government would pass a decree on May 11 aimed at bolstering confidence in the industry, adding the announcement would be linked to the government’s plan to allow lenders to hive off real estate assets into separate asset-management companies.

The government also may inject funds into Bankia by buying contingent-capital securities, an Economy Ministry official said May 7, declining to be identified as the plan isn’t public. Barcelona-based newspaper La Vanguardia reported today that Spain may offer guarantees to investors that take majority stakes in vehicles set up to remove banks’ real estate from their balance sheets.

Investors won’t be convinced by anything short of a “bad bank,” or vehicle that removes assets from the balance sheets of not just Bankia but all the banks, said Wehrhahn.

“They want to know at what price the assets will be taken out of the balance sheets and who will be financing all this and for how long,” Wehrhahn said.

Wielding Influence

Economy Minister Luis de Guindos has said the plan to allow banks to split off assets will be voluntary and each lender may set up its own vehicle. According to him, provisioning levels set in February of 80 percent for land and 65 percent for unfinished property are sufficient and will let banks offload assets without generating additional losses.

Rato, a former International Monetary Fund managing director, quit Bankia weeks after the IMF singled out the company in a report on Spanish lenders. The biggest of the country’s vulnerable banks should “especially” take swift steps to bolster its balance sheet and improve management, the IMF said.

Rato, 63, was unwilling or unable to clear away structures that enabled the savings banks that merged to create Bankia to continue wielding management influence, said Alvaro Cuervo, a business professor at Madrid’s Complutense University.

Sweeping It Away

Caja Madrid and Bancaja, savings banks linked to the People’s Party administrations of the Madrid and Valencia regions, hold 90 percent of Banco Financiero y de Ahorros, the parent company that controls Bankia and holds the 4.5 billion euros of preferred shares subscribed by the government in a first bailout in 2010.

“Rato made the mistake of not turning the page more forcefully away from the time of the savings banks,” said Cuervo. “Investors want Goirigolzarri to bring in his own people and sweep all this away.”

Bankia’s troubles under Rato also indicate how balance sheets across Spain’s banking industry are still deteriorating as the country’s economy endures a recession that has driven unemployment above 24 percent, said Blattner.

Bad loans across the Bankia group reached 8.7 percent in December and 7.6 percent at the listed Bankia business unit. The group said it also renegotiated almost 10 billion euros of assets in 2011 to stop them from defaulting, a figure equivalent to about 5 percent of its loan book.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net;

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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