Spain to Recapitalize Bankia After 4.5 Billion-Euro Loss

Spain will inject capital into the Bankia (BKIA) group after the nationalized lender posted a 4.45 billion-euro ($5.6 billion) first-half loss.

The nation’s bank rescue fund, known as FROB, will pump from 4 billion euros to 5 billion euros into Bankia, Spain’s third-biggest lender, in the next two weeks, said a person familiar with the situation who asked not to be identified because those details aren’t public.

The capital is an advance on money Bankia is due to receive once a reorganization plan is completed in October and approved by European authorities in November, FROB said in a statement yesterday. Bankia’s May request for 19 billion euros in state aid followed a 4.5 billion-euro bailout in 2010 and came two weeks after Economy Minister Luis de Guindos said 15 billion euros would be enough for the whole industry.

“The important thing for Bankia is to clean up the balance sheet because it’s already known that they’re going to have very big losses this year,” said Carlos Joaquim Peixoto, an analyst at Banco BPI SA in Porto, Portugal.

The unraveling of Bankia, with an asset base almost a third the size of the country’s economy, focused investors on the costs of fixing Spanish lenders and helped push the government to seek as much as 100 billion euros of European bailout funds in June to shore up the banking system.

Bad Bank

Spain’s cabinet set out a framework for restructuring the banking industry yesterday, including a bad bank that will take soured real estate from rescued lenders and seek to sell the assets over 10 to 15 years. The European bailout requires the government to spell out procedures for dealing with failed lenders that limit costs to taxpayers.

Spain is tightening bank regulation against a backdrop of doubts about the nation’s finances that spurred the government to call on the European Central Bank to buy its bonds to rein in financing costs. Spanish lenders have about 180 billion euros of troubled real estate assets, according to the Bank of Spain.

The “gigantic” financial reform announced yesterday will bring benefits to Spain’s economy over the medium long-term and the process of cleaning up the banking system is on its way to completion, Prime Minister Mariano Rajoy said today in a speech to party members at Soutomaior Castle in Galicia.

In its third reform of the financial system this year, the government also bolstered the powers of FROB to restructure troubled banks. The fund will be able to take on debt to a limit of 120 billion euros in 2012, the economy ministry said.

Santander, Sabadell

Spanish banks rose in Madrid trading after de Guindos announced details of the bad bank. Banco Santander SA (SAN), Spain’s biggest lender, climbed 6 percent and Banco Sabadell SA jumped 10 percent. Bankia rose 6.3 percent. The company released earnings after the close of trading.

The Bankia group set aside 6.8 billion euros in the first half to provision for bad loans and real estate, and a further 6.9 billion euros of charges are expected this year, the bank said. The group lost 12.8 billion euros of deposits in the first six months of the year, a 10 percent decline, it said.

Bad loans as a proportion of total lending jumped to 11 percent in June from 7.63 percent in December, while customer funds plunged 37.6 billion euros, or 18 percent, over that period, the bank said. Lending shrank 2.9 percent from December and the group’s core capital ratio under Basel II standards, a measure of financial strength, dropped to 6.3 percent from 8.3 percent, the bank said.

Capital Injection

Olli Rehn, the EU’s economic and monetary affairs commissioner, said in a statement that Spain’s commitment would pave the way for the capital injection’s approval in November.

“I am very happy with the declarations by the Spanish and European authorities because they mean a great support for our project,” Jose Ignacio Goirigolzarri, Bankia’s chairman, said in a statement sent by e-mail. “It means a commitment by these authorities to Bankia’s future.”

The FROB will first pass funds to the Bankia group parent Banco Financiero y de Ahorros, which will then in turn recapitalize the listed Bankia SA unit, the person familiar said. Other government-controlled banks also reported big losses yesterday.

Catalunya Banc, another lender nationalized last year, reported a first-half loss of 1.44 billion euros. De Guindos said yesterday the bank’s soured real estate would be passed to the bad bank before it is put on sale. NCG Banco, a Galician lender also taken over by the government last year, posted a 1.4 billion-euro loss.

Wider Consequences

Bankia’s woes piled pressure on other Spanish banks because it stress-tested residential mortgages and company loans, as well as real estate, to calculate the size of its bailout request to the government. Spain nationalized the group in June after experts appointed by the country’s bank rescue fund said its parent company had a negative value of 13.6 billion euros.

Bankia’s travails have also had wider consequences for the government and its own former management.

The practice by Bankia and other lenders of selling subordinated debt such as preference shares to retail clients has come back to haunt the banks as European officials demand these investors absorb losses under terms of the bailout. The new regulation passed yesterday enshrines the principle that holders of subordinated debt at banks receiving state aid should be made to bear losses.

“This is never going to happen again,” said Rajoy, referring to the “lamentable” situation facing retail clients sold subordinated debt. He said the government was working on ways to ease the impact of the losses facing affected customers.

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

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

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