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Bankia $5.6 Billion IPO Deemed ‘Brutal Stress Test’ of Spain

Bankia, emerging from the combination of Caja Madrid, Bancaja and five other savings banks, has about 275 billion euros in assets. Photographer: Denis Doyle/Bloomberg
Bankia, emerging from the combination of Caja Madrid, Bancaja and five other savings banks, has about 275 billion euros in assets. Photographer: Denis Doyle/Bloomberg

May 24 (Bloomberg) -- Spain’s effort to bolster its banks, stanch spending and stave off sovereign debt contagion will hinge in part on the initial public offering of Bankia, a lender formed from the merger of seven savings banks.

Led by Chairman Rodrigo Rato, the former Spanish economy minister and International Monetary Fund chief, Bankia plans to raise as much as 4 billion euros ($5.6 billion) in an IPO in mid-July, a person with knowledge of the plans said yesterday. The Madrid-based bank was created over the past year and named a chief executive officer only last week.

“They are attempting something very difficult in a very short period of time,” said Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid. “The fact is that the Bankia IPO is a brutal stress test for Spain as a whole.”

The IPO will show whether Spain’s drive to persuade investors to pour capital into a financial system burdened by real estate losses is working. A successful offering would ease pressure on the state, which is toiling to cut the euro region’s third-largest budget deficit, and rekindle confidence in the industry. Concern that Spain might succumb to Europe’s sovereign debt crisis revived two days ago when the ruling Socialist Party suffered its worst defeat in local elections in three decades, putting further austerity efforts at risk.

Capital Shortfall

Spanish bonds tumbled yesterday after the election results, pushing the extra yield investors demand for holding the country’s 10-year debt over German securities to the highest level in four months. The gap narrowed 4 basis points to 246 today. A basis point is equivalent to one one-hundredth of a percentage point.

Bankia, emerging from the combination of Caja Madrid, Bancaja and five other savings banks, has about 275 billion euros in assets. That makes it about the same size as Barcelona-based CaixaBank and larger than all of Spain’s publicly traded lenders except Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.

It hired investment banks including Deutsche Bank AG, JPMorgan Chase & Co., Bank of America Corp. and UBS AG to manage a share sale as it seeks to plug a shortfall under minimum capital requirements set by the government in February. Bankia held a presentation yesterday for analysts at the firms arranging the sale, the person said.

If it raises the maximum amount sought, the sale would be Spain’s second-biggest IPO after Iberdrola Renovables SA’s 4.5 billion-euro offering in December 2007. Banca Civica and Banco Mare Nostrum, two Spanish banks formed from merging cajas, may also sell stock. The Bankia offering will be the largest.

Won’t ‘Know Enough’

It may prove a tough sell with international investors because of questions over the property loans the bank is carrying, said Simon Maughan, head of sales and distribution at MF Global in London. Spain’s banks recognized 96 billion euros of losses on their assets since January 2008, the Bank of Spain said in its latest financial stability report on May 3.

A successful outcome may depend on the bank’s ability to convince its own customers that buying shares makes sense. Spanish lenders routinely sell their products to consumer-banking clients through their branches. Santander raised 7 billion euros in 2007 from the sale to individual investors of debt that automatically converts into stock to help buy a bank in Brazil from ABN Amro Holding NV. Individuals bought about half of the 3.8 billion-euro 2007 IPO by Criteria CaixaCorp.

‘Challenging Sale’

Maughan said there is sufficient political will in Spain to make sure the Bankia sale happens. Some potential investors say it offers an opportunity.

“It’s a very good bank and there must be value there for investors,” said Javier Arguelles, a 55-year-old building company administrator and Caja Madrid customer for more than 30 years.

Julio Segura, Spain’s stock market regulator, said he will monitor sales to individual investors because of the complexity of accurately valuing the assets of the newly formed banks. It’s essential that there are enough professional investors participating to reliably set prices for the sales and avoid any risk of collusion that could push them higher, he said in a May 13 speech in Madrid.

“My advice to retail investors would probably be to invest in something less volatile, maybe a utility,” said Peter Braendle, who helps manage about 60 billion Swiss francs ($68 billion) at Swisscanto Asset Management in Zurich. “It’s going to be a challenging sale because there are still problems with the Spanish economy and the real-estate market.”

Bankia Merger

Rato, 62, has said he’ll strip out damaged assets linked to real estate, such as loans for building land, before the IPO. The group had 41.3 billion euros of lending linked to construction and real estate, the most of any Spanish lender.

The merged savings banks will seek pre-tax cost savings, or “synergies,” of 500 million euros by 2013 as they shed staff and close branches to achieve a reduction up to 12 percent in administrative costs by next year, they said in a presentation filed with regulators last June.

Rato paved the way for Spain’s adoption of the euro in 1999 as Spain’s economy minister, and served as managing director of the IMF in Washington from 2004 to 2007. He was hired by Lazard in 2007 as an adviser on corporate finance and named head of Caja Madrid in January 2010.

Bankia named Francisco Verdu, vice chairman of Banca March, a firm focused on private banking and wealth management with 13 billion euros of assets, as CEO on May 20. Bankia says it has appointed about 90 managers since December.

Former politicians still hold some senior management roles in the group’s holding company, a holdover from the savings bank-era, when local and regional officials held sway over the institutions, said Alvaro Cuervo, a business professor at Madrid’s Complutense University.

“It needs good management given the size of the challenge ahead of them,” Braendle said.

To contact the reporters on this story: Charles Penty in Madrid at

To contact the editor responsible for this story: Frank Connelly at

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