Bankia SA, the Spanish lender taken over by the government in a bailout this month, struggled to convince money managers to take part in its initial public offering less than a year ago.
The bank instead relied on individuals, investors who are typically less equipped to analyze stock risks, to fill orders for the IPO in July. About 347,000 investors, most of them individuals like Josefa Rodriguez, an 86-year-old retired housewife from Madrid, bought Bankia’s shares.
“My aunt is a lady with almost nil knowledge of financial products and this wasn’t an appropriate product for her,” said Marta Rodriguez, her niece, who spoke on her behalf in a phone interview as Josefa lives in a residential nursing home. “Staff at the bank was under a lot of pressure themselves to sell the shares.”
After pricing at 3.75 euros a share in the IPO and gaining 4 percent in the first two weeks of trading, Bankia had dropped to 1.86 euros by yesterday’s close as concern grew that Spanish lenders would need more capital. Investors such as Rodriguez have since lost about $2 billion, or half of what they paid for Bankia shares in the IPO, deepening the cost of a sovereign debt crisis that’s pushed Spanish unemployment to an 18-year high.
A spokesman for Bankia, who asked not to be identified in line with company policy, declined to comment.
Spain’s Association of Bank, Savings Bank and Insurance Users, known as Adicae, said today it would start a campaign to protect the interests of Bankia’s retail shareholders.
The decision by then-chairman Rodrigo Rato to list Bankia was “disastrous,” the organization said in an e-mailed statement today, and had been made “without gauging or stating truthfully the financial risks of a company that just 10 months later has shown itself on the verge of bankruptcy.”
“A deal like this undermines the credibility of the European banking sector and IPOs in general,” said Josef Schuster, founder of Ipox Schuster LLC, which invests in global IPOs. His European portfolio still holds about $20 million of the lender’s stock.
The Bankia group, formed in 2010 from a merger of seven savings banks led by Caja Madrid, has the most exposure to Spanish real estate among the nation’s banks. The company turned to the stock market to raise capital last year after parking its worst real estate assets in the parent company.
A 10-year property boom that came to an end with the onset of the global financial crisis left the nation’s banks with soaring bad loans and a need for capital. After encouraging banks to seek funds privately, Prime Minister Mariano Rajoy, who took over in December, said this month for the first time that Spain may use public money to save banks. In a fourth attempt to clean up the industry in less than three years, the government ordered banks last week to increase provisions on real estate loans that are still performing by about 30 billion euros.
Bankia’s stock-market fundraising boosted the lender’s core capital ratio to about 9.6 percent, from 7.9 percent before the sale, according to the offer document. The Bank of Spain, the country’s central bank, had set a minimum target of 8 percent for publicly traded lenders.
To lure buyers, Bankia held out the promise of distributing about 50 percent of its net income as dividends.
“The IPO was mainly a dividend play, so it appealed particularly to retail investors when interest rates elsewhere are so low,” said Ipox’s Schuster. “Bankia has a strong retail network and that’s basically how the deal got done. Now not only their shares get diluted, it’s also a question mark whether Bankia will be able to deliver future dividends.”
Spain is taking over Bankia by converting its 4.5 billion euros of preferred shares in the group’s parent company into ordinary shares. Bankia group’s new management will have an initial deadline of May to present a restructuring plan, including additional state support, a person with knowledge of the plans said.
To help find buyers for its stock outside its home market, Bankia had also hired the world’s top securities firms to be managers of the IPO.
A total of 15 underwriters led by Bank of America Corp., Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG earned a commission of about 1.2 percent on the 3.1 billion-euro IPO, or about 37 million euros, data compiled by Bloomberg show.
While managers were taking orders for Bankia’s IPO, investor concern about Europe’s deepening debt crisis was already propelling Spanish bond yields to what was then a euro-era record. The lender had to reduce its IPO price by about 26 percent from its initial range in order to complete the sale.
The IPO “has been considered a reference point for the Spanish banking industry” and was completed “in the middle of a true storm in the markets that imposed the toughest financial conditions of the last decade,” Rato, Bankia’s then chairman, said in a speech on July 20.
Rato stepped down last week and is being replaced by Jose Ignacio Goirigolzarri, a former president of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest bank.
Dirk Sebrechts, a Brussels-based fund manager at KBC Asset Management SA, said there was already the likelihood at the time of the IPO that the shares would fall. The bank’s valuation of 0.39 percent of its book value wasn’t low enough to guarantee an investment gain, he said.
“It was a merger of undercapitalized banks that remained undercapitalized,” said Sebrechts, who didn’t buy shares in the IPO 10 months ago. “The risk-return wasn’t convincing.”
Theo Vermaelen, a finance professor at Insead in Paris, didn’t express surprise at the shares’ decline either.
“IPOs tend to be bad investments because companies tend to sell stock amid over-optimistic expectations,” said Vermaelen. “The fact that the smart money wasn’t investing wasn’t a good sign.”
Individuals bought about 60 percent of the shares on sale in the IPO, Spain’s third-largest ever. Historically, about 30 percent of shares were sold to retail investors in IPOs, according to Alexander Ljungqvist, a finance professor at New York University’s Stern School of Business.
“Institutional investors act as a certification on whether or not the price on an IPO is reasonable,” said David Goldreich, a finance professor at the University of Toronto’s Rotman School of Management. “The IPO illustrates the problem of adverse selection, whereby some investors only get good deals and others only bad deals.”
Bankia fell for a ninth day today, by 9.7 percent to 1.68 euros at 11:45 a.m. in Madrid. That’s 55 percent less than their IPO price of 3.75 euros a share.
During the same month that Bankia went public, another Spanish lender, Banca Civica SA, which was formed from a merger of four other Spanish saving banks, raised 600 million euros in an IPO. CaixaBank SA, Spain’s fourth-largest lender, in March agreed to buy Banca Civica, also based in Madrid, for a price that’s 27 percent lower than the shares fetched in its IPO. Credit Suisse Group AG and Morgan Stanley managed the IPO.
“It’s a serious problem,” said Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London. “What’s happening with Bankia is a reflection of the recession itself. The deeper it goes into recession, the more vulnerable the position of the banks become.”