Spain’s Bankia-Led Bailout Won’t Spell End of Bank Troubles

Spain’s 41 billion-euro ($54 billion) rescue of lenders, prompted by record losses at Bankia, won’t spell the end of troubles for the nation’s financial industry as the economy remains mired in recession.

The lender that received the biggest Spanish bailout said in November it plans to cut about 6,000 jobs and 50 billion euros of assets as it targets a return to a profit this year after an estimated record loss of 19 billion euros in 2012. Bankia will report earnings tomorrow before the stock market opens in Madrid.

Bankia, whose collapse last May helped push Spain to seek a European bank bailout, underlines the excesses of a financial system that turned a decade-long credit boom into a bust. With Italy’s political gridlock undermining investor confidence across the region, a quarter of the Spanish working population unemployed and the economy shrinking, the country’s banks may still face more loan losses and uncertain access to financing.

“It’s going to go down in history books as a massive crash that contributed to an explosion in unemployment and a massive loss in income -- it’s an unmitigated disaster,” Charles Wyplosz, director of the International Center for Money and Banking Studies in Geneva, said in a telephone interview. “It’s not over yet.”

Bank Losses

Other Spanish lenders are also reporting losses. Catalunya Banc SA and NCG Banco SA, which were both nationalized, are estimated to post about 20 billion euros in combined pretax losses, according to the European Union. Banco de Valencia, which was also bailed out, had a full-year loss of 3.6 billion euros, while Banco Popular Espanol SA, Spain’s No. 6 commercial lender, reported a shortfall of about 2.5 billion euros.

Bankia was forced to pass 22.3 billion euros of soured assets linked to real estate to a so-called bad bank. Under the auspices of its European bailout, it published a new business plan in November, pledging to eliminate about a quarter of its workforce and reduce its branch network by 39 percent.

One lesson to be learned from Bankia is that consumer banks may pose just as big a threat to the financial system as investment banks with their riskier models, said Peter Hahn, a lecturer at Cass Business School in London.

“In Spain, it was the plain-vanilla, consumer-type banking that became the casino banking,” said Hahn, a former managing director at Citigroup Inc.

‘Reset Button’

Bankia Chairman Jose Ignacio Goirigolzarri, the former second-in-command at Banco Bilbao Vizcaya Argentaria SA, has said he expects the restructured bank to earn 1.2 billion euros in 2015. The bank estimates 3.1 billion euros in accumulated profits through 2015.

Bankia’s collapse strengthens the case to take banking supervision out of the hands of national regulators and pass it to a pan-regional authority, said Wyplosz.

“The local supervisor is a branch of government and governments have many, many reasons not to make the life of the banks too tough,” he said.

Still, the government’s orders to banks last year to recognize 84 billion euros of losses on real estate and the creation of the bad bank to absorb soured assets from bailed out lenders means the scope for future losses has been reduced, said Carlos Joaquim Peixoto, an analyst at Banco BPI SA.

“We already know that the quarter will be bad -- and that’s an understatement -- but after this they may be able to press the reset button,” Porto, Portugal-based Peixoto said. “They still have a lot of work to do.”

Bankia shares have dropped 21 percent this year and are down 92 percent since its initial public offering.

Spanish Bailout

Steps by the Bank of Spain to limit excessive yields on deposits will help bolster margins, according to Peixoto. The European Commission said last week it didn’t foresee further banking bailout payments being needed for Spain beyond the 41 billion euros disbursed to recapitalize the nationalized banks and the new bad bank.

The refusal by auditor Deloitte LLP to sign off on Bankia group’s accounts for 2011, a year in which it raised more than 3 billion euros by selling shares, set in motion a chain of events that led to the resignation of Chairman Rodrigo Rato and the lender’s request for 19 billion euros of state aid in May 2012. Spain formally sought a bailout for its banking system a month later, when it requested as much as 100 billion euros in aid.

While banks have stepped up efforts to return to health, Spain’s deepening economic slump threatens to push up loan defaults and further undermine lending. The country’s gross domestic product will probably drop 1.5 percent this year after decreasing 1.4 percent in 2012, according to a Bloomberg survey of 40 economists. Spanish unemployment was at 26.1 percent in December, more than double the euro-area average.

Transition Year

“2013 is still a year of transition and very much depends on the course of the economy,” said Antonio Ramirez, a London-based analyst at Keefe, Bruyette & Woods Ltd.

Europe’s economy may struggle to return to growth this year as governments toughen austerity measures to restore confidence. Stocks tumbled and borrowing costs rose this week after Italy’s inconclusive elections triggered renewed market concerns over the region’s fiscal crisis that has forced five nations including Greece and Ireland into seeking external aid.

For their part, Spanish bank executives have signaled confidence in the country’s economic outlook. Francisco Gonzalez, chairman of BBVA, the second-biggest bank, predicted an “inflection point” for the economy toward the end of this year. Emilio Botin, chairman of Banco Santander SA, the largest lender, said Jan. 31 a “change in the cycle” was close.

‘Bright, Shiny’

Still, Banco BPI’s Peixoto said some banks with focus on Spain may find it more difficult to restore earnings.

“It’s not as everything is going to be bright and shiny from now on because there are a lot of doubts about the economy,” he said. “Not all the banks have had the opportunity to make their balance sheets as clean as Bankia.”

Past crises affecting the Spanish banking industry have included a suspension of payments by Philip II in 1575 that hit financiers in Sevilla and the collapse of 21 banks from 1882 to 1884, Alvaro Cuervo, director of the University College of Financial Studies in Madrid, wrote in a 1988 study. Twenty-nine lenders were seized in the crash in the years after the death of dictator Francisco Franco in 1975, he wrote.

Economists and historians will now seek to learn the lessons from Bankia and other lenders formed from former savings banks that were at the heart of the latest crash, Cuervo said in a telephone interview.

“We have seen the loss of 30 percent of Spain’s banking system and yet it seems no one is responsible,” he said. “I find that troubling.”

(Updates with share decline in 14th paragraph.)
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