Why Spain's New Government Has an Old Bank Problem

(Bloomberg) -- Among the questions facing Spain’s new government is what to do with its stake in Bankia, the country’s fourth-largest bank. It’s been a headache for Spanish leaders since it required a rescue in 2012 to avert a collapse that could have brought down the nation’s entire financial system. The prior government set itself a deadline of December 2019 to sell its 61 percent stake in Bankia, but its falling price has made selling on the open market a politically unpalatable prospect.

1. How did Spain’s government end up with Bankia?

In 2012, with Bankia facing bankruptcy under the weight of the largest holding of real estate among Spanish banks, the government of Mariano Rajoy stepped in to bail it out and took a controlling share of 45 percent in Bankia (which it later increased with further aid packages). The lender had been a troubled project since its inception in 2010, when it was stitched together from seven struggling savings banks. The bank’s price plunged 83 percent within a year of its initial public offering in July 2011 as an economic crisis driven by soured real estate loans peaked.

2. What’s been the cost to Spanish taxpayers?

The government provided about 22.4 billion euros to bail out Bankia and has been repaid 2.86 billion euros so far in stake sales and dividends. (BFA, the state-controlled vehicle that owns Bankia, most recently sold a 7 percent stake in December 2017 for 818 million euros, or $949 million.) At current prices, the government stake in Bankia is worth 6 billion euros, meaning Bankia’s price would have to triple in order for the government not to incur any losses from the bailout. Bankia’s share price has fallen 21 percent this year, the most among its Spanish rivals.

3. Has the government done anything?

In 2012, the government asked Rodrigo Rato to step down as chairman and replaced him with Jose Ignacio Goirigolzarri, a veteran banker who had served as chief operating officer at Banco Bilbao Vizcaya Argentaria SA. (Rato, a former finance minister, wound up being charged, convicted and jailed for misusing corporate credit cards during his tenure at Bankia.) Goirigolzarri has overseen a restructuring that succeeded in steadying the ship. In February, the bank said it had completed its turnaround after reducing the number of branches and staff by one-third and divesting 61.3 billion euros in non-strategic assets. It posted a profit of 229 million euros in the first quarter.

4. Then why is its stock price falling?

Spain’s political turmoil and jitters about Italy have played their part. But Bankia has been hit more than its peers because of its dependence on interest rates to achieve profitability; more than 80 percent of Bankia’s loan book is floating rate, according to Bloomberg Intelligence. Plus, with the government seen as intent on shedding its stake, short positions are at the highest since December, according to Spain’s securities regulator.

5. What does the new government say?

With just 84 seats in the 350-seat parliament, the new prime minister, Socialist leader Pedro Sanchez, had to ally himself with the left-wing populist party Podemos, which has argued that Bankia should remain in state hands. Still, recently sworn-in Economy Minister Nadia Calvino appeared to rule out the nationalization option by telling El Pais newspaper that the government has time to complete the privatization although it will prioritize recouping taxpayers’ money over getting the job done quickly.

6. What are the options for dealing with Bankia?

The government could heed the calls of its allies and maintain Bankia as a state-controlled bank, although Goirigolzarri has strongly opposed that option in recent comments. The bank and the previous government said they favored selling off packages of shares to the market, in a similar vein to how the U.K. government has privatized Royal Bank of Scotland. Unless its share price rises significantly, the government may have to extend the self-imposed deadline again. The free market could also intervene, as Bankia is seen as the most likely Spanish banks to be acquired. Goirigolzarri told the Financial Times in March that Bankia would be "a good combination for everybody."

7. Who could acquire Bankia?

Speculation has swirled about a potential merger with Banco Bilbao Vizcaya Argentaria SA or Banco de Sabadell Sa. Analysts say a merger is complicated by the fact that the government’s stake would need to be paid in cash, meaning most suitors would need to carry out a capital increase to make the acquisition.

The Reference Shelf

  • QuickTake explainers on bank stress tests and the hurdles in the way of large European bank mergers.
  • What Spain’s Socialists wanted in pushing out Rajoy.
  • Bloomberg’s story on the December 2017 sale of government shares in Bankia.
  • Bankia has been hoping to shift from recovery to growth.

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