Ailing Spanish bank could need €10bn in capital

Tue, May 8, 2012, 01:00

RODRIGO RATO stepped down yesterday as chairman of Spanish lender Bankia, helping clear the way for a rescue plan that the government hopes will persuade international investors of the country’s financial stability.

The departure came as the prime minister, Mariano Rajoy, opened the door to using public funds to aid the deeply troubled bank sector, after previously ruling out such a move, as Spain tries for a fourth time to overhaul a sector that threatens the country’s finances and ultimately the euro zone.

The aid for Bankia, saddled with huge toxic loans which put it at the heart of concerns over the cost of a Spanish bank bailout, will include a cash injection, according to three government, central bank and financial sources, although they declined to confirm reports Bankia would need as much as €10 billion in capital.

Mr Rato, ex-IMF chief and a former minister for the ruling centre-right People’s Party who managed Bankia’s stock market debut last year, gave no reason for his departure, although the sources had earlier said the bank’s bailout would include management changes.

Mr Rato said in a statement yesterday he would hand over to Jose Ignacio Goirigolzarri, a former chief executive of major Spanish bank BBVA.

Two government sources said state money would be injected into Bankia – an agglomeration of local savings banks or “cajas” – through the purchase of bonds known as CoCos, or contingent convertibles, that can be converted into shares.

The manoeuvre may increase Spain’s public debt-to-GDP level this year as the government would have to raise debt to buy the Bankia bonds. However, since Bankia has to pay back the CoCos at market rates it would not be calculated as spending that weighs on the public deficit.

Cash from the CoCos would be used to clean up the banking and real estate activities held by Bankia’s parent group BFA.

These activities would then be absorbed by Bankia and BFA would stop operating as a bank, a source with knowledge of the plan said.

The move aims to clarify the group’s structure and reassure investors the bank – which holds around 10 per cent of Spanish deposits and is highly exposed to a devastating property crash – will not push Spain to seek an international bailout to recapitalise its lenders.

Mr Rato’s statement came after Mr Rajoy said his government would detail its bank reform scheme on Friday. He said he would use state money to help lenders, but only as a last resort.

“The objective is to send a strong signal to the markets and also to the International Monetary Fund and other international partners that the plan is ambitious and strong, and will complete our ongoing banking reform,” one of the sources said.

The Bankia rescue will dovetail with a wider plan to create a so-called bad bank to park and eventually sell off toxic real estate assets held by the banks. The clean-up of Bankia’s balance sheet would involve between €5 billion and €10 billion in a state-backed loan at a rate near 8 per cent, El Pais said. The Bank of Spain and Bankia declined to comment.

Spanish banks have a portfolio of troubled real estate assets of €184 billion, of which €31.7 billion belong to BFA-Bankia.

The group has recognised losses of 37.5 per cent or €11.9 billion on these assets.

Bankia’s shares fell 3.7 per cent to €2.363 by lunchtime yesterday.

Spain’s country risk, as measured by the spread between yields on Spanish and German benchmark bonds, spiked up to about 429 basis points before coming back to 422 basis points.

“Bankia shares are clearly falling after the bank confirmed Rato would step down. This is . . . negative for Bankia in the short term because they have not explained why and what is going to happen next, besides saying that Goirigolzarri would be his possible successor,” said Maria Lpez, banking analyst at Espirito Santo.

“This news seems, however, to be positive for the Spanish banking sector overall, because it seems that a clean-up at Bankia will take place with public money and not be paid by other banks.”

The Spanish government has been financing some of the clean-up of the sector through yearly contributions that all the banks make to a deposit guarantee fund.

Spain’s government has passed austerity measures worth more than €40 billion for this year in an effort to reduce a public deficit of 8.5 per cent of gross domestic product last year to 5.3 per cent by the end of 2012.

Spain has already spent €18 billion to clean up the country’s financial sector, has forced banks into dozens of mergers (including those which created Bankia) and to recognise more than €50 billion of losses on property loans and assets.

“If it were necessary to get the credit to save the Spanish financial system I would not hold back from doing what other European Union countries have done, loan them public money, but it would only be as a last resort,” Mr Rajoy said on Onda Cero radio in an interview yesterday.