Spain's Rescued Banks to Shrink More Than Half in Bailout - Businessweek

BFA-Bankia (BKIA), the biggest Spanish bank set to receive European bailout funds, will cut about 6,000 jobs, or more than a quarter of its workforce, and forecast a 19 billion-euro ($25 billion) loss for this year.

Bankia will also sell 50 billion euros of assets through 2015, force losses on subordinated debt holders and reduce its branch network by 39 percent, the Valencia, Spain-based company said today. The European Commission approved the restructuring plan as a condition for the 18 billion euros of European bailout funds Bankia is set to receive.

"It's a demanding but realistic plan," said Chairman Jose Ignacio Goirigolzarri at a news conference. "Bankia is a company that with this aid is capable of recovering and we are going to fight so that it does."

Bankia was formed from the merger of seven regional savings banks in Spain's first attempt to clean up losses from the real estate collapse, and then listed on the stock market last year in a deal that hinged on support from retail investors. Bankia is the biggest recipient of funds from the euro region's rescue facility, which Spain agreed to tap in June as narrowing access to markets undermined its ability to backstop its banks.

Bankia fell 9.3 percent to 96.1 cents in Madrid trading. The stock has dropped 73 percent this year.

Shrinking Banks

Bankia, Novagalicia Banco and Catalunya Banc will reduce their balance sheets by more than 60 percent by 2017 compared with 2010, European Union Competition Commissioner Joaquin Almunia said in Brussels today. The three lenders started off as savings banks, or cajas, which abandoned their traditional role as small, local institutions to pursue profits in Spain's real estate boom, often with projects linked to regional politicians.

As part of the deal, shareholders and bond investors including retail clients will be forced to absorb losses, Almunia said. Preference shares will be swapped at an average of 61 percent of the nominal value and perpetual subordinated debt will be swapped at 54 percent, Bankia said.

The exercise, which is known as burden-sharing and also applies to the other bailed-out banks, will reduce the cost to the taxpayer by 10 billion euros, Almunia said. The losses on preference shares are controversial in Spain because they were marketed to depositors as safe, high-yielding investments.

Record Unemployment

The 6,000 planned Bankia job cuts, some of which will result from outsourcing rather than firings, come as Spain is already battling a record high unemployment rate of 26 percent, the highest in the EU. The economy remains in recession and the slump caused by the collapse of the real estate boom five years ago is likely to continue next year.

To help restore the financial industry, Spain is creating a so-called bad bank to lift toxic real estate assets off rescued lenders' books. Bankia will pass 25 billion euros of assets to the facility, for which Spain is still trying to find private investors.

That figure is part of total asset sales of 50 billion euros planned by 2015, which also includes selling 8 billion euros of securities portfolios and 17 billion euros of loans, Bankia said in a presentation today.

Bankia will return to profit next year and will aim for 1.2 billion euros of profit in 2015, Goirigolzarri said, adding the lender had every intention of returning state aid. The group estimates gross margin of 4.1 billion euros in 2015, about the same as this year, as it cuts operating costs by 25 percent.

'Best Shot'

"Are we going to reach the 1.2 billion euros? I'm going to give it my best shot," he said, adding that he and his managers were not being naïve about the scale of their task. "Are we going to do it? I don't know. If I did, I'd be a magician."

The Bankia group had assets of about 330 billion euros at the end of 2010. The plan presented today includes trimming gross loans to 125 billion euros in 2015 from 182 billion euros now, with corporate loans rising to 38 percent of the lending mix from 22 percent. Bankia will strip out the real estate loans that now make up 19 percent of lending, the bank said.

"The projections on costs are fairly easy to make because you know the cuts you need to make and that's all fairly easy to calculate," said Inigo Lecubarri, who helps manage about $400 million at Abaco Financials Fund in London. "Projecting the revenue part is very difficult because it's the most unstable and I would say the risks are to the downside."

Industrial Stakes

The bank will have four years to sell off industrial stakes, Director General Jose Sevilla told the news conference. The group will sell its bank in Miami and its 15 percent stake in insurer Mapfre SA (MAP), Goirigolzarri said.

Spain has pledged to sell Novagalicia Banco and Catalunya Banc within five years or wind them down. Banco de Valencia was bought by CaixaBank SA (CABK) for 1 euro yesterday.

Bankia's capital needs are 17.96 billion euros, including 4.5 billion euros already advanced by the Spanish state. Novagalicia Banco needs 5.43 billion euros, while Catalunya Banc needs 9.08 billion euros and Banco de Valencia 4.5 billion euros, the European Commission said.

Almunia said he plans to decide on restructuring plans for Liberbank SA, Banco Mare Nostrum SA, Banco Caja 3 and Ceiss on Dec. 20. He declined to say how much money those banks would need, adding it would be much lower than those announced today.

To contact the reporter on this story: Aoife White in Brussels at awhite62@bloomberg.net Charles Penty at cpenty@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net Frank Connelly at fconnelly@bloomberg.net