The Bankia group, the lender Spain nationalized this month, will seek 19 billion euros ($23.8 billion) of state funds, as it set aside provisions for residential mortgages and lending to companies.
The group took provisions of 5.5 billion euros for non-real estate lending after stress-testing the loans, including 2.2 billion euros to individuals, most of which is residential mortgages, Director General Jose Sevilla told reporters in Madrid today. It also reclassified 300 million euros of lending, that had been booked as loans to small and medium-sized companies, as lending to property developers, Chairman Jose Ignacio Goirigolzarri said.
The unraveling of Bankia has deepened concern about the health of Spain’s banks and the burden the industry risks placing on public finances. The 19 billion-euro bailout for Bankia (BKIA) already exceeds Economy Minister Luis de Guindos’s estimate two weeks ago that 15 billion euros of state funds would be enough for the whole industry.
“Bankia is the tip of an iceberg as we’ve been saying all along,” Tobias Blattner, an economist at Daiwa Capital Markets in London, said in a phone interview yesterday. “It’s a very large institution, it’s systemically important and it needs to be dealt with properly.”
Spain is seeking to bolster its banks and shore up cash- strapped regional governments as its own access to markets has narrowed and its 10-year borrowing costs approach the 7 percent level that prompted bailouts in other euro nations. Spain’s bank-rescue fund has 5 billion euros in cash, de Guindos said on May 11, meaning the state-backed agency will have to tap markets in order to finance the bailout.
The Spanish government, which has tightened provisioning rules twice since coming to power in December, has focused its cleanup efforts on lending to real estate companies. Bankia’s decision to provision for residential mortgages goes beyond those rules and comes as the economy ministry and lenders including Banco Santander SA (SAN) say those loans aren’t a problem.
“Mortgages get paid in good times and in bad,” Santander Chief Executive Officer Alfredo Saenz said on April 27. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
Bankia based the new provisions on an assumption that mortgage defaults would rise to 8 percent to 10 percent, compared with the current sector-wide rate of less than 3 percent. Sevilla said that assumption made the bank “calm” and gave it a good margin to cope with future deterioration.
Bankia also increased provisions for lending to non-real estate companies by an additional 3.3 billion euros, the presentation showed. De Guindos told parliament on May 23 that Bankia is a “specific case,” without any read-across for the rest of the industry. Goirigolzarri echoed that view today.
The nationalization of the Bankia group, which comes on top of a 4.5 billion-euro bailout in 2010, has helped increase Spain’s financing costs as it struggles with the debt crisis. The yield on Spain’s 10-year benchmark bond climbed to 6.31 percent yesterday from 5.73 percent on May 7, the day former Chairman Rodrigo Rato announced his resignation.
Bankia, the commercial banking unit of the group that listed on the stock market in July, said yesterday its restated loss for 2011 was 2.98 billion euros. Shares in the lender, which has a new board after the former directors collectively resigned, have lost 58 percent since the initial public offering.
In a second phase of the restructuring plan, the listed Bankia unit will carry out a rights offer for about 12 billion euros. The 19 billion euros being requested from the government includes the cost of the rights issue, even if no minority investors take part, Goirigolzarri told reporters today.
The Bankia group will have a so-called principal capital ratio, a measure of financial strength, of 9.8 percent and a ratio of provisions to real-estate assets of 48.9 percent after the cleanup, it said.
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