Maribel Martinez, 51, was counting on income from the 82,000 euros ($99,810) of savings she invested in Bankia preferred shares two years ago after losing her job cooking meals for nuns in a Barcelona convent.
A 1,435-euro interest payment on the 7 percent securities failed to arrive in the family bank account on July 7, said her husband Paco Valiente. On June 1, the group suspended 52 million euros of payments to holders of 3 billion euros of preferred shares sold in 2009 by Caja Madrid, one of its founding savings banks, after the lender restated 2011 earnings to show a 3.3 billion-euro loss.
Missed payments may be the least of Martinez’s problems as the practice of selling preferred stock through branch networks, after debt markets dried up in 2009, comes back to haunt banks and their customers. Holders of preferred shares sold by rescued lenders such as Bankia risk losing part of their capital after European officials ruled they should absorb losses under the terms of Spain’s 100 billion-euro bank bailout.
“We invested in the preferred shares trusting in the good word of our branch manager, but our money has been effectively sequestered,” said Valiente, 51, who also lost his job last year. “What’s happening to our country now and people like us makes me scared about the economy and the future.”
The memorandum of understanding on the terms of the bailout requested by Spain on June 9 says Spanish authorities will “require burden sharing measures from hybrid capital holders and subordinated debt holders in banks receiving public capital” as part of efforts to minimize the cost to taxpayers of restructuring, according to a draft copy of the document distributed by Spain’s economy ministry.
As many as 686,296 retail investors held about 22.5 billion euros of preferred shares sold by banks as of May 2011, according to Spain’s stock market regulator, known as CNMV. Out of 73 issues since 1999, 23 were sold in 2009, including the Bankia (BKIA) securities bought by Martinez and Valiente, as lenders that year raised 11.4 billion euros from branch clients.
Preferred shareholders, unlike depositors, aren’t insured by the government against losses.
After banks including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) offered investors the chance to swap out of preferred shares into other securities, the amount outstanding is now 7.1 billion euros, CNMV said. Spanish lenders have 66 billion euros of outstanding subordinated and hybrid debt, according to Bank of Spain data.
NCG Banco, a lender based in La Coruna, Spain, that has 43,000 customers holding 961 million euros of preferred or other undated securities, today published an apology in Galician newspapers.
“We apologize for having sold preferreds among individual clients that didn’t have sufficient financial know-how, causing them such serious problems,” according to the apology, written in the Galician language and signed by Chairman Jose Maria Castellano and Chief Executive Officer Cesar Gonzalez-Bueno.
The government has responded to mounting customer outrage over losses linked to preferred shares by condemning the practice by at least 18 Spanish banks of selling the securities.
Banks “acted wrongly” on preferred shares, Prime Minister Mariano Rajoy told parliament on June 27. Economy Minister Luis de Guindos told a parliamentary committee on May 23 that the notes should never have been sold to retail customers.
The sale of higher-yielding securities to customers used to low-risk bank deposits has become a problem for the government as Spain seeks as much as 100 billion euros of European funds to bail out failed lenders such as Bankia, the country’s third- biggest bank nationalized last month after taking 23.5 billion euros of state support.
The prospectus for Bankia’s 2009 sale of preferred shares warned of the risk of losses for investors in the securities in “extreme” circumstances because they count as bank equity.
“Institutional investors are more than prepared for this, but it will be more of a shock for the retail investors,” said Michael Symonds, a financials credit analyst at Daiwa Capital Markets in London, referring to the risk that junior debt holders will be made to share the burden of absorbing losses at banks that take state aid. “It looks like the senior debt holders will be made whole and explaining that is also going to be a political problem.”
An official for Valencia, Spain-based Bankia declined to comment in a phone interview.
European Competition Commissioner Joaquin Almunia said June 26 that Spain’s government could use funds from its own budget to compensate retail holders of bailed-out banks’ preference shares.
The government is working on giving “trapped” retail clients a “way out through exchange deals into more liquid and less complex products and not only shares,” Rajoy said in Parliament on June 27.
Spanish banks said they have sought to help investors swap preferred shares for new securities, mostly other loss-absorbing instruments such as shares.
Santander, Spain’s biggest lender, has swapped more than 1.9 billion euros of preferred shares for new stock and BBVA has exchanged about 3.4 billion euros of the debt for bonds that automatically convert into shares. BBVA shares are down 21 percent this year.
Both carried out the exchange at the full nominal value of the preference shares.
Banco Mare Nostrum, based in Madrid, is seeking to swap its 932 million euros of preferred shares for four-year deposits paying as much as 2.65 percent, according to the CNMV.
“Banks used their depositors to rescue themselves when institutions shunned their debt since 2008,” said Fernando Herrero, the secretary general of ADICAE, a Madrid-based association of bank customers. “The exchange offering in most of the cases is like having to choose between having your head cut off or your arm.”
In February, the Bankia group announced an exchange of about 830 million euros of preferred shares held by its parent company for new stock in its listed Bankia SA unit. The exchange came weeks before the government nationalized the lender after a valuation showed the parent company had a negative value of 13.6 billion euros.
Shares of Bankia fell as much as 9.3 percent today, extending their decline since the exchange was announced on Feb. 10 to about 80 percent.
The sale of preferred shares by the savings banks including Caja Madrid that merged to form the Bankia group in 2010 forms part of a fraud probe into the lender and 33 board members including former Chairman Rodrigo Rato announced on July 4 by Fernando Andreu, a judge at the National Court in Madrid.
“Forcing losses on retail investors may have repercussions for the Spanish banks at a later stage, both by damaging their reputation and from the potential for litigation over mis- selling,” Carmen Munoz, a senior director at Fitch Ratings in Spain, said in a statement today. “The sale of subordinated debt and preference shares through banks’ branch networks has been common practices in Spain for some time.”
Anger at Bankia’s collapse and losses faced by holders of stock and preferred shares held by its retail customers erupted at the lender’s general shareholders’ meeting in Valencia on June 29. Jose Ignacio Goirigolzarri, the former second-in- command at BBVA who replaced Rato as Bankia’s chairman in May, told investors he “profoundly regretted” their losses.
He said investors who swapped out of preferred shares into Bankia stock in the exchange had suffered “significant losses.” While the bank had liaised with Spanish and European authorities to find a solution for preferred shareholders, its room for maneuver was limited, said Goirigolzarri.
“I ask you with all my heart that you try to give us back our money,” said Mercedes Martinez, a pensioner, who was one of more than 100 shareholders to speak at the meeting. “They told we who invested in preferred shares that they didn’t carry any risk and now we don’t have a single bloody penny left.”
“I speak on behalf of my mother who has 11,965 shares placed with her by force or at least through ignorance,” said Maria Carmen Jaen, another investor who spoke at the meeting. “She spoke to someone who she trusted and this person played on that, tricked her and sold her these preferred shares when my mother thought she was taking out a deposit.”
The banks have become victims of their strategy of raising funds from branch clients who will be more reluctant in future to buy their products, said John Raymond, an analyst at CreditSights Inc. in London.
“The branch networks work like armies that get instructions on the quota of the product they need to sell,” Juan Fernandez-Armesto, a former chairman of the CNMV, said in a phone interview. “The relationship of trust between the branch manager and his customers has now been severely undermined.”
To contact the reporters on this story: Charles Penty in Madrid at email@example.com; Esteban Duarte in Madrid at firstname.lastname@example.org
To contact the editor responsible for this story: Frank Connelly at email@example.com; Paul Armstrong at firstname.lastname@example.org