IFR Editor-at-large Keith Mullin
I STILL CAN’T believe that the four dud Spanish banks Bankia, NovaCaixaGalicia, Catalunya Banc and Banco de Valencia are being bailed out to the tune of €67bn of state aid (in gross terms) via the ESM credit line to FROB. I know the saga has been going on for a considerable amount of time, but I still found the magnitude of the final numbers unveiled by the European Commission astounding.
Even more perverse, there’s talk that the dud of all duds Bankia, considered too big to fail by the government, could eventually be sold via a privatisation IPO once it’s been cleaned up. After the previous €3.1bn flotation, I find it astonishing not only that no-one’s been whacked yet with fraud or dishonesty for that trade, but also that the bank should be allowed to disgrace the equity capital markets once again.
The criminal fraud case brought in July against 33 former bank officials – including former IMF supremo Rodrigo Rato – doesn’t appear to have gone anywhere. At the time, the banks running the trade were asked to hand over files relating to the deal. Those watching events reckon the case will be a slow burn, but the results could be explosive.
The global co-ordinators of arguably the most scandalous IPO of recent years should certainly be barred from handling any future business with the bank, at least during the restructuring period. And I still argue that they should hand back their fees.
THE EC SAYS the restructuring plans of the banks – reckless, out-of-control lenders forced into crazy shotgun marriages by the clueless previous government – will allow them to become viable in the long-term without continued state support.
Well, Banco de Valencia was flogged to CaixaBank for €1 with generous first-loss state guarantees, so won’t exist for much longer. But that hardly eases the pain of a series of state bailouts that should never have been allowed to happen.
Huge chunks of the banks will be nuked to assure their long-term viability, while hybrid debt holders will be written down and forced to absorb around €10bn of losses.
Retail holders of Bankia hybrid instruments – who still claim vociferously they were misled into buying risky securities they didn’t understand – could be on the hook for €6.5bn at group level. They’re being written down to an average price of 54 for perpetual subordinated debt, 61 for preferred stock and 86 for dated subordinated debt.
I wonder why the government is continuing with the charade of keeping the banks afloat
All that talk of minimising losses because of the circumstances in which the securities were sold clearly came to nothing. In a straight toss-up between hammering (greedy?) retail investors or taxpayers, the latter won. I don’t think there was really any other reasonable outcome.
At group level, even after hybrid holders have been written down and taking into account the €4.5bn FROB had already transferred in September, BFA-Bankia is still left with a gap of €13.5bn against Oliver Wyman’s baseline adverse scenario capital shortfall of €24.7bn.
YOU WONDER WHAT’S going to be left of the banks at the end of the five-year restructuring period. Think about it: by this time in 2017, the balance sheets of the banks will have to have been slashed by over 60% relative to 2010 levels.
They’ll be forced to stick to retail/consumer business and SME lending, and their focus will have to be the regions from which they originated. They’ll be forced out of doing business with real estate developers and will be “persuaded” to avoid tapping wholesale markets and central bank funding. Oh, and taxpayers will own €45bn of their toxic crap that’s being transferred to the government bad bank Sareb.
Once the hybrids have been written down and assets transferred to Sareb, the capital shortfall of the banks to meet statutory solvency requirements will be reduced to “just” €37bn.
You can understand why the government is imposing so many intensely restrictive practices, but at the same time I wonder why the government is continuing with the charade of keeping the banks afloat. It is committed to selling NCG and Catalunya Banc early: the sale of the latter is already underway and it will be first on the block early in 2013.
Exactly what bidders – expected to be restricted to Spanish banks looking to add regional branches and build market share – will be buying is a bit of a conundrum. If no-one wants to buy them, the government will close them. I say do it now.
In the meantime, investment banks are likely to benefit from the forced sales out of the banks of their substantial industrial holdings and subsidiaries. Bankia will dump €50bn worth of assets and businesses. Some of the banks’ industrial holdings, including stakes in International Airlines Group, Telefonica, Iberdrola and Mapfre, are likely to hold some value. The forced sale of Bankia and Catalunya Banc’s trading/treasury fixed-income positions, on the other hand, will likely get low-ball bids.
Net-net, this whole saga is a farce. Greed and recklessness have won and the government is adding insult to injury by making political capital out of it: running the banks as political footballs with someone else’s money. Cute.
