Spain's efforts to recapitalize its banking system revisited

Previously this blog has discussed that in the absence of asset-level data, Spanish banks, in particular the cajas, are going to have trouble raising capital.

Seven cajas merged and are trying to raise capital through an IPO.  A Wall Street Journal article calls this the make-or-break moment for raising private equity to recapitalize the cajas.

The initial public offering of Bankia, Spain's third-largest bank by assets, is shaping up as a make-or-break moment for the country's efforts to overhaul its savings banks as well as a key vote of confidence in Spain itself.

... Bankia has suffered billions in losses on real-estate loans and is by some measures one of Europe's weakest banks. If the IPO fails and Spain is forced to bail out its banking system, the risk the country would itself need a bailout would grow. 

... It would be hard enough to get investors to put cash into Bankia in the best of times. But with Greece needing another bailout and Ireland having accepted a bailout after its banking sector collapsed, the challenge is even harder. "The situation in Europe is what affects Spain the most now," Mr. Rato said. "This situation must be cleared up." 

"The Irish crisis changed everything," he said. 

The IPO is so important to Spain that it is regularly referred to in financial circles as a cuestion de estado, an affair of state, which makes it fitting a former finance minister is leading it. 

"Bankia is a reference for the market. If Bankia's IPO has problems, it would make it difficult for other savings banks to list," said Daragh Quinn, a bank analyst with Nomura International. Savings banks hold about half of all Spain's deposits and loans, but their lending decisions were often influenced by politics, leading to big losses when the country's real-estate bubble burst. 

... Mr. Rato ... led Bankia through a complex merger of seven savings banks, a process he describes as "the biggest restructuring in Spanish banking history, and one of the largest in Europe." 

Bankia also set aside €9.2 billion ($13.4 billion) in December to cover loan losses, wrote down the value of its real-estate holdings and took a €1.4 billion charge to cover restructuring costs. It now has some €275 billion in assets, 11 million clients and an extensive branch network across Spain.  

Still, Bankia needs to bolster its capital. Last year's European stress tests showed that the lender would rack up the biggest loan losses on the Continent —€17.6 billion—if conditions worsened drastically.

Remember, this set of stress tests was immediately discredited because it showed that the banks in Ireland were adequately capitalized.

And, in February, Bankia borrowed more from the European Central Bank than any other Spanish lender, accounting for 23% of total Spanish borrowing, according to the latest data from the Spanish savings-bank association and the Bank of Spain. 

Bankia plans to use the IPO proceeds to boost its core capital ratio—a key solvency measure—to more than 9.5%, from 7.8% at present. Mr. Rato said that would allow an upgrade in Bankia's credit rating and, as a result, cut its financing costs. 

"It was clear that the Spanish banking system was heading for restructuring, but…I think the past 12 months have been much more intense than anybody could have foreseen," Mr. Rato said in an interview in his office on the 23rd floor of Bankia's Madrid headquarters. 

... Analysts note that, with no track record to fall back on, Bankia will require a leap of faith from investors.

Several months ago, this blog predicted that it would be very difficult for Spanish cajas, like Bankia, to raise equity from private investors without disclosing their asset-level data. There is no reason for investors to take a leap of faith when they do not have the information they need to determine if Bankia is solvent today (the market value of its assets exceeds the book value of its liabilities).

As Mr. Rato pointed out, the Irish crisis changed everything.  One of the things that changed was relying on bank management and the regulators for valuing the bank's assets.  Those investors who invested in the Irish banks after the stress tests lost their investment.  Where is the asset-level data to show that Bankia is any different?

Rating-agency Standard & Poor's didn't count the effects of a potential IPO when it gave the institution an A-minus credit rating May 30. "We didn't include it because it's a difficult process," said S&P credit analyst Elena Iparraguirre. "The bank must convince investors that the project is realistic and that the management team will be able to carry it out." 

And though Bankia is aiming to sell shares by mid-July, Mr. Rato makes it clear this time line will change if market conditions worsen. Bankia is so big, analysts expect the government to step in if the IPO fails.