Bankia Announces Major Overhaul and Receives Eurozone Bank Rescue

on Nov 29, 2012

Bankia (SM:BKIA), Spain’s biggest bank to receive Eurozone bailout funds, said on Wednesday it is slashing more than 6,000 jobs and closing around 1,000 branches as part of a strategic overhaul. The bank’s stock plunged 9.34 percent to €0.9610 a share on the news. So far this year the group has lost 73 percent of its valuation.

**Bankia’s Deep Cuts**
The Madrid bank announced it expects a loss of €19 billion (£15.36 billion) this year, the biggest loss in the history of Spanish banking. The company hopes to swing back to profit next year after the planned cuts are implemented. In addition to the layoffs and branch closures, Bankia will also have to sell €50 billion (£40.37 billion) of its assets by 2015 and force losses on subordinated debt holders.

“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.”
According to the Financial Times, Bankia’s investors, many of whom are retail clients, would have to absorb losses of between 46 and 14 percent as part of the bank’s capital raising exercise. Holders of preferred shares would face a writedown of 39 percent, investors who own perpetual subordinated debt – 46 percent and those that own subordinated debt with a maturity date – 14 percent. This exercise, known as burden-sharing and already applied to other bailed-out banks, will reduce the cost to the taxpayer by €10 billion (£8.07 billion).

!m[Spanish Banks Are Expected to Shrink by More than Half After Their Bailout](/uploads/story/925/thumbs/pic1_inline.png)Bankia is also expected to sell its 12 percent stake in International Airline Group, the parent company of British Airways and Iberia after their merger in 2011. The share price of IAG has been rising recently, which means the bank might get some much-needed cash in the case of a quick sale. However, as it presented its strategic plan on Wednesday, Bankia remained silent on the matter of selling its share in IAG and simply stated it has given itself four years to sell its industrial stakes.

**Eurozone’s Bailout Funds**
The dramatic cuts announced by Bankia are a prerequisite for the bank to receive a total of €17.9 billion (£14.5 billion) in bailout funds from the Eurozone. On Wednesday European regulators confirmed they will be injecting €37 billion (£30 billion) into four nationalized banks in Spain. Apart from Bankia, the other three banks to be recapitalised are Catalunya Banc (€9.1 billion), NCG Banco (€5.4 billion) and Banco de Valencia (€4.5 billion). The Financial Times reported that Banco de Valencia will be bought out by Caixabank and will cease to exist as an independent bank, as it is impossible to be saved on a standalone basis.

The cuts are needed to ensure that the bailed-out banks use “no more than what is necessary of taxpayers’ money to restructure and do not go back to unsustainable business practices.” said Joaquin Almunia, EU Competition Commissioner.
A total of €100 billion (£80.7 billion) rescue funds have been set aside for Spanish banks, which took heavy losses after the real-estate bubble burst. According to the International Monetary Fund, the four banks expected to be recapitalised have credit portfolios equal to roughly 40 percent of Spain’s GDP, which means a rapid restructuring, hindering the availability of credit to business and households, could lead to further contractions in Spain’s economy.