The European Commission unveiled Wednesday its conditions for the 37 billion injected into the most troubled banks in Spain. They are subject to a harsh medicine, their balance sheet being cut by 60% and their network by 50%. Moreover their activity is curtailed to retail banking, engaging into real estate financing being forbidden in future.
Yet the banking community is far from unhappy about this outcome. As 3 out of 4 entities will be sold to solvent banks, buyers will get a real bargain in the ensuing merger process. This industry has never been a loser and it intends to behave much the same in future.
Bankia is the only troubled bank to have a go on its own. Restructuring to be undertaken over the next three years will be firmly anchored by a massive real estate portfolio transfer to the public bad bank. A staggering €50 billion amount will accordingly disappear from its balance sheet, reducing it by one third. Half of this figure will simply evaporate in the air as transfer prices are set at much lower levels than the ones enshrined in the accounting books. The rest will be paid in debt issued by the bad bank.
Furthermore, Bankia will face heavy provisioning totalling €25 billion this year. No wonder it will indulge in heavy losses. Shareholders and subordinated debt owners will face extensive hair cuts reckoned to be as high as 60% of their investment. Taxpayers will have to foot the rest, up to €18 billion.
The worrying thing is that Bankia for all its restructuring efforts will be unable to increase its profitability in the coming years. Its gross margin will remain unchanged, even if its strategic plan foresees an unlikely surge in the credit to businesses area. Should we place ourselves in the more realistic scenario that the entity is bound to lose a sizeable market share, one fails to see how it will manage keeping its margins unscathed. Furthermore, bad loans will trigger higher provisioning than expected. An awfully omen for its future profit record.
Spain has implemented a far reaching clean up of real estate risk in its banking sector, paying a hefty ransom for it. But in pursuing the goal to preserve Bankia as an independent bank it may lose a lot more money in a high risk gamble. The restructuring plan amounts to an attempt to lure markets in believing the worst is over. But no one will be fooled by such rosy promises. Bankia will remain a lame duck for years to come.