Bankia

PLEASE SEE IMPORTANT DISCLOSURES ON THE LAST THREE PAGES OF THIS REPORT

Credit Views

London

London, 29 November 2012

Market Analysis

Credit

Global Credit

Head of Global Credit Research

Javier Serna

[email protected]

+44 207 648 7581

Europe

Head of European Credit Research

& Covered Bonds

Agustín Martín

[email protected]

+44 207 397 6087

Guilherme Balieiro

[email protected]

+44 207 397 6075

Financials

David Golin *

[email protected]

+44 207 648 7501

Antonio Vilela *

[email protected]

+44 207 648 7682

Corporates

Ana Greco

[email protected]

+44 207 648 7669

Sabrina Ran

[email protected]

+44 207 397 6082

Public Sector

Mercedes Ferrer

[email protected]

+44 207 648 7655

* Author/s of this report

BFA-Bankia offers a benign exit option

to subordinated bondholders • The EC has approved the restructuring plans of the four nationalised

entities

The initial EUR47bn identified by Oliver Wyman has been reduced to EUR37bn due to capital

management actions. BFA-Bankia will receive EUR18bn, NCG Banco EUR5.4bn, Catalunya

Banc EUR9bn and Banco de Valencia EUR4.5bn.

• Following the announcement by the EC, Bankia unveiled its updated

strategic plan

The group aims to be profitable from 2013 and expects to report a net profit of EUR1.2bn in

2015. Pre-provision income should stand at EUR4.1bn and RoE at 10%. The number of

branches will be downsized by 39% to c. 2,000 and headcount by 28% to c. 14,500.

• The BFA-Group’s recapitalisation stands at EUR18bn and will be carried out

by mid-December 2012

During the call management stated that BFA will be recapitalised by means of ESM bonds.

However, there is still uncertainty on both the timing and on in which form Bankia will receive

capital from its holding company.

• BFA-Bankia group has disclosed the losses to be imposed on subordinated

bondholders

Subordinated bondholders will receive a generous exit offer. Tier 1 debt will be swapped into

Bankia shares at 61% of par value and Upper Tier 2 at 54%. For LT2 bonds, the group’s

restructuring could permit the exchange into shares at 84% or into a senior BFA zero coupon

bond.

• An important step towards the resolution of the Spanish banking crisis, in

our view

Bear in mind that the largest capital shortfall of the domestic banking system is related to

BFA-Bankia group. Its imminent recapitalisation and restructuring, with most of its problematic

real-estate assets transferred to the bad bank should ensure its solvency and viability. This

should boost confidence in the rest of the sector, in our view.

Credit Views London, 29 November 2012


Page 2

The EC approves the restructuring plans

of the four nationalised Spanish banks The EC has just approved the recapitalisation plans for the four nationalised banks, BFA-Bankia,

NCG, Catalunya Banc and Banco de Valencia (BdV). The disbursement of capital by the ESM to

the FROB will take place in the first half of December. Subsequently, the FROB will inject the

capital into the banks once the necessary corporate operations have been completed.

It is important to highlight that although OW identified a capital shortfall of EUR47bn in these four

entities, the capital needs of the entities will be reduced by the transfer of real estate assets to the

SAREB, the assumption of losses by the subordinated bondholders and restructuring measures

(asset disposals). This will reduce the capital needs of the four entities by EUR10bn to EUR37bn, of

which EUR18bn for BFA-Bankia, EUR5.4bn for NCG, EUR9bn for Catalunya Banc and EUR4.5bn for

BdV.

According to the restructuring plans, by 2017 the balance sheet of each bank will be reduced by

more than 60% compared to 2010. In particular, the banks will refocus their business models on

retail and SME lending in their historical core regions.

Finally it is important to note that if NCG Banco and Catalunya Banc are not sold before 2017, the

entities will be liquidated (orderly resolution plan). This does not apply to BFA-Bankia as it is a

systemic institution. Also, during the call Mr Almunia clearly stated that the liquidation of BdV

would have been more expensive than selling it to CaixaBank despite the support provided for

the transaction.

The EC will disclose the capital requirements for the Group 2 banks, (CEISS, BMN, Caja3 and

Liberbank) on 20 December.

Bankia unveiled its new strategic plan following the EC

announcement

Following the announcement of the European Commission’s approval of the restructuring plans

of the four nationalised banks, Bankia updated its 2012-2015 strategic plan. The key elements of

this plan are set out below:

• A EUR17,959mn injection of state aid (including the EUR4,500mn already injected).

• The group aims to be profitable starting 2013 and to report a net profit of EUR1.2bn in 2015.

• The bank is targeting new lending for c. EUR52bn up to 2015, of which 84% to corporates.

• Divestment of non-core businesses and non-core strategic assets.

• The number of branches should be downsized by 39% (from 3,117 to c. 1,900-2,000) and

headcount by 28% (from 20,589 to 14,500).

• Operating expenses should decline by 26% to EUR1.8bn. The group’s cost-to-income ratio

should therefore stand at c. 40-45% by 2015.

• Average total assets should decline by 20%, pre-provision income should stand at

c.EUR4,100mn.

• RoE of 10%.

• Excess capital above the 9% core Tier 1 target (EBA) of EUR4.5bn. The group’s risk-weighted

assets should contract from EUR166bn to EUR112bn.



Page 3

Mostly developer lending to be transferred to SAREB

As at June 2012, the group had EUR57.2bn of commercial real-estate risk (EUR15.9bn real-estate

assets and EUR41.3bn developer loans). After applying the discount to the transfer price to SAREB

(around 49%), this exposure will have a net value of EUR29.3bn, of which EUR24.6bn will comply

with the eligibility criteria to be transferred to the SAREB. The remaining exposure of EUR4.7bn on

Bankia’s books is therefore negligible.

Figure 1

Reduction of real estate risk after transfer to SAREB (EUR bn)

Total gross

real estate risk

(Data as of 30 June)

Net real estate risk

after discount on

transfer to SAREB

Net real estate risk

on the balance sheet

after transfer to SAREB

Real Estate

Developer

41.3

Real Estate

Assets

15.9Discount due

to transfer

price to

SAREB

27.9

57.2

29.3

Assets

transferred

to SAREB

24.6

4.7

Source: BFA Group data

Following the transfer Following the transfer Following the transfer Following the transfer of of of of assets to the bad bank, Bankia’s EUR144.6bn loan portfolio at the assets to the bad bank, Bankia’s EUR144.6bn loan portfolio at the assets to the bad bank, Bankia’s EUR144.6bn loan portfolio at the assets to the bad bank, Bankia’s EUR144.6bn loan portfolio at the

enenenend of 2012 will be mainly retaild of 2012 will be mainly retaild of 2012 will be mainly retaild of 2012 will be mainly retail----focused (62%). Corporates should represent 33% and realfocused (62%). Corporates should represent 33% and realfocused (62%). Corporates should represent 33% and realfocused (62%). Corporates should represent 33% and real----

estate estate estate estate developdevelopdevelopdevelopers will just represent justers will just represent justers will just represent justers will just represent just 2%. 2%. 2%. 2%.

Update on the liquidity profile

The BFA-Bankia group has disclosed that it has EUR45.3bn of debt maturities, of which EUR32.8bn

by 2017. According to the entity, liquid assets stood at EUR12.2bn in October 2012, but taking into

account the capital increase (EUR13.5bn as EUR4.5bn has been already injected) and the

EUR24.6bn government-guaranteed debt issued by SAREB in exchange for assets transferred,

liquid assets will increase to EUR40.3bn. This figure also takes into consideration the EUR10bn

reduction in liquid assets due to the fact that Bankia’s eligible OC would be below 25% as a

consequence of transfer of assets to SAREB. Therefore the issuer will be requested to amortize

retained covered bonds.

Liquid assets will thus cover 89% of the debt maturities or 120% of debt maturities up to 2017.

The entity has a LTD ratio of 164% in June 2012, which should decrease to 143% at the end of

2012e after transferring the real estate assets to SAREB. The group has a target LTD ratio of 120%

in 2015.



Page 4

As regards the group’s reliance on the ECB and its exit strategy, the entity has stated that this

money is currently funding its bond portfolio and the exposure will decline as government

securities mature.

Figure 2

Impact of recapitalisation plan on BFA Group’s liquidity

Liquid assets (October) 12.2 Covered bonds (roll-over capacity) 30.5

SAREB bonds 24.6 Rest of maturities 14.8

Impact of transfer to SAREB on covered bonds (10.0) Total BFA Group maturities 45.3

Capital injection, BFA Group (net)* 13.5 Of which, maturing before end 2017 32.8

Total liquid assets 40.3

Liquid assets – Dec 2012e (EUR bn) Wholesale maturities

* Net of the €4.5 bn already injected Source: BFA Group data

The recapitalisation will amount to EUR18bn, less than OW’s EUR24.7bn

Oliver Wyman initially estimated a capital shortfall for BFA-Bankia group of EUR24.7bn. The

injection of public aid to be made in December 2012 stands at EUR18bn. As can be seen in Figure

3 below, this is the result of the EUR200mn capital relief derived from the transfer of assets to the

bad bank and the benefit of EUR6.5bn which will come from the liability management transaction.

The EUR4.5bn already injected in September 2012 (after the severe losses that the group

experienced in 1H12 following which the group had to be recapitalised as its capital fell below the

minimum regulatory level) also has to be deducted from the original EUR24.7bn.

During the call the management stated the BFA will be recapitalised in the form of ESM bonds

and before the end of the year. However nothing was said about the type of instrument that will

be utilised to recapitalise Bankia, or the timing.

Figure 3

Group recapitalisation – determination of final capital needs (EUR bn)

BFA Group capital needs – Oliver Wyman adverse scenario 24.7

-/+ Impact on capital needs due -/+ to transfer of assets to SAREB -0.2

-/+ Hybrid instruments -6.5

Capital to be contributed by shareholders 18.0

Of which, injected in September 2012 4.5

Source: BFA Group data

Losses imposed on subordinated bondholders are

less than expected

Subordinated bondholders will receive a generous exit offer, Tier 1 debt will be swapped into

Bankia shares at 61% of par value, and Upper Tier 2 at 54%. LT2 bonds can be either swapped into

shares at a 14% discount or into senior BFA zero coupon bonds with a discount of 1.5% per month

until the maturity date of the LT2 security. In our view, given the discount rate, the second option

would be applied only to low duration BFA bonds.

The process for assessing the haircut to applied to each security is as follows: the economic value

will be determined by discounting a bond’s cash flow by using a discount rate of 20% for Tier 1

securities, (15% UT2 and 10% LT2). 10 points have then been added to the economic value, being

the maximum premium allowed by the Memorandum of Understanding and a further 20 points

as equity will be given instead of cash.



Page 5

This method of calculating the terms of the exchange explains why subordination rights appear

not to have been respected given that the haircut applied to UT2 is higher than applied to the

preference shares. We are in touch with the issuer on this and will pass on any further information

provided.

We have to acknowledge that haircuts applied to hybrids and subordinated debt are less than

either our estimates or those implied by market levels. Management has said that the timing of

the exchange has not been decided yet. In particular, at this stage it is still uncertain if it will be

implemented before or after the recapitalisation.

However, during the conference call, Bankia’s management stated that the dilution risk deriving

from the issue of new shares has already been taken into consideration when the terms of the

exchange were set.

From our conversation with management, we understood that the liability management will be

initially implemented on a voluntary basis. However we recall that according to the

Memorandum of Understanding “steps will be taken to minimise the cost to taxpayers of bank

restructuring. After allocating losses to equity holders, the Spanish authorities will require burden

sharing measures from hybrid capital holders and subordinated debt holders in banks receiving

public capital, including by implementing both voluntary and, where necessary, mandatory

Subordinated Liability Exercises (SLEs). Banks not in need of State aid will be outside the scope of

any mandatory burden sharing exercise. The Banco de España, in liaison with the European

Commission and the EBA, will monitor any operations converting hybrid and subordinated

instruments into senior debt or equity”.

The risk here is therefore that a subsequent mandatory liability management exercise could

follow the initial voluntary one. That said, we expect the participation rate in the voluntary

exercise to be substantial. The distinction here between voluntary or mandatory exchange offer is

important as the second is a restricting credit event and therefore triggers CDS contracts.



Page 6

Market & Client Strategy Director

Antonio Pulido

[email protected]

+34 91 374 31 81

Global Credit Head of Global Credit Research

Javier Serna

[email protected]

+44 207 648 7581

Credit Europe Head of European Credit

Research & Covered Bonds

Agustín Martín

[email protected] +44 207 397 6087 Guilherme Balieiro [email protected] +44 207 397 6075

Financials

David Golin [email protected] +44 207 648 7501

Antonio Vilela [email protected] +44 207 648 7682

Corporates Ana Greco [email protected] +44 207 648 7669

Sabrina Ran [email protected] +44 207 397 6082

Public Sector

Mercedes Ferrer

[email protected] +44 207 648 7655

Americas

New York

Jose Bernal

[email protected]

+1 212 728 1561

Mexico

Edgar Cruz

[email protected]

+52 55 5621 9774


Page 7

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Page 8

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Page 9

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Bankia