Bankia's potential black hole

Despite having got its €3 billion IPO away in the teeth of July’s sovereign debt panic Spanish lender Bankia could now be faced with having to raise a substantial percentage of this total again as the true extent of bad real estate lending at the merged entity is exposed.

Shares in subsidiary Banco de Valencia were suspended from trading in Madrid on Monday Nov 7 after the extent of its troubled real estate exposure became apparent. Banco de Valencia has extended €3.1 billion loans to the sector a full 74% of which are now likely to default.

Bankia owns 39.3% of Banco de Valencia – a stake that it has been anxious to offload since it inherited it via Bancaja as part of the seven-bank merger that created the bank earlier this year. Bankia has the option to raise a further €60 million capital but this will fall far short of its needs now that the extent of the hole at Banco de Valencia has come to light.

Intervention from Spain’s Fund for Orderly Bank Restructuring (FROB) seems inevitable, but sources in Madrid suggest that the problem is of such magnitude that Bankia itself could now be a merger candidate again. If, as anticipated, the right-wing Partido Popular wins Spain’s general election on November 20, the new administration is expected to tackle restructuring of the banking sector as a priority. This could see it lean on the likes of Banco Santander or BBVA to take over the troubled lender.