Spain: BMN merger to trigger sales as Rajoy returns

By:
Dominic O’Neill
Published on:

Bankia privatization looms; caja independence in doubt as IPOs lag.

Leo Alvear-600
Leopoldo Alvear, Bankia

Mariano Rajoy’s belated success in securing a fragile second term as Spain’s prime minister has brought hopes of increased financing activity in the country, which spent 10 months without a government. 

Bankers expect real estate transactions to gain traction as companies go ahead with moves to larger offices, more mid-sized domestic M&A deals, and infrastructure schemes getting better assurance over a new policy framework. 

International political risks, though, have replaced domestic ones, notes Ricardo Samaniego, co-head of Iberia corporate finance at Société Générale. 

Another banker in Madrid says a lot of companies were already fed up with waiting after the inconclusive 2015 election and started to prepare deals when it became clear that Rajoy would probably continue, though his party failed to secure a majority in the second election in June. 

Now the formation of a government puts Bankia, still 64% state-owned, at the top of the list of local investment bankers’ possible post-election equity capital market sales. Budget demands from Brussels as part of Spain’s long-standing excessive deficit procedure – and the commitment to return bailed-out banks to private hands – could spur a sale.

Delays

Since an initial sale of 7.5% of the bank in 2014, the prolonged political uncertainty has delayed a further sell-down of Bankia, Spain’s fourth biggest bank, which was formed in 2010 from seven troubled savings banks. Running up to the elections late last year, bankers say the government was hesitant about taking on the political risks of Bankia’s privatization. 

Luis de Guindos, the minister of economy who presided over the 2014 sale, has kept his position in the new government. 

The problem is, say bankers, that de Guindos and others in the government have repeatedly touted the chances of recouping Bankia’s €19 billion bail-out, even though its market valuation has fallen by 40% since 2014, in line with other European banks

Given the interest-margin challenges European banks are facing – particularly Bankia – it seems highly uncertain if the government will achieve a gain on its investment if it sells down in the medium term, despite the bank’s efficiency drive. Any attempted sale, moreover, could face obstacles in parliament, where Rajoy has only attained a majority through backing from the rival Ciudadanos party, and the grudging abstention of the socialists.

What might happen before a sell-down in Bankia, however, is a merger with another bailed-out but profitable lender: Banco Mare Nostrum, which previously targeted an IPO of its own. 

Spain’s state resolution fund for banks, FROB, said in late September it was engaging external advisers to see if a merger between Bankia and BMN might better enable it to recoup public funds.

If a merger went ahead and went well, synergies could improve Bankia’s valuation – which a gathering economic recovery could further boost.After the formation of the new Rajoy government, the hope is that businesses will be happier to proceed with investments and tap banks for more borrowing. 

At the same time, a merger with Bankia could cut BMN’s central operating expenses, while reducing its cost of funding, says Javier Bernat, Madrid-based analyst at GVC. 

Leopoldo Alvear, Bankia’s CFO, says “there is a fit” between BMN and Bankia as “savings banks were active in their regions of origin”, adding that Bankia does not have any branches in BMN’s regions of Murcia, Granada and the Balearic islands. “If FROB decides to recommend a merger, we will start looking at it on an independent basis, to see whether it makes sense for all our shareholders,” he says.

Merger pressure

If BMN is swallowed up, bankers think it will increase pressure to merge, too, at Ibercaja and Unicaja: other savings banks that have contingent convertible debts to the state and must rethink plans to list after the drop in European bank stocks. Some also call into doubt the viability of Liberbank as an independent institution, as its bad debt ratio remains higher than average. Its shares have roughly halved in the past year.

Bankers say an amalgamation of these smaller lenders is less likely than their takeover by bigger banks – and even Bankia could be an eventual target, though buyers might baulk at having the government as a shareholder and struggle to afford a cash deal. 

Although now quite efficient, the former savings-bank franchise of Bankia is relatively unattractive for bigger banks because of its heavy mortgage focus, as the big retail banks in Spain are instead building their small and medium-sized enterprise and consumer finance operations.

The state is therefore more likely to sell its shares in Bankia in blocks. If it needs cash, the government could alternatively sell down some of its 51% stake in the Spanish airports operator Aena, whose stock price has almost doubled since its €4.3 billion IPO in 2015. 

But, as one investment banker says, if the government has to sell down its Bankia shares, it might be easier to get away with the political cost of selling below the 2014 price earlier in Rajoy’s new mandate.