October 1, 2020

The State loses control of Bankia in the merger with CaixaBank and paves its future exit without recovering the aid


The Government begins the new political course with many open fronts: budgets, negotiating table in Catalonia, renewal of the powers of the State … and the merger of Bankia and CaixaBank. At the moment only the beginning of negotiations is known that could culminate in a union to build the largest financial institution in Spain, but this fact has already caused an earthquake, also among the members of the Executive. And among all the issues that appear on the table of the State, Bankia’s largest shareholder, a question arises: control 60% of the fourth Spanish bank or own 14% – shareholders that the FROB would retain – of the largest financial group Spanish and tenth in Europe.

Sánchez assures that only Economía knew of the negotiation between Bankia and CaixaBank for "protect confidentiality" of process

Sánchez assures that only Economía knew of the negotiation between Bankia and CaixaBank to “protect the confidentiality” of the process

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In other words, choosing between controlling a medium-sized financial institution or being the second shareholder, behind the La Caixa Foundation, in a large bank. The President of the Government, Pedro Sánchez, defended the operation on Monday despite the fact that the participation of the State would be curtailed, understanding that it improves “territorial cohesion”, moves towards a “healthier” sector and “maximizes” the value of the shares of the FROB, present in the entity since the rescue in 2012.

Although the economic value, taking the listing on the stock market as a reference, is the same –60% of a group with a capitalization of 4,200 million or 14% of an entity valued at around 16,300 million–, if the operation is completed there would be different repercussions. The first is that the debate to create a public bank in Spain using Bankia, as requested by United We, a partner of the PSOE in the Government, ends. Sánchez once again settled the matter by limiting the presence of the public sector in financial activity at the Official Credit Institute.

The economist Miguel Carrión It adds that with this operation the State loses a power, that of control of an entity to be able to carry out public banking policies, which it never really exercised. “Having control of the shareholders has not meant anything,” he says. Carrión understands that although he has been in the United We Can program, the “why” of having a public bank has never been specified in Spain, a proposal that was not in the coalition government’s program either. The voice of the State in the new group, Carrión points out, would be restricted even if it had “one or two” representatives on the board of directors.

Ignacio Muro, from Economists Facing the Crisis, considers that Bankia has been managed without taking into account the “social value” that the participation of the State could have contributed, since it was controlled by the FROB, whose objective is divestment and not by SEPI or any other mechanism. there has been a public logic “in Bankia, emphasizes the economist. However, it argues that if the negotiation for the merger is carried out with the State demanding certain “conditions”, it can maintain a political weight in the decision-making of the resulting entity.

No control but higher share value

Assuming that the State would thus lose control over one of the main financial entities in the country, it remains to be addressed whether, despite the shareholding of the new entity being diluted into a secondary position, the FROB can revalue its participation. Carrión considers that the shares in Bankia were being “burdened” by being a rescued bank and that, therefore, they could be revalued with this operation. In addition, it understands that if the agreement were made based on the book value of both entities, their participation could reach 21%, compared to the 14% that is given as a reference based on the market capitalization of both groups. “The government is interested in making it as high as possible,” he says.

Muro adds that Bankia has, in turn, been dragged down by a banking sector that fails to attract investors. “Banks are falling in capitalization because they do not see a future for this business,” he points out. In addition, it points out that the rescued entity has shown worse performance on the stock market than other competitors and points to its president, José Ignacio Goirigolzarri, as responsible: “It has not been well managed.”

The State rescued an entity with 24,000 million euros, of which it has barely recovered just over 3,000 million. Therefore, it is looked at with a magnifying glass how much it can capture in the future with its participation in the new group that arises from this operation. Juan Abellán, professor at the EAE Business School, considers that the State gains from the operation because “it changes its shares in Bankia for those of a larger group with higher returns”, which would be boosted if the trend in the financial sector improves. “That is more advantageous than trying to continue at Bankia,” he argues.

Carrión understands that depending on how the negotiation is managed, the State could recover “a part” of the aid that the State injected into Bankia. Muro, from Economists Facing the Crisis, has more doubts and considers that “if the new society is healthier”, the State may have “capital gains” for its participation, but that this will depend on the future of the sector, which still lacks for facing turbulence caused by the coronavirus.

Today, experts do not contemplate a 100% recovery, with some banks weighed down on the stock market even before the pandemic. “You can recover a part, but the whole is very complicated”, underlines Fernando Rojas, partner of Analistas Financieros Internacionales (AFI). Rojas argues that the operation is “positive” and improves the value of the State’s participation by going to participate in a “more solvent and profitable” entity. “The operation suggests that their participation may have more value,” he says. “The market has understood that together Bankia and CaixaBank are worth more than separately, it sees it with very good eyes,” he assures in reference to the response that the Stock Exchange has given to the announcement of the negotiations, with strong increases by both banks.

Moody’s does not see a stronger institution “immediately”

Experts agree on this idea, although this Monday the rating agency Moody’s cooled down this expectation: “the agreement may not immediately create a stronger institution.” Specifically, it points out that the efficiency gains and the costs of restructuring (branch closures and layoffs of workers) would mean that the benefits of the operation were not immediate.

Once the loss of power is assumed, which was never exercised, but the improvement in the stock market valuation of the participation, the next derivative that the experts see is that the way is paved for the State if it decides to sell its participation in the future. As it is a more healthy and profitable entity, according to analysts, the value of the share will be boosted. In addition, it is considered that since it is not a position of control in the shareholders, the Government can see more facilities and interested parties to buy, even in parts, their participation. “It is easier to place 14% of one bank than 60% of another,” considers economist Miguel Carrión, an idea shared by other analysts.

However, they agree that “it will be an equally slow divestment”, as Carrión points out and that for the moment it will continue to form part of the capital of the new entity, if the operation comes to fruition. The State is committed to Europe from the rescue of Bankia to leaving its shareholding. However, the complication to be able to sell without millionaire losses has been delaying the final date of his departure. “It will be politically compromised,” acknowledges the economist. “Selling now would be frowned upon,” emphasizes EAE professor Juan Abellán. However, it understands that the new bank model, where the State would no longer be the main shareholder, would less inconvenience the ECB and would give the Government a “stronger position” to be able to negotiate future extensions of its divestment.

If the operation is confirmed, the State will star in what will be “the starting gun” of a new process of bank concentrations in Spain, according to AFI’s Rojas. “The supervisor (ECB) has already highlighted that to be profitable, you have to come together,” he concludes.

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