Spanish banks get bailed out, but bank employees and shareholders will lose out

November 28, 2012
Obsession
Euro Crunch
November 28, 2012

The European Commission gave the green light today to pump about €40 billion ($51.9 billion) into Spain’s nationalized banks in a bid to end the troubled economy’s banking crisis. Bankia, NCG Banco, and Catalunya Banc will be recapitalized, while Banco de Valencia will cease to exist as a stand-alone bank and be sold and integrated into CaixaBank. EU Competition Commissioner Joaquín Almunia in a statement said:

Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future. We also make sure that banks use no more than what is necessary of taxpayers’ money to restructure and do not go back to unsustainable business practices. Restoring a healthier financial sector capable of financing the real economy is indispensable for economic recovery in Spain.

By 2017, Bankia, NCG Banco, and Catalunya Banc are each expected to reduce their balance sheets by more than 60% compared to 2010. Banks are being forced to refocus their business models on retail and small business lending in their “historical core regions,” stop lending to real estate developers, and limit their wholesale business. The idea is to reinforce capital and liquidity positions and reduce their reliance on wholesale and central bank funding.

The approval unlocks up to  €100 billion in a permanent euro zone bailout fund that could turn things around for Spain, which has been teetering on the edge of requesting a full sovereign bailout for months. The country has been in trouble ever since the real estate bubble burst in 2008.

What may be good news for the long-term viability of the Spanish banking sector, is bad news for Spanish banking employees and shareholders. Bankia announced today its goal to return to profitability by next year. The aggressive plan involves slashing some 6,000 jobs from its more than 20,000-person staff, reducing its bank branches by 39%, and disposing of €50 billion in assets to achieve a net profit of €1.2 billion in 2015. Dividend payments are off the table until 2014.

Preferred shareholders and other subordinated debt holders from all of the banks being bailed out will absorb losses and share in some of the restructuring costs. These contributions are estimated to reduce Spanish government support by about €10 billion euros.

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