Spanish banks receiving EC aid will have to cut balance sheets by over 60 percent

The European Commission will require Spanish banks receiving European funds to recapitalize to slim down their operations by more than 60 percent by 2017, the EC said Wednesday.

The European Union commissioner for competition, Spaniard Joaquín Almunia, said the restructuring was essential to ensure the long-term viability of the banks in question, which are BFA/Bankia, NCG Banco, Catalunya Banc and Banco de Valencia. In return they will receive 37 billion euros to recapitalize from Brussels as part of a memorandum of understanding the EC signed with the government of Prime Minister Mariano Rajoy in July.

The banks will transfer 45 billion euros of toxic assets, largely derived from their exposure to the moribund real estate sector, to the asset management corporation (Sareb) at an average discount to their book value of 63 percent. As a result, the capital needs of Bankia/BFA will be reduced to 17.96 billion euros, Catalunya Banc’s to 9.08 billion and NCG’s to 5.425 billion.

Banco de Valencia is to be sold to Caixabank for a nominal one euro. It will receive a further capital injection from the state of 4.5 billion euros on top of the one billion euros it received after being taken over in November of last year. It was also given two billion euros in liquidity to restore its balance sheet and keep it afloat; meaning the total cost to the Spanish taxpayer is seven billion euros.

Banco de Valencia is to be sold to Caixabank for a nominal one euro

Brussels will also require Bankia, NCG and Catalunya Banc to focus their business model on lending to individuals and small to medium-sized enterprises in their historical core regions. They will cease to lend to real estate developers and have limited wholesale banking activities. The banks’ problems largely stemmed from their over-exposure to a property boom that burst around the start of 2008.

All of the banks receiving aid will also have to offload a number of industrial equity stakes and subsidiaries, the proceeds of which will go to funding their restructuring. BFA/Bankia and Catalunya Banc will divest their trading and treasury portfolio of fixed-income securities, while Catalunya Banc will also divest all of its venture capital funds.

Brussels also will require the state to sell off or wind up NCG and Catalunya Banc within five years.

“Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future,” Almunia said in a statement. “We also need to 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.”

As regards NCG and Catalunya Banc, Spain committed to sell the banks before the end of the five-year restructuring period. Should a sale fail, Spanish authorities will present an orderly resolution plan.

Brussels said holders of preference shares and subordinated debt of the nationalized banks will suffer heavy losses under the restructuring with a burden-sharing arrangement. It said this would reduce the state aid needed to restructure the banks by about 10 billion euros.

Brussels said the Commission and the Spanish government opted to sell Banco de Valencia to Caixabank after deciding its viability could not be restored on a standalone basis. The bank will be fully integrated into Caixabank.

Almunia said Brussels will decide on restructuring plans for Liberbank, Banco Mare Nostrum, Banco Caja 3 and Ceiss next month. These banks have not been nationalized but will find it difficult to access private funds to recapitalize at an acceptable cost.