Bankia falls sharply on report of large dilution for shareholders

Bankia’s shares fell sharply on Thursday after reports of a significant write-down in its capital to absorb losses, generating a further loss for the some 350,000 retail investors that bought into the bank when it was listed on the Madrid stock exchange at an initial price of 3.50 euros per share.

At noon, Bankia’s shares were down 14.53 percent at 0.400 euros after having been suspended at the start of trading by the National Securities Commission (CNMV) for over two hours in the wake of the reports, which said the nominal value of Bankia’s shares would be reduced to 0.01 euros from 2.0 euros.

Bankia was nationalized in May of last year after coming unstuck because of its exposure to the ailing real estate sector, requiring a capital injection in its parent company Banco Financiero y de Ahorros (BFA) by the Bank of Spain’s Orderly Bank Restructuring Fund (FROB).

In a statement to the CNMV, the FROB said it had yet to complete the valuation of Bankia. However, it added that: “The economic value of the bank, together with its estimated losses for 2012, lead to the forecast that the FROB’s entry through BFA will be after a significant reduction in the nominal value of its shares to absorb the losses, which implies a significant dilution [of value] for current shareholders.”

The FROB in December estimated that Bankia had a hole in its accounts of 10.444 billion euros and a negative value of 4.148 billion euros. The FROB has subscribed to 10.7 billion euros in convertible bonds issued by BFA, giving it a 100-percent stake. However, it remains to be determined at what price those bonds will be converted into shares.

In order the continue to trade in the stock exchange, Bankia needs to have a positive value, and in order for this to be the case, the nominal value of the shares needs to be reduced in order to absorb the losses. Under the terms of the European bailout to recapitalize Bankia and other lenders in the sector, the FROB noted that “shareholders should the first to assume the costs of the restructuring.”

In the case of Banco de Valencia, which was also nationalized, the result of the valuation saw a reduction in the bank’s capital from 1.099 billion euros to 55 million, with the nominal value of its shares cut from 0.20 euros to 0.01 euros.