Huge volumes of Bankia shares change hands for the second day running

Massive amounts of shares of nationalized bank Bankia exchanged hands on Friday for the second day running ahead of the swap of hybrid debt instruments for shares next week, prompting the National Securities Commission (CNMV) to launch a probe.

Alomost 39 million Bankia shares changed hands on Friday, with the stock closing down 4.41 percent at 0.65 euros. Trading volumes in Bankia on Thursday amounted to 49.39 million shares, 42 times the average daily volume of the past three months, and more than double the number of the bank’s outstanding common shares of 19.83 million. Its share price fell 51 percent on the day to 0.68 euros, well below the price set for exchanging preferred shares and subordinated debt into common stock at 1.3526 euros.

The CNMV on Thursday issued a statement saying it would launch an investigation into share transactions in Bankia on that day to determine if there was anything untoward. “The National Securities Commission will analyze in detail the operations that took place in the session with a view to verifying if they conform to current legislation,” the watchdog said.

Bankia’s shares have lost about 90 percent of their value since the start of this year. The bank listed in July 2011 at 3.75 euros. The bank was nationalized in May of last year after falling foul of its exposure to Spain’s ailing real estate sector.

Bankia’s share price fell 51 percent on Thursday to 0.68 euros, well below the price set for exchanging preferred shares and subordinated debt into common stock at 1.3526 euros. Market sources suspect that investment funds holding Bankia preferred shares and subordinated debt may have been indulging in naked short selling; in other words selling shares they neither own nor have borrowed, in anticipation of falls in the price when the swap becomes effective on May 28. That would give investors short selling the stock time to obtain the shares and cover their positions, thereby trimming their expected losses.

Under the terms of the 40-billion-euro bailout Spain received from its European partners to clean up its banks, the bulk of which went to Bankia, the government agreed that holders of hybrid debt instruments should bear part of the cost of the rescue. As a result, Bankia agreed to repurchase preferred shares at discounts to their nominal value of between 39.5 and 80.2 percent but in the form of Bankia stocks. The 51-percent drop in Bankia’s share price on Thursday, therefore, entailed a further massive haircut on initial investment in the hybrid debt.

The CNMV said it was too early to say whether there had been naked short selling, which under current rules is banned.

Bankia Chairman José Ignacio Goirigolzarri welcomed the CNMV’s decision to probe transactions in Bankia’s shares. In an interview Friday with radio station Cope, he said it was not clear to him what was behind the movement in Bankia’s shares. “It seems prudent to me to wait for the outcome of the investigation,” he said.

Goirigolzarri said, based on the amount of its shareholder funds, the bank’s shares have a book value of 0.7-0.8 euros, in line with other lenders in the sector whose business is based around Spain. He said this should be the “fundamental reference” for potential investors in the stock.