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Spain Rescued Banks to Shrink More Than Half in EU Bailout

Nov. 28 (Bloomberg) -- Spanish banks getting European aid will shrink their balance sheets more than 60 percent, the European Commission said, as BFA-Bankia, the biggest rescued lender, expects to lose 19 billion euros ($25 billion) this year.

Bankia, Novagalicia Banco and Catalunya Banc will reduce balance sheets by more than 60 percent by 2017 compared with 2010, EU Competition Commissioner Joaquin Almunia said in Brussels today. Bankia plans to shed 50 billion euros of non- strategic assets, reduce its branch network by 39 percent and cut 28 percent of staff, or 6,000 jobs, through 2015, it said today.

The three banks, together with Banco de Valencia, which was sold yesterday, will receive 37 billion euros from the European rescue facility, 18 billion euros of which goes to Bankia, the commission said.

Almunia set out the terms for banks receiving European funds as part of the bailout Spain agreed to in June, when the government’s narrowing access to financial markets undermined its ability to backstop its banks. Most of the lenders that needed rescuing were savings banks, or cajas, that abandoned their traditional role as small, local institutions to pursue profits in Spain’s real-estate boom, often with projects linked to regional politicians.

Absorbing Losses

As part of the deal, shareholders and bond investors including retail clients will be forced to absorb losses, Almunia said. Preference shares will be swapped at an average of 61 percent of the nominal value and perpetual subordinated debt will be swapped at 54 percent, Bankia said.

The haircuts are controversial in Spain because preference shares were marketed to depositors as safe, high-yielding investments. The exercise, which is known as burden-sharing and also applies to the other bailed-out banks, will reduce the cost to the taxpayer by 10 billion euros, Almunia said.

Spain is creating a so-called bad bank to lift toxic real- estate assets off bailed-out banks’ books. Bankia will pass 25 billion euros of assets to the facility, for which Spain is still trying to find private investors. That figure is part of total asset sales of 50 billion euros planned by 2015, which includes selling 8 billion euros of securities portfolios and 17 billion euros of loans, Bankia said in a presentation today.

Bankia, which asked for 19 billion euros when it was nationalized in May, was formed from the merger of seven Spanish savings banks and then listed on the stock market last year in a sale that was heavily marketed to retail clients. It expects to make a loss of 19 billion euros this year and return to profit next year, it said in the presentation.

Spain has pledged to sell Novagalicia Banco and Catalunya Banc within five years or wind them down. Banco de Valencia was bought by CaixaBank SA for 1 euro yesterday. Bankia group’s capital needs are 17.96 billion euros, including 4.5 billion euros already advanced by the Spanish state. Novagalicia Banco needs 5.43 billion euros, while Catalunya Banc needs 9.08 billion euros and Banco de Valencia 4.5 billion euros.

Almunia said he plans to decide on restructuring plans for Liberbank SA, Banco Mare Nostrum SA, Banco Caja 3 and Ceiss on Dec. 20. He declined to say how much money those banks would need, adding it would be much lower than the needs announced today.

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