FT Alphaville " Bankia in the coalmine, looking like a dodo The Spanish government may be bailing out Bankia by injecting cash in return for contingent convertibles to the tune of some €7-10bn, but many analysts have reacted with something along the lines of: "Haha! That's cute! They are like ever so slightly less delusional about the trouble their banking sector is in! Adorable! Bankia is no canary in a coalmine. It's more like the first sign that the inevitable support of the banking sector is finally materialising. Indeed, prime minister Mariano Rajoy was quoted saying: "If it was necessary to reactivate credit, to save the Spanish financial system, I wouldn't rule out injecting public funds, like all European countries have done," in an interview with radio station Onda Cero, as reported by the WSJ. Finally playing catch up, are we? So it looks like Bankia shareholders are going to get hosed by dilution at some point. The feeling of disappointment though, will already be familiar one: As with Spain's other banks, there are serious doubts as to whether anything like the appropriate level of provisioning has been done for problem loans. From the team at JP Morgan Cazenove on Wednesday: Asset quality remains very problematic and provisions are low. Bankia had €36bn problematic assets as of 4Q11, or 17.4% of total, with a low coverage ratio (36%) and more will be needed to adjust the bank's balance sheet to health, in our view. We consider the developer portfolio requires provisioning above 55% to be more realistic, or an extra €6.9bn. But if things were less rosy, and with Basel III on the way: Bankia would have a €10.6bn capital shortfall in our stress scenario. The result of our stress test on Bankia's loan book (detailed below) leads to a €8.7bn capital deficit, where we include the full impact of Basel III, severe deterioration of the loan book and 21% of the Spanish debt banking book. This alone is over 2x Bankia's market cap. A pained attempt to look at the possible upside: Upside risks to our view are macro or political, both remote. An equity friendly resolution for Bankia or a sudden resolution to the European turmoil would allow Bankia to refinance its expensive funding liabilities at lower spreads. We consider the likelihood of both these occurring as remote however. It should come as no surprise that the analysts aren't too keen on the stock, so are underweight. Meanwhile, for Spanish banks as a whole, the additional amount of capital the government is requiring them to set aside is still considerably less than what analysts think the banks need. Non-performing loans are on the up, but has the property market even hit bottom? There are plenty of indicators one can look at to determine that. As the analysts at UBS have pointed out, one would expect, among other things, a bottoming out in the market to be accompanied by an increase in new mortgage transactions, and yet... ... there's no sign of that. The chart doesn't even tell the whole story. From UBS (emphasis ours): In particular, we are struck that a significant proportion of these low volumes are funded by banks involved in prior financing of the asset being mortgaged. Banesto recently commented that its mortgage originations had increased - but predominantly as a function of its problem credit disposals: That sort of recycling also serves to just confuse things further: This is an appropriate way of managing challenged loans but it does not provide any real price transparency. The value added to a bank involved in these transactions may be, for example, in realising losses over time effectively through a reduction in the income account (the loans being at below market price). Or it may be in deferring impairments to a future date when commercial real estate losses have been taken. It could of course be that the new loans will prove to be appealing from an income and risk perspective, but we cannot be confident of this as external observers. So why doesn't the government just clean house? It seems that bad bank may well be on the cards. All that while trying to reign in government borrowing, implement various reforms, and not plunge the economy into darkness. Erm, good luck. Related links: Spain Appears Unsure What A "Bank Bailout" Means - Zero Hedge Bankia's failure to face reality brings back crisis - FT Doubts spread to Spain's big banks - FT Spain to spend billions on bank rescue - FT This entry was posted by Lisa Pollack on Wednesday, May 9th, 2012 at 11:21 and is filed under Capital markets. Tagged with Bailout, bankia, housing, non performing loans, Spain, spanish banks.