Spain favours CaixaBank, Bankia merger

Spain's government is pushing for former savings banks CaixaBank and Bankia to merge as it struggles to shore up the ailing sector without pouring in more public money, sources said. A merger of Madrid-based Bankia and its Barcelona-based counterpart would speed consolidation in a weak sector with scant state funds available to flush out toxic property assets, banking and political sources said.
Although Spain will struggle to pull off the merger of the country's third- and fourth-biggest banks because of the cost of providing state guarantees to encourage them to tie up, the move is seen as the only viable option. The government has rejected ringfencing the billions of euros of unsellable property assets and rotten loans to property developers in a "bad bank" which would cost the government billions to fund at a time when debt levels of peripheral euro zone countries are critical.
"This (the merger) is being discussed, because it's either merging or having a bad bank, and the government has said it doesn't want a bad bank," said one political source. But the newly-elected centre-right government is looking at how to tackle a huge funding gap in its banking system after rejecting the idea of using public money to bail out the banks.
Spain has shunned an Ireland-style rescue of its banks, because it would push up national debt and further sour euro zone sentiment. Madrid-based Bankia and Barcelona-based CaixaBank together make up around 18 percent of the country's banking system and would create a lender to rival Spain's two biggest banks, Santander and BBVA. However, Santander and BBVA have spent years diversifying away from Spain and its sick economy which is on the brink of its second recession in three years, whereas the majority of Bankia and CaixaBank's business is domestic.
"A deal between CaixaBank and Bankia could hugely advance the cleaning up and restructuring of the sector." said one sector source. The major obstacle would be finding state funds to compensate CaixaBank - one of Spain's strongest banks - to merge with Bankia which has one of the heaviest exposures to real estate in the country. Parent BFA has 11 billion euros ($14 billion) in foreclosed property assets on its balance sheet.
"The government couldn't force CaixaBank to take over Bankia, but it could incentivise it," said one Spanish banker. "I believe they are carrying out an analysis to see if it's viable." Spain's bank Deposit Guarantee Fund, an instrument funded by contributions from banks, was nearly all used up to bail out failed savings bank CAM and provide a guarantee for future losses for buyer Sabadell in December.
Economy Minister Luis De Guindos said on Tuesday a new round of consolidation amongst Spanish banks was extremely important, but declined to comment on specific examples. A CaixaBank spokesman declined to comment on any potential link-up with Bankia, and a Bankia spokesman insisted the bank's focus was on remaining independent and the integration of its seven constituent regional banks.
Another possibility the government is hoping for is that one of the European funds contributes directly to the Deposit Guarantee Fund, a legal source said. "The formula the government is looking for is that there should be some kind of loan or financing to the Deposit Guarantee Fund from one of the European funds to complete restructuring," he said. "They want the clean-up to be quick and not to have any effect on the public accounts. The only way that's possible is if it comes from the sector itself or a loan or guarantee from a European fund," the source added. Spain is desperately trying to reduce its state deficit, already around 2 percentage points above its 6 percent target for this year. Bailing out banks could bump up the country's public debt to dangerous levels.