Why didn't Bankia's stock price collapse?

Innumerable headlines written in most human languages today trumpeted the beating taken by Bankia's shares on their return to public trading after Thursday's halt. None that we have been able to find makes mention, at least in the lead, that a stock which is arguably worth about 30 cents following Saturday's nationalization announcement...

opened at 1.15 euros,

briefly sank to 1.11 before

rising to 1.46 by about noon and

later closed at 1.36 sporting a bid-ask spread of 1/10 of a cent on

volume of 20 million shares, this approximately a record.

We'd suggest two possible reasons for this disparity between expectations and reality:

1). Ibex Salad was in there buying on behalf of the Goat Universal Sufferance Trust.

2). Part of that 12 billion euro capital injection - an amount for which we can, so far, find no justification for in the published details of Bankia's recapitalization requirements - will be used to buy out existing shareholders.

With lawsuits and criminal complaints against the bank's management about to abound from all directions, it might be interesting to effect this buyback at a price that could be reasonably attributed to market forces operating prior to the announcement, neutralizing claims of material damage in the process. Typically, for the Spanish market, those who would be the expected beneficiaries will be the last to find out.

As usual, other suggestions to the comments section.

As to whether the Bankia is actually of any interest at all to people living outside the Magic Kingdom, our experience is that getting linked to in a post at FT Alphaville usually results - at least for a narrow audience blog like Ibex Salad - in an increase in readership on the same day of between 500 and 1,000. Today's mention (placed, we think, a little mischievously because that wag 'capra.iberica' made some pointed comment or other in an earlier entry) has netted us about 70 unexpected visits. The mob has moved on.

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Bankia fleeces the flock

In response to a journalist's question, the recently appointed CEO of both BFA and Bankia, José Ignacio Goirigolzarri, made the assertion that the latter's responsibility towards current shareholders, in the wake of the massive dilution that he had announced earlier, was nil - having been covered perfectly well by the boilerplate disclaimers published in the short-form prospectus. The reader knows the type:

The value of assets described herein may not reflect the price they will draw in the event of a sale;

Changes in the economic, business or legislative environment may have an adverse effect on...;

Etcetera.

But 10 months after the IPO (accompanied by its recently minted Fitch A- rating) that had been advertised as being - at least for Bankia if not BFA - a sufficient recapitalization and after previously having gone to great lengths to describe how they had passed their truly garbage assets on to the parent corporation - Bankia, announces today that they will need no less than 12 billion euros in state-provided equity funding to sanitize their first audited books. That, to put it in perspective, is roughly 3 times what they took in from the initial public offering. The bank, obviously, is finally being nationalized (yes dears, you weren't wrong but merely prescient) in the process and shareholders who bought into the IPO might optimistically expect to receive 5 cents on the dollar invested.

Some of the opinions - now quite clearly mistaken - previously expressed in this blog on the matter of BFA-Bankia, unfortunately, did not take into account the possibility that the entire operation was fraudulent and that its probable outcome was known by its promoters from the outset.

There is no other explanation that fits the scale of this deviation.

Aficionados of black humour will appreciate Goirigolzarri's remarking that current shareholders will have right of first refusal on the new issue that drives the value of their current stake to near zero.

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Edward bites the hand that feeds

Spreading lies about a publicly-traded, deposit-taking institution during a serious bout of market panic is bad enough. But when the source of this misinformation fails to identify himself to his readers as being in the pay of a competing bank...?

Edward Hugh, who characterizes himself as an 'independent macro-economist' - hence, presumably, beholden to no one - was, in fact, paid 10,000 euros* in 2011 as a member of the board of directors of CatalunyaCaixa, a post which he seems to retain to this day.

In normal societies this is, if not outright illegal, unacceptable.

We wonder, by the way, what the Bank of Spain's bailout fund - the FROB - would think of all this... especially after having recently putting out 1.7 billion euros to make itself 90 percent owner of CaixaCatalunya itself and now looking at shelling out some multiple of that on BFA and Bankia.

*Those clicking through will note that the person referred to here is described as Edward Hugh Bengree-Jones. It's the same guy with his surname hispanicized.

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Don't quit your day jobs, Bankia investors

Update May 28, 2012 - 11:18 of the first morning of trading following the nationalization and dilution announcement, Bankia (perhaps inexplicably) trading at 1.34 euros. Still 15 percent above the lows mentioned below.

TMM's Polemic very tactfully refers to those amateur participants in financial markets as persons who 'have a non-financial day job', but everyone else in the professional world uses one word to describe them - 'retail', synonymous with 'cretinous', 'moronic' and 'irremediably stupid'. The recent excitations of Bankia common stock do nothing to rid retail investors of this reputation.

The truth of the matter is that the massive selloff that culminated in yesterday's 30 percent drubbing through a little after 12 noon appears to be exclusively the responsibility of the many Bankia deposit holders that had been convinced, cajoled and conned into subscribing to their bank's July IPO (presumably on the promise of a succulent, if unspecified, dividend) - all of which purchases were transmitted through the in-house brokerage, Bankia Bolsa - rushing to get out of its clutches in the face of relentless, criminally incompetent news flow.

Having had our attention grabbed by an article in El Boletín, we resorted to our old favourite, especulacion.org, to see which brokerages were handling sell orders for Bankia stock. Although only updated through May 11th, the reader easily gets the picture. From May 3rd to that date, BKIA sell orders effected through Bankia Bolsa made up no less than 24.5% of total volume on the stock.

Now, being ourselves an individual having 'a non-financial day job' (and reserving our fundamental right as a member of that sub-species to be utterly mistaken at any point in time), we're going to suggest a number of possible reasons that many retail holders of Bankia stock might have made the wrong decision in selling. Keeping in mind the incredible amount of confusion - product, we add, of a near utterly opaque corporate structure that probably reflects the haggling that took place in order to achieve the incorporation of Bancaja into the fold - here's how we see it:

1). The company that was nationalized to a yet unknown extent (but probably approaching 100 percent) was Banco Financiero y de Ahorros, not Bankia;

2). Bankia shareholders, to the best of our knowledge have no stake in BFA. The real relationship between the two is the opposite. The latter owns 45 percent of the publicly-traded bank in question;

3). The nationalization of BFA is quite conceivably the best possible outcome for Bankia shareholders because:

a). BFA was on the hook for 600 miilion euros in interest payments per year, of which 350 million were due on the FROB convertibles that triggered the nationalization;

b). BFA's primary source of income was to be the dividend paid on its Bankia holding. The removal of 350 billion of income need on the part of BFA equally reduces the pressure on Bankia to save the parent via an unaffordable dividend;

c). Retained earnings - those not paid out as dividends - are counted as core capital, something Bankia will continue to be in need of.

4). The obvious conclusion is that BFA shareholders - the group of cajas that originated the company - were taken to the woodshed in order to save, to the degree possible under the circumstance, holders of Bankia stock.

Until further notice, this plan has succeeded. The, presumably non-retail, buyers that have bid BKIA up from yesterday's low of 1.17 to the current 1.71 (45%, readers) know this. A guess would be that the stock's price will settle at a price that reflects the new expected dividend yield to be determined by BFA's much reduced income requirements - with a nod to insurance company Mapfre that was a big subscriber to the IPO.

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What were we saying yesterday?

One of hallmarks of recent media reports on BFA, Bankia or BFA-Bankia has been the near-infinite repetition of the fact that Bankia stock had lost more than 40 percent of its value since their July IPO - as if this were to separate it from the happily prosperous herd of euro zone banks which, as represented by the Eurostoxx bank index, had merely shed 39.08 percent over the same period.

However, as if to confirm our assertion yesterday that public commentators (in this case, Edward Hugh) on financial and economic matters have a moral responsibility to at least get their facts right, Bankia did indeed distinguish itself in today's trading.

Here's the list:

Sabadell -2.65%
Santander -3.04%
Bankinter -3.39%
Intesa SP -3.55%
BNP Paribas -3.66%
BBVA -3.72%
Caixabank -3.84%
Deut. Bank -4.12%
Soc. Generale -4.15%
Popular -4.37%
Unicredit -4.91%
Credit Agricole -5.49%

Bankia -8.93%

Of course, correlation is not causation. But try telling that to the retail investors* that took up 60 percent of the IPO. Or to the shorts who seem to have climbed all over Edward's compendium of fallacies.

*This writer not included among them.

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Edward Hugh slanders Bankia

Edward Hugh has come up with his two cents worth on the nationalization of BFA and, rather than merely affording us the usual sport provided by picking through his pieces in search of the inevitable factual errors and examples of analytical incompetence, the entry's near-criminal misinformation concerning what took place last week at BFA leaves us...umm...repulsed.

To wit...

What brought matters to ahead (sic) was the publication on Friday 4 May of Bankia's unaudited accounts for 2011 wherein the parent bank BFA still valued Bankia, in its individual accounts, at book value. In fact at the time Bankia was trading at around 0.3 of BV, while listed stakes in companies like Mapfre, NH Hotels, and Indra were by no means fully marked to market. The reason the accounts remained unaudited was that Deloitte, the bank’s auditor during the time of the stock market listing, had refused to sign off on them.

and

Bankia's holdings include a 5.4% stake in the troubled hydrelectric (sic) company Iberdrola, which is now only valued at 21 billion Euros, some 40% down from the 35 billion Euro valuation the company had only one year ago. A back of the envelope calculation suggests this drop alone has cost the bank 800 billion (sic, we suppose) euros...

We hate to be the bearers of bad news, but Bankia's accounts (audited or not by Deloitte or anyone else) were not released on May the 4th - or, at least, are not available from the CNMV website (the two appropriate links are dead). BFA's were.

The current value, calculated at market or purchase price, of Bankia's stakes in Indra, Mapfre and Iberdrola is actually zero. Bankia has no obligation to book m-t-m losses on these because it actually owns no shares in the above companies. With the exception of NHH*, they are all entirely on the books of BFA, the change in ownership of which (unless Edward would like to set us straight on the matter) has no downstream financial effects on Bankia.

Just so that readers understand what we're on about here...

Bankia is a deposit-taking institution which, as do all of its ilk, relies almost entirely on public faith in its solvency to continue functioning. In our often less than humble opinion, at delicate moments such as this widely-read commentators like Edward Hugh have what is no less than a moral obligation to at least get their facts straight before opening their gobs and spewing whatever nonsense happens to be rolling about in their heads on a hot Barcelona Sunday afternoon.

Comments, of course, are always welcome. But they might be better directed at any (or all) of the sites that will feature Edward's article. This Google search provides a list.

*Bankia did retain a piece of NHH, however. Mark-to-market losses since the Bankia IPO would amount to about 60 million euros.

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Weekend reading

Residents of, and visitors to, Madrid who find their intended itineraries blocked by this weekend's temporary privatization of the Puerta del Sol by adherents of the Gravy Train Revolution performing their late 60's parody might instead stay home or in their hotel rooms and share in the writer's recent fat-tailed stroke of good luck. He found, in one improbable single day, both an intelligently reasoned indignado blog and an equally smart publication espousing the libertarian cure for humanity's woes. Respectively, they are:

Boiling Frogs, and

Bleeding Heart Libertarians.

Otherwise, they should consider calculating exactly how many people attend the event and comparing that with press reports. The Puerta del Sol is about 7,000 square metres in size. Packed suffocatingly cheek to jowl, as in the front rows of a Stones concert at a retirement home, in its entirety it might conceivably hold 30,000 people. If relatively normal pedestrian passage is possible, as was the case during virtually all of last year's occupation, that number won't get past 10 grand.

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Catharsis!!

Banco Santander share price in the wake of the Spanish government's announcement of new bank capital regulations - with bonus gratuitous shot at The Economist. Timing is everything.


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Bankia? BFA? Who? What?

A few pointers for those that are struggling to understand what took place when the Bank of Spain announced yesterday that it would be converting its 4.47 billion euro investment in BFA-Bankia to equity. Here's the rundown...

BFA is the parent corporation of the retail bank known as Bankia. Both are the result of the shotgun marriage of Caja Madrid and the Valencia-based Bancaja to the rusted hull of which adhered several other smaller entities.

The deal that separated the two resulted in BFA being the owner of a large portion of Bankia's bad real estate assets (cleaning up Bankia's books to some degree in the process), industrial investments (particularly in Iberdrola) and it's stake in Bankia itself. On the other side, BFA assumed most of the non-deposit liabilities. These, which imply about 600 million euros in annual cash outlays in order to service, are dominated by the 350 miilion due on the 8 percent convertibles that constituted the Bank of Spain's contribution to the amalgamation.

BFA, up until yesterday afternoon, was owned in its entirety by the charitable (read 'pork barrel') foundations that remained of the original constituent cajas de ahorros.

BFA's income would derive from Iberdrola dividends, property sales and, most importantly, the yet-to-be-determined Bankia dividend.

Delays in the Bankia IPO - mostly attributable to Bancaja's resistance to almost any rational proposal - resulted, due to market conditions last July, in the bank failing to raise the money intended before it ran up against its self-imposed limit of a 50 percent float. When the plan was originally hatched, they dreamed of getting what they wanted from an 80 percent interest in what was mooted to be a 7 percent Bankia dividend.

The final result of the preceding is that BFA cannot find 600 million euros a year to meet its obligations - let alone pay a dividend to the cajas that will allow them to continue to fund unneeded community centres to be built by favoured constructors. The solution is to rid themselves of the 350 million burden of the FROB 8 percent converts, meanwhile easing the pressure on Bankia to declare an exorbitant dividend. The price paid is the cajas losing control of BFA - and Bankia.

Good riddance.

The Spanish government has, for its part, saved Bankia equity holders from the ignominy of a massive dilution the consequence of which would be, due to the extra dose of fear it would install in private investors, an inevitable and unaffordable direct nationalization of a considerable portion of the country's banking system. Readers can expect this policy of assuming control of the holding company, and not the bank, to continue.

Spanish banking stocks were hit hard yesterday amidst the swirling of rumours regarding Bankia in the wake of Rodrigo Rato's resignation*. New lows were generally not made, however. The most mistreated was, perhaps surprisingly, Caixabank. In principle one that should be very interesting to long term investors at current prices, it is possibly going to end up swallowing some portion of BFA-Bankia that might not otherwise interest it. Other interpretations of the 7 percent pummelling taken by CABK are, of course, welcome.

*Evidence that the Finance Minstry had won the fight with the Bank of Spain, by the way.

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Foreign property sales - half full or half empty?

To add a bit of context to yesterday's chart of quarterly Spanish property purchases by foreigners, that on the left shows sales as a percentage of what were two peaks over the first decade of the century. The first - being the absolute maximum of about 7 billion euros in the fourth quarter of 2003 - probably reflects considerable activity in the commercial market. The second, in the third quarter of 2008*, was certainly primarily residential purchases. The bounce from 2010 lows to the present was initially driven by commercial - a bias which is likely wearing off as we speak.

As of year end 2011, the value of property sales stood at about 2/3 of all time highs and 85 percent of the residential peak. As to what degree this is eating into the residential property overhang - probably not much, but seeing as the demand for homes will be concentrated in the overbuilt Mediterranean coast it certainly will be welcome. As to what statement this makes about Spain's suitability as an investment destination, the reader may feel free to choose between glass half full and half empty.

*The seeming lateness of this figure is an artefact of statistical methodology. In Spain, sales of new homes are recorded on the deeding of the property. Off-plan sales from as early as 2005 will still be showing up on the records at this date.


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