BFA-Bankia Group will return to profitability in 2013, with net profit of 1,200 million in 2015

Posted on 29, November 2012 by | This entry was posted in Banks, Business, Financial, Management, Spain. Bookmark the permalink.
  • Plan approval entails immediate injection of the requested capital, making Bankia one of Spain’s most solvent banks
  • The state aid to be received by the BFA-Bankia Group totals 17,959 million, including the 4,500 million injected on 12 September
  • The go-ahead from the authorities sets the framework within which the 2012-2015 Strategic Plan is to be implemented
  • BFA Group’s goal is to increase profitability through balance sheet management and efficiency improvements: the profit before provisions over assets will increase 60% and the efficiency ratio will rise to 40%–45% 
  • The Bank envisages 52,000 million of new lending in the period to 2015, 84% for businesses, and will dispose of non-strategic businesses
  • The branch network will be reduced by 39% and the workforce by 28% between 2012 and 2015
  • The Group will build up a capital surplus, above the regulatory minimum, of €5,400 million over the next three years
  • Once the plan has been implemented, the Bank will achieve a return on equity of more than 10% by 2015
  • Goirigolzarri: “We have a bank that is financially sound and we are going to focus on making it profitable because that is the best way to reward our shareholders and ensure that taxpayers recover their investment.”

29-11-2012 — /europawire.eu/ — The BFA-Bankia Group’s Restructuring Plan for the period 2012-2017 has received the approval of the European Commission, the Banco de España and the Fund for the Orderly Restructuring of the Banking Sector (Frob).

The Bank will continue to have a country-wide franchise, focused on the customer relationship, with a stronger presence in the Group’s home territories and in the businesses in which the Bank is best placed to obtain high returns and exploit its competitive advantages.

Approval of this plan makes the BFA-Bankia Group one of Spain’s most solvent institutions. The Bank will continue to have a country-wide franchise, focused on the customer relationship, with a stronger presence in the Group’s home territories and in the businesses in which the Bank is best placed to obtain high returns and exploit its competitive advantages.

The Restructuring Plan defines the framework that will allow the BFA-Bankia Group to implement a Strategic Plan over a three-year horizon: 2012-2015. The Bank will return to profitability in 2013, with net profit of 1,200 million euros in 2015, profit before impairments of 2,300 million euros and a return on equity (ROE) of more than 10%.

Capital needs

Oliver Wyman assessed the Group’s capital needs at between 13,200 million in the baseline scenario and 24,700 million euros in the downside scenario. Starting from this latter hypothesis, the needs are reduced by two effects: the transfer of assets to Sareb (the asset management company for assets arising from bank restructuring), which reduces the capital shortfall by 200 million; and the exchange of hybrid instruments (preferred participating securities and subordinated debt), which may generate up to 6,500 million euros of capital in the Group.

The conversion of the retail hybrid instruments will take place at an estimated average exchange price of 61% of face vale in the case of preferred participating securities, 54% of face vale in the case of perpetual subordinated debt and 86% of face value in the case of subordinated debt with a maturity date. In other words, the discount for customers ranges between 46% and 14%, not including interest already received for these securities.

The amount of public funds that is needed to be injected into the BFA-Bankia Group is therefore 17,959 million euros. Following the advance of 4,500 million injected by the Frob on 12 September, the amount of public funds still to be received is 13,459 million euros. BFA expects to receive the capital injection before the end of the year.

The capital needs of Bankia, on the other hand, are part of the overall capital needs of the BFA Group. They are estimated at 15,500 million euros, of which up to 4,800 million will come from the exchange of hybrid instruments, while 10,700 million will have to be contributed by the shareholders. The capital increase in Bankia is fully underwritten by BFA.

Provisions and write-downs

The BFA-Bankia Group estimates total provisions and write-downs for 2012 at 24,800 million euros. Of this amount, 12,200 million have already been recognised as of September, while 12,600 million remain outstanding.

Following these provisions and write-downs and without considering the final adjustments to be decided with the regulator and the auditor, the Group expects to end 2012 with losses in the region of 19,000 million. The Bank expects to return to profitability from 2013.

The provisions are higher than announced on 26 May because of the higher demands of the Oliver Wyman stress test, the transfer of loans and foreclosed assets to Sareb and the revaluation of investees and certain assets.

Solvency and liquidity

After provisions and write-downs and the capital injection to be made before the end of the year, BFA’s solvency ratio (EBA Core Tier 1) will be above 9.5%. The same will apply to Bankia once its capital increase is complete.

In terms of liquidity, given the capital injection and the asset transfers to Sareb (in exchange for bonds), together with the liquid assets already available, the Group will have liquid assets totalling 40,300 million euros, as against total maturities of 45,300 million. Of these maturities, 30,500 million consist of cédulas that can be placed back in the market.

Strategic plan 2012-2015

With this scenario as the starting point, the BFA-Bankia Group has designed a Strategic Plan for the period 2012-2015 that is influenced by limitations imposed by the authorities as a result of having received state aid, and by the complex macroeconomic context.

Bankia has a base of more than seven and a half million customers, who form a great franchise, which is the essential foundation for the belief that executing this plan will make the Bank viable.

Bankia has a base of more than seven and a half million customers, who form a great franchise, which is the essential foundation for the belief that executing this plan will make the Bank viable.

The European and Spanish authorities have imposed certain limitations: the Memorandum of Understanding (MOU) requires that shareholders and hybrid security holders share part of the burden of the capital injection; the required capacity adjustment and balance sheet reduction is greater than Bankia would have wished; and shareholder dividends are temporarily restricted until 2014.

The Bank started with three fundamental issues: solvency, liquidity and profitability. The first two are basically resolved at the outset through the capital increase and the transfer to Sareb, which will take place before the end of the year. Furthermore, Bankia will take additional measures that will affect these ratios, aimed at strengthening the capital base, reducing risk-bearing assets and achieving a solid liquidity position by readjusting the funding structure to give greater weight to retail deposits.

However, the main focus of the plan is on improving profitability through four main lines of action: strengthening the Bank’s competitive positioning; rebalancing its balance sheet; improving efficiency; and reducing the risk premium.

Profitability

As regards strengthening its competitive positioning, Bankia has high potential for growth through cross-selling of products to its customers. The Bank’s current market share in segments such as pension plans, investment funds, consumer finance and credit cards is only around half its natural market share. In businesses, there is ample scope for growth in products such as receivables discounting, finance leases, factoring and reverse factoring, foreign trade financing and payroll services.

As regards the second line of action, rebalancing the balance sheet, a divestment plan has been drawn up to dispose of non-earning assets and non-strategic equity investments. Through this plan, between the transfer of assets to Sareb, the sale of investees and other portfolios and the disposal of loan portfolios, Bankia expects to shed 50,000 million euros (down from 90,000 to 40,000).

The Strategic Plan also aims to bring about a change in the composition of the loan portfolio, resulting in a greater proportion of lending to businesses and practically zero exposure to the real estate business (2.5% of the total loan portfolio in 2012). The Bank envisages 52,000 million euros of new lending in the period to 2015, with 84% of this total going to businesses.

With regard to efficiency, any improvement in profitability will require not only revenue growth but also cost reduction.

To ensure its future viability the Bank needs to reduce capacity, both in terms of its branch network and in terms of its workforce. The number of branches will be reduced by around 39%, from 3,117 to around 1,900-2,000, and the workforce will be cut by 28%, from 20,589 to around 14,500 employees. This retrenchment will guarantee the Bank’s viability and the preservation of 72% of existing jobs. The top management of BFA-Bankia will start talks with the unions immediately to seek an agreement.

Efficiency will also be improved by rationalising the intermediate structures of the branch network and optimising central services.

Total operating costs, including depreciation and amortisation, which in 2012 will come to around 2,400 million euros, will be reduced to 1,800 million in 2015, a decrease of 26%. As a result, the efficiency ratio will improve to 40%-45% in 2015.

Together, these four lines of action will result in a notable increase in BFA Group profitability. With average total assets (ATAs) shrunk by 20% over three years, the Bank’s gross income will hold steady at around 4,100 million euros. The profit before provisions over ATAs will go from 0.52% to 0.89%, an increase of 70%.

Goals for 2015

In terms of liquidity, a total of 28,800 million euros will be generated over the three years of the plan, amply covering maturities for the period 2013-2015.

As regards solvency, profit generation in the period, together with the reduction of risk-weighted assets, will allow the BFA Group to generate a capital surplus above the regulatory minimum (9% EBA Core Tier 1) of 5,400 million euros, as the Group will have a capital ratio above 14.5%.

Statement by José Ignacio Goirigolzarri

Bankia chairman José Ignacio Goirigolzarri stated that “the Bankia capital increase and Strategic Plan that we are presenting to the market today situate our bank as one of the most solvent institutions in the Spanish financial system”.

“Our customers can rest assured because we have a viable project, a solid project, in which they can be absolutely confident that their savings are safe,” Goirigolzarri added.

Our customers can rest assured because we have a viable project, a solid project, in which they can be absolutely confident that their savings are safe.

“Now that our institution is financially sound, we shall focus on making it profitable because that is the best way to reward our shareholders and also, of course, Spanish taxpayers, so that they can recover their investment,” he emphasised.

“We have a difficult road ahead because we will have to make great efforts, but I can assure you that in managing this project we will start from basic principles, the principles of professionalism, integrity and commitment, and of course we will remain very close to our customers,” the Bankia chairman said.

“Building on the loyalty of our customers, we are convinced that Bankia is going to be a solid, profitable and efficient franchise. That it is very important for Bankia, but it is also very important for the seven and a half million households that have entrusted us with their savings. It is very important in order to preserve fourteen thousand five hundred jobs, and it is very important in order to strengthen the image of the Spanish financial system, which essentially means strengthening the image of the Spanish economy,” Goirigolzarri declared.

Related documents

STRATEGIC PLAN 2012-2015. GRUPO BANCO FINANCIERO Y DE AHORROS

Download document (pdf, 1,669.26KB)

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