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Catalonia turmoil to complicate Liberbank rights issue, Bankia sale

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Catalonia turmoil to complicate Liberbank rights issue, Bankia sale

Ongoing political turmoil in Catalonia will complicate Liberbank SA's rights issue and the Spanish government's plans to sell a stake in state-owned Bankia SA, as investors view Spain with a wary eye. But both sales will likely go ahead, according to market observers.

Tensions have been rising in the northeastern region following an independence referendum on Oct. 1, which was declared illegal by Spain's Constitutional Court. Turnout was just 43%, but pro-independence parties have said 90% of voters opted for independence. Catalan President Carles Puigdemont is scheduled to address the region's parliament in the afternoon of Oct. 10 to discuss the "political situation," Spanish newspaper El País reported.

Banks have warned that a declaration of independence would likely see Madrid impose direct rule, triggering protests and damaging the country's economy. Investor sentiment has soured, with shares in Spanish banks — not just those based in Catalonia — taking a hit in recent days.

SNL Image

A Spanish national police officer confronts independence demonstrators in Barcelona on Sept. 20.

Source: Associated Press

Amid the uncertainty, shareholders in Madrid-based Liberbank approved a €500 million rights issue on Oct. 9, a move designed to help the bank boost its coverage ratios and accelerate its sales of nonperforming assets. Meanwhile Spain's economy minister, Luis de Guindos, said in July the government would evaluate selling about 7% of state-owned Bankia in the coming months.

Investor sentiment clouded

"The situation in Catalonia is a negative for the appetite and a negative for the multiples that the market is willing to attach to entities like Bankia and Liberbank," Daniel Lacalle, chief investment officer at fund manager Tressis Gestión, said in an interview.

Liberbank is saddled with a large pile of soured real estate debt accumulated during the country's financial crisis, and its exposure to the domestic market, coupled with the current political crisis, is likely to play into the success of the rights issue.

It is a "very local bank" and has "tremendous" exposure to real estate and to small and medium-sized enterprises, Lacalle said.

"The more local [and] the more regional the activities are, the more challenging it is in terms of valuation and in terms of appetite for the bank," Lacalle said.

Bankia, one of Spain's largest banks, is also domestically focused with an extensive branch network around the country. When considering Bankia, the market will likely be thinking about the impact of the Catalan crisis on the wider Spanish economy, Lacalle said, which is "very hard to fathom."

Investors may still want to invest in the Spanish market, but may not be willing to pay the kind of prices they would have before the crisis flared up.

"Both things will get resolved through price," Luis Arenzana, partner at London hedge fund Ronit Capital, said in an interview. "The Liberbank rights issue will be done in worse conditions for existing shareholders. In the case of the Bankia sale, the government may not get the same price for the share block that they wanted," he said.

He added, however, that he didn't believe the market is completely shut off for now.

De Guindos, in a interview with Reuters published Oct. 5, said the government would look at the Bankia sale "as soon as circumstances and prices improve."

Headquarters moves

Two Catalan banks, CaixaBank SA and Banco de Sabadell SA, have decided to move their headquarters outside Catalonia, a move that will assuage investors concerned the lenders would lose access to ECB liquidity should a split with Spain leave them outside the EU and eurozone.

There have also been fears that worried depositors would withdraw their savings from the banks, potentially leading to bank runs and a hit to capital.

"You get the double whammy," Lacalle said. "On the one side you lose the deposits, on the other side your nonperforming loans within the region go through the roof. So your core capital can evaporate."

He said the national government and the banks themselves are giving messages that don't make a huge difference to the firms' operations, but that make a "big, big difference" to the client base.

Spain's banking sector is far more robust and resilient than it was when the country's property bubble burst in 2008, having gone through a substantial restructuring.

"Most of the banks are well capitalized [so] it is hard to see how you make this into a problem," Arenzana said. "It doesn't have to be a financial problem -- it's a political problem."