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Bankia eyes capital easing as NPL improvement continues, but margin worries loom


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Bankia eyes capital easing as NPL improvement continues, but margin worries loom

BankiaSA is confident that regulators will reduce its capitalrequirements at the end of the year, which would enable it to contemplate adividend increase or a merger with Banco Mare Nostrum SA.

Speaking during an analyst call after the release ofBankia's second-quarterresults, CEO José Sevilla said the bank expects at least a marginalreduction in its capital requirements during the ECB's Supervisory Review andEvaluation Process. That's because its nonperforming loan portfolio andcoverage ratio improved during the period, while Bankia also no longer has tohold back capital because of its disastrous 2011 , having recently minority shareholders whotook part in it.

Having already built up comparatively high levels ofcapital, Bankia might therefore have the opportunity to reward shareholders ormake investments. Bankia reported a phased-in common equity Tier 1 ratio of14.53% at the end of the first half, compared to 13.89% at the end of 2015 anda minimum level of 10.31% required by various regulatory edicts. The fullyloaded CETI ratio was 12.89% as of June 30, compared to 12.26% at 2015-end andthe 10.50% required.

Though cautioning that any use of excess capital woulddepend on the regulatory environment, Sevilla admitted that a with BMN could providecost synergies and open up new regional markets in Spain for Bankia. BMN was,like Bankia, cobbled together from a number of former Spanish savings banks,and like Bankia it remains majority state-owned.

"But we are talking about possibilities — there'snothing on the table for the time being," Sevilla said.

Haitong Bank analysts said that at the right price, theacquisition could make strategic sense for Bankia, which would "benefitfrom significant badwill to reduce the capital consumption of theacquisition." Yet restructuring BMN to make it more profitable would alsorequire significant investment, the analysts warned.

Drop in NPLs

Despite the cost of settling the IPO case and of paying theannual contribution to the Single Resolution Fund, and even thoughsecond-quarter net interest income and total net fees and commissions droppedyear over year —  profit attributable tothe group only fell to €245 million from €296 million a year earlier.

That was because of strong decreases in both operating costsand NPLs, said CFO Leopoldo Alvear. Operating expenses fell 3.1% compared tothe first quarter, which was a bigger improvement than the bank had anticipatedat the start of the year, he said.

Likewise, "the dynamics in relation to the NPLs havebeen very positive, better than what we had foreseen," Sevilla said.

In the 12 months to June 30, NPLs fell by €3.5 billion to€11.8 billion, while they were down by €810 million quarter over quarter. Sincetheir peak in December 2013, Bankia's NPLs have fallen more than 40%, Sevillanoted.

Having had an NPL ratio of 10.8% at the end of 2015,compared to a then-sector average of 10.1%, the bank has reduced that figure bya percentage point to match the sector average of 9.8% at the end of June.Coverage of NPLs stood at 60.8% at June 30, up 0.8 percentage point from sixmonths earlier.

"I expect that in the coming quarters, [our NPLs] willcontinue to evolve positively and therefore be below the average of thesector," Sevilla said.

Bad news on thehorizon

The CEO also highlighted the positive evolution ofmortgage-related NPLs, with Alvear saying these are strongly linked tounemployment figures.

"In the first half of the year, these figures have beenvery positive," the CFO added. "So, we do believe that right now theguidance for the cost of risk annually should be below 30 basis points, thatis, below the lower rung of the guidance we gave at the beginning of the year."

Second-quarter cost of risk was 24 basis points, 9 basispoints lower than in the first three months of the year.

"The evolution of the costs and the reduction of thecost of risk allows us to offset the decrease of the financial margin,"Sevilla said.

Yet Haitong's analysts were less convinced by that strategy,saying that despite the "outstanding management of both [operational costsand NPLs, we] see limited room for further improvements from current levels."

They noted that the bank reduced its net interest incomeguidance for the full year to €2.2 billion from €2.3 billion, saying that"combined with the potential normalization of its cost of risk" thiscould reduce Bankia's profitability levels in 2017 and 2018 from the 8.6% underlyingreturn on tangible equity recorded in 2015.