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Merging Spain's Bankia with Mare Nostrum may mean bigger not better

Spain is looking at combining two rescued banks, but whilejoining forces with Banco MareNostrum SA might extend Bankia SA's reach in the country's south, there are noobvious targets for the cost savings that have driven such mergers in the past.

The Rescue Fund for Orderly Restructuring (FROB), theSpanish state rescue fund, said Sept. 28 that it would hire external advisers to studywhether merging the two would help it to recoup public money. Bankia chairmanJosé Ignacio Goirigolzarri, who has previously spoken in favor of the move,said Oct. 4 a merger could take place in mid-2017.

The wave of consolidations and European-funded bailoutsfollowing the collapse of Spain's precrisis real estate bubble left the FROBwith stakes of about 65% in both Bankia and Mare Nostrum. Bankia was formed in2010 from seven regional savings banks, including the old Caja Madrid, but hadto be saved with €22.4 billion in 2012. Mare Nostrum has a similarly checkeredhistory, emerging in 2010 from the combination of four savings banks, andreceiving €1.65billion in bailout money between 2009 and 2013. Its recovery has proven slowerthan Bankia's, with return on average equity of only 1.2% in the second quarter.

Many of Spain's savings banks, with close ties to localgovernments, ran into trouble when loans to property developers went bad.Unlike in Italy, whose banking system is still struggling to deal with itsstock of nonperforming loans, Spanish authorities oversaw a radicalrestructuring of the sector, with the number of savings banks falling from 45in early 2010 to 11 five years later. Cost savings came quickly, with totalbank branch numbers falling by 37% while employees were reduced by a third.

But there is little geographical overlap between Bankia, thefourth-largest Spanish lender by assets, and Banco Mare Nostrum, whose namereflects its Mediterranean focus, with more offices in the country's south andthe Balearic Islands. This makes branch closures more challenging. The smallerbank, whose assets of €41 billion are dwarfed by Bankia's €214 billion, hasalready cut exposure to real estate and sold offices in the north of thecountry to Banco de SabadellSA.

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Mare Nostrum's nonperforming loan ratio, at 10.8% of totalloans, is also worse than Bankia's 9.8%, with its coverage ratio onlytwo-thirds of the larger bank's level. Mare Nostrum's common equity Tier 1ratio of 11.4% is below Bankia's 12.9%.

S&P Global Ratings said Sept. 29 that it maintained itsBankia rating at BB+, one notch below investment grade, and BB- for its state-ownedparent, BFA Sociedad Tenedora deAcciones SAU. Its positive rating outlook was largely based onBankia's capital position, Antonio Rizzo, an S&P Global Ratings associatedirector, said in an interview.

"We think that in the next 12 to 18 months the capitalposition will improve. However, our current assessment doesn't include thepotential impact of the merger," he said.

"If this merger were to go ahead, we will assess thebusiness and financial impacts. Specifically, we will consider how this couldaffect Bankia's capital position, profitability perspectives, franchise andmanagement capabilities to finalize successfully such integration."

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A positive for Bankia would be to inherit Mare Nostrum'sstrong local client base.

"The name of the brand is very strong with customers inthe regions where it operates. Banco Mare Nostrum has good relations with smallcompanies and SMEs locally," Javier Bernat, analyst at Beka Finance, saidin an interview.

S&P Global Ratings and S&P Global MarketIntelligence are owned by S&P Global Inc.

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