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Bankia aims for quick settlements on mortgage floor clauses to cut legal costs

Bankia SA is aiming for quick settlements with customers affected by controversial mortgage practices to avoid costly legal fees and to reduce its exposure to ongoing legal claims, its CEO said Jan. 30.

Spain earlier in January published legislation setting out how banks should deal with the fallout of a December 2016 European Court of Justice ruling that they must repay the totality of customer losses incurred because of the clauses. The floors set a lower bound on the interest rate applicable to a mortgage, but customers have claimed that they were not properly advised of the caps and that their imposition cost them some of the benefits of prevailing low interest rates.

The law obliges lenders to settle with borrowers within the next three months and says that if an agreement can't be reached, the borrower can start legal proceedings. Bankia on Jan. 30 announced an express procedure at its branches whereby affected customers can apply for a refund. Customers can choose to be reimbursed either in cash or by repayment of any outstanding capital on their mortgage, and payment can be immediate.

"We want to have ... [a] quick and agile process allowing the customers to recover the money from the mortgage floor clauses preventing legal costs," CEO José Sevilla told an analysts' call following publication of the bank's fourth-quarter 2016 results. He added that potential lawsuits would also give the bank a bad image.

"With this we will mitigate any other possible legal procedure and we will reduce our exposure to this phenomenon of legal claims," he said.

The lender took an extraordinary provision of €65 million related to the clauses in the fourth quarter of 2016, helping push down profit for the period 71% year over year to €73 million.

Bankia already faces a slew of lawsuits who lost money after investing in the bank's 2011 IPO. The lender was bailed out in 2012 to the tune of more than €22 billion after the country's financial crisis and property crash, and the state still holds a majority stake in it.

Formed in 2010 through the consolidation of seven regional banks, Bankia is meant to be reprivatized by the end of 2019, a deadline that was extended from the end of 2017 in December 2016. Spain's bank restructuring fund, known as FROB, is considering a possible merger of Bankia with Banco Mare Nostrum SA, which is also the product of a multibank merger and like Bankia is majority state-owned.

Sevilla reiterated previous comments that such a merger makes sense, adding that it would be up to FROB to decide. An announcement is expected sometime in the first quarter.

"It's industrially logical," he told analysts. "But we should first see if it is possible, if the FROB thinks it would be a good strategy ... if it has financial logic and if the numbers meet the requirements to add value for the shareholders."

Bankia will increase its capital ratios in 2017, and excess capital could be potentially used to finance an acquisition of Banco Mare Nostrum, Sevilla added. The lender reported a fully loaded common equity Tier 1 ratio of 13.02% at the end of 2016, up from 12.26% a year earlier.

Bankia also said it would increase its dividend payouts by 5% for 2016, accounting for almost 40% of profits.

For the full year, Bankia reported net profit of €804 million, down 22% from €1.04 billion in 2015. The bank benefited from a one-off gain of €118 million in the fourth quarter in 2015 from the sale of City National Bank of Florida to Chile-based Banco de Credito e Inversiones SA, excluding which profits would have fallen 8% year over year.

Net interest income fell more than 21% to €2.15 billion, attributable to the persistently low interest rates that are dragging on banks' earnings across the sector. However, Bankia struck a note of optimism with respect to the fourth quarter, pointing out that net interest income rose on a sequential basis for the first time in a year and adding that the customer margin rose quarter over quarter to 1.49% from 1.41%.

The customer margin rose as the credit yield ticked up quarter over quarter, while the cost of customer deposits continued to decline, reaching 0.16% in the fourth quarter from 0.47% a year earlier.