Spain's New Plan: When in Doubt, Nationalize!

Spain has a lot of questions at the moment, but very few answers. Ten-year lending rates for the struggling country are once again rising past 6%, which makes borrowing money difficult for a country already in recession and trying to cope with an imploding housing market and a 24.4% unemployment rate.

I've already sounded off that I think a default is practically a given based on Spain's worsening financial situation, but I can't say that I saw its latest move coming so soon.

Wednesday, following the close of the U.S. markets, the Bank of Spain, its equivalent to our Federal Reserve, announced that it will convert its 4.5 billion euro interest in BFA and Bankia that it obtained through bailout loans in 2010 and 2011 to shares and essentially nationalize Spain's fourth-largest bank by assets. The reason behind the move is that Bankia has the greatest exposure to Spanish commercial real estate loans -- 32 billion euros, to be exact.

What's really goofy/stupid/mind-numbing (choose your best word) about this whole situation is that its original loan amount of 4.5 billion euro was lent to facilitate the merger of seven smaller savings banks into Bankia while also creating a 45% parent company to Bankia, known as BFA, which is nothing more than a bad bank that holds the toxic real estate assets of the seven smaller savings banks. Why the Spanish government didn't just nationalize BFA in the first place is beyond me, because this is just more bad publicity at a time when it can afford none.

And so it goes: The first Spanish bank is officially on its way to being nationalized. That's not particularly sound news for shareholders of Banco Santander (NYSE: STD  ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) , which have a much larger presence in Spain's financial picture, albeit much less toxic real estate exposure. That didn't stop Societe Generale from projecting in February that Banco Santander and BBVA could take a hit of 42% and 52%, respectively, to their bottom-line profits as they set aside cash to shore up reserves against toxic real estate loans.

According to the Bank of Spain, of the 348 billion euros in commercial real estate loans, up to 176 billion euros of that amount could be problematic. With just over 50% of CRE loans either in foreclosure or in serious doubt of collection, the Bank of Spain's plans to inject 10 billion euros into Bankia doesn't exactly inspire confidence that its problems will be solved. It's likely to take a considerably larger injection than this to make a dent in Bankia's toxic portfolio of loans.

Is this the last bank to be nationalized in Spain? Only time will tell as Spain marches closer to what I think is an inevitable default.

Is nationalizing Bankia going to change your opinion on Banco Santander or BBVA? Tell your fellow Fools in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has no interest in nationalizing your portfolio.


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Comments from our Foolish Readers

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  • Report this Comment On May 12, 2012, at 1:19 PM, mwlove wrote:

    Santander at $6 is like BAC at $5: an over-reaction to bad news. I'm still long Santander and will more if it drops below $US6.00/ADR. Here's what the IMF report says about Spanish banks:

    “The largest banks appear sufficiently capitalized and have strong profitability to withstand the expected further deterioration of economic conditions. The solid capital buffers of most banks as well as the robust earning capacity of

    the internationally diversified large banks have reduced system-wide solvency concerns to a relatively low-probability event of a confluence of adverse macroeconomic developments”.

    Santander derives over half its profits from Latin America. It has provisions to write down a bunch of its Spanish loans, so they have been preparing for the present course. The only thing that would provoke a crisis is a severe restructuring of Spanish sovereign debt, with massive write-downs. That scenario would cause Santander to raise capital and would be dilutive, but not fatal. Long term, this is one of the best-run banks in the world. They can get through this crisis, so I view any further decline in the price of ADRs as an opportunity.

  • Report this Comment On May 12, 2012, at 4:04 PM, rd80 wrote:

    I think Banco Santander will be fine and that anyone buying today is probably a happy camper several years out. BUT, there are definitely risks and I think there are some better buys among the banks.

    If a key argument for buying Santander is the Latin American business, why not buy Santander's Brazilian or Chilean bank instead? Both are publicly traded.

    For the 'this bank is cheap' argument, why not consider Citigroup? C is cheaper on price-to-book and price-to-tangible book and I believe Citi is well on it's way out of the woods while Santander is still in the middle of problems due to European economic troubles.

    Disclosure: Long C.

  • Report this Comment On May 13, 2012, at 12:13 PM, Teacherman1 wrote:

    Good post Sean, with reasonable outlook for what will be happening in Spain.

    As for STD, I fully expect they will have to reserve more for problem real estate loans (even though they are ahead of the curve on that), but I also expect they will continue to remain profitable at a reduced rate (though I don't think it will be as much as Societe Generale has indicated) and will likely have to reduce their dividend (but I don't think they will curb it all together).

    They could get a boost in their UK operations with the recent influx of Spanish and Greeks seeking a safer place to live, or at least park their cash; with the resulting increase in UK house prices.

    They may also do something with their Mexican Bank holdings to enhance their capital position.

    I will continue to buy STD on significant dips, but am holding my position on BBVA, because I don't think the picture is quite as clear on them just now.

    I want to take a position in BSBR, but they just won't quite get down to the start price I want.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On May 13, 2012, at 2:13 PM, steveat wrote:

    Spain is going to tank..there's a few big dips left. STD will be fine, but I'd wait till it hits $2/share before buying in. The tidal wave hasn't come yet. Remember, there's still Italy, so there is a lot more bad news to come which will in turn drop the share price.

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