Spain's Bankia to face new hurdles on road to recovery

MADRID, March 22 Fri Mar 22, 2013 12:36pm EDT

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MADRID, March 22 (Reuters) - As Spain's nationalised Bankia awaits an imminent announcement on the valuation of its shares, the last step in the clean-up of the bank, the government is pressing ahead with a new partial merger which could slow its recovery.

The tens of thousands of Spaniards who bought shares in the savings bank in 2011 will find out later today that each share they hold is worth just 0.01 euro, a valuation insisted upon by EU regulators as Bankia prepares to get 18 billion euros ($23.3 billion) of European rescue funds.

While the bank is showing tentative signs of recovery, official and banking sources said the government will hire an international consultant to come up with a plan to partially merge Bankia with CatalunyaBanc and NCG Banco, two other rescued lenders, which it wants to operate under a single holding company.

The plan emerged unexpectedly earlier this month after the Bank of Spain failed to auction off CatalunyaBanc. The cancelled sale was a sign of possible cracks emerging in the country's ongoing financial reform.

Bankia's executives have not yet been briefed on the plan.

"It is an unexpected distraction. Things were starting to fall in line well," said a banking source with knowledge of Bankia's thinking.

After requesting a bailout last year and meeting strict conditions such as imposing steep losses on small savers who invested into the bank, the announcement of the valuation on Friday was meant to mark a fresh start for the lender.

Bankia in February reported tentative signs of recovery and said it would return to profit this year after deposits rose at the end of 2012 and it began cutting costs.

The other two banks, however, are expected to report losses in 2013 and 2014. Also, the government could end up having to renegotiate with the EU some terms of the rescue of the banks, if their operations are joined.

The government insists it will not fully merge the three banks and that the lenders will join forces on marketing, negotiating terms on major purchases and other items.

It also says that creating a single holding operated by Bankia's top executives will not weigh on the lender's capacity to apply its European Union-agreed roadmap.

"Absolutely not. This will add value, not cut value," a source close to the government said, adding that the European authorities have been briefed on the plan.

"It makes sense for Bankia to lead the project because it has an impeccable management team and it also has the biggest client base."

The process is still at an early stage and could change over time. Spain's financial sector restructuring has gone through several stages over the last five years and the model of grouping several commercial brands under a single holding failed when it was tried previously.

It led banks involved in such operations to later fully merge, helping shrinking Spain's banking sector from more than 45 lenders to just over 10 today. ($1 = 0.7737 euros) (Editing by Fiona Ortiz and Elaine Hardcastle)

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