April 18, 2013 / 4:36 PM / in 4 years

UPDATE 1-Spain mulls extra capital for Banco Gallego sale-source

3 Min Read

(Adds details, background)

By Sarah White

MADRID, April 18 (Reuters) - Spain may inject more capital into nationalised lender Banco Gallego before its sale to Sabadell, a source with knowledge of the matter said, an unexpected move that signals the government's difficulty in ridding itself of rescued banks.

Though small, the deal is being closely watched after the failed auction of larger nationalised Catalunya Banc earlier this year, when the state received lower offers than it had wanted and bidders clamoured for government-funded protection against future losses as a condition for taking it on.

Cash-strapped Spain has so far been reticent to dole out extra funds to help sell the banks it has already bailed out, and the extra capital injection may yet not materialise.

Spain's bank restructuring fund FROB said on Wednesday it was close to handing the bank to Sabadell, but was negotiating the terms of the sale.

"The extra cash would be to make sure all the risks are well covered ... it is being negotiated," the source familiar with the talks said on condition of anonymity.

"A deal is close," the source added, declining to comment on the size of a possible cash injection.

Sabadell and the FROB declined to comment, as did the Bank of Spain and the Economy Ministry.

Sabadell offered to pay 1 euro ($1.31) for Banco Gallego, the source said, echoing the price tag on previous disposals by the government as it tries to offload the lenders it took over in recent years after they were felled by a property crash.

The FROB last year sold Banco de Valencia to La Caixa for 1 euro, for instance. But that sale came with an asset protection scheme which Spain, battling to rein in spending to contain its deficit, has ruled out for future deals.

Spain has already bailed out its weakest banks using 41 billion euros of funds from Europe. Banco Gallego, originally part of bigger bailed out bank NCG Banco, has already received 80 million euros from the FROB.

The bank has transferred some of its soured property assets to a so-called bad bank, but some of its smaller loans to developers and real estate assets remain on its books and could bring further losses.

Banco Gallego, deemed by the FROB to have negative equity of 150 million euros, has just over 180 branches, most of which are based in the northern region of Galicia.

Sabadell has already bought several banks during the sector's consolidation, including rescued CAM, from the eastern region of Valencia.

$1 = 0.7644 euros Editing by Carlos Ruano and Mark Potter

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