Bankia SA : BFA-Bankia earns 428 million in first half

• BFA result does not include positive impact of hybrids exchange
• Recapitalization process completed, while non-strategic asset disposals and restructuring process gain momentum in second quarter
• Bankia earned 192 million euros in the period to June, with improved results in the main income statement items in the second quarter compared to the first
• The extraordinary gains generated in Bankia in the second quarter were allocated to provisions, with 284 million euros of non-recurring provisions and write-downs
• In the first half of the year Bankia granted 6,963 million euros of new financing to businesses and individuals, 4,745 million of which was granted between April and June
• The NPL coverage ratio rose to 63%, while the balance of NPLs fell for the second consecutive quarter, resulting in a cumulative decline of 514 million in the first half of the year
• The Bank has 24.4% coverage of refinanced loans
• Bankia generated 754 million euros of capital organically in the first half and raised its core capital ratio to 10.32%
• The loan-to-deposit ratio fell to 118.2%, so that deposits already account for 79% of the funding structure
• The restructured branch network accounts for 86% of deposits and 80% of gross income generated as of 30 June 2013

In the first half of the year the BFA-Bankia Group obtained profit after tax of 428 million euros, putting it on track to achieve the target established in the 2012-2015 Strategic Plan of posting full-year profit of 800 million euros.

This result does not include the effect of the exchange of hybrid instruments for capital, which, as forecasted, generated 1,795 million euros. Out of this amount, Banco Financiero y de Ahorros (BFA) allocated 525 million euros in the second quarter to cover contingencies in the arbitration process. BFA estimates that it has sufficient funds to assume any additional cost that might arise from arbitration, without having to raise more capital. Arbitration has no effect on the capital of Bankia, the listed entity. 

In the first half of the year Bankia achieved profit of 192 million euros after tax. The first half results show the effect of the subordinated loan that BFA granted to Bankia on 12 September 2012 and that was cancelled on 23 May.

Bankia's net interest income reached 1,092 million euros in the first half of the year, 35.9% less than one year earlier, although the decline was less pronounced in the second quarter than in the first. If the effect of the abovementioned subordinated loan is excluded, net interest income came to 1,234 million, down 27.6%.

Despite the complexity of the macroeconomic environment, pro forma net interest income quarter on quarter showed a change of trend, with better performance in the second quarter (633 million euros) than in the first (601 million).

This change is attributable to the fact that the mortgage portfolio has already largely absorbed the effect of the fall in interest rates, and also to the decrease in the interest paid on deposits. The net interest spread on customer loans was 0.95%, nine basis points more than in the previous quarter.

The Bank's gross income in the first half of the year came to 1,773 million euros, down 23.9%. Discounting the effect of the subordinated loan, gross income was 1,915 million, down 17.8%.

Bankia's income remained stable quarter on quarter, despite the downsizing of the branch network, as lower net trading income was offset by improved net interest income and stable fee and commission income.

Over the first half as a whole, fee and commission income reached 449 million euros, down 14.2% on one year earlier, while trading income was down 17% at 298 million euros. Gross income also reflects the smaller contribution to the Deposit Guarantee Fund following the regulatory changes approved in 2012.

Administrative expenses amounted to 888 million euros in the first half, down 15.1% on one year earlier. Once again, the second quarter was better than the first. Staff costs in the first half fell a cumulative 17.4% to 596 million euros, while general expenses fell 9.9% to 292 million. Depreciation and amortisation expense was down 29.8% at 94 million euros.

The fall in expenses brought the recurring cost:income ratio (excluding net trading income and exchange differences) to 60.1% at the end of the second quarter, an improvement of two percentage points compared to the previous quarter.

The pre-provision profit of Bankia thus came to 791 million euros, down 31.2%. If the effect of the subordinated loan by BFA to Bankia were excluded, pre-provision profit would have been 933 million euros, down 19%, consisting of 463 million in the first quarter and 470 million in the second.

In the first six months of the year Bankia recorded provisions totalling 856 million euros (272 million in the first quarter). The Bank used the extraordinary profit obtained in the second quarter, including the proceeds from the sale of its stake in IAG, to strengthen its balance sheet by increasing the level of provision coverage, with 284 million euros of non-recurring provisions being recorded in the second quarter.

As a result of all this, the profit after tax of Bankia came to 192 million euros, made up of 72 million euros in the first quarter and 120 million in the second. 

In the first half of the year Bankia granted 6,963 million euros of new financing to individuals and businesses in a total of 63,962 transactions.

Lending activity was more vigorous in the second quarter than in the first. A total of 37,560 transactions were recorded between April and June, as against 26,402 between January and March. In terms of volume, the 6,963 million total breaks down into 2,218 million granted in the first quarter and 4,745 million, i.e. more than double, in the second quarter.

Bankia provides up-to-date information on new lending through the website www.darcuerda.com. The 6,963 million euros of new lending in the first half breaks down into 5,018 million of loans to independent contractors, SMEs and businesses, 1,605 million euros of home loans, and 340 million of consumer finance.

Gross lending to other resident sectors (households and businesses) fell 3% as a result of the general deleveraging of the economy. The conversion of a syndicated loan arranged with the Fondo para la Financiación del Pago a Proveedores into a bond increased the fall in gross lending to customers to 5.5%, or 137,716 million euros.

At the end of the first half, on-balance-sheet customer funds (customer deposits and funding via clearing houses) rose 3.6% to 114,873 million euros, as a result of the increase in repo market activity (transactions through clearing houses, which have replaced part of the financing the Group obtained from European Central Bank).

As a result of the cancellation of all the Group's subordinated liabilities following the capital increase and exchange of hybrid instruments, subordinated loans went from 15,641 million euros at 31 December to zero at 30 June.

These cancellations, combined with the effect of the maturities of debt issues and marketable securities, reduced the total amount of on-balance-sheet customer funds by 11.6% to 144,848 million euros. In contrast, gross funds managed off-balance-sheet rose during the half by 4,053 million euros, or 27.8%, to reach 18,645 million.

Liquidity

The Bank's funding structure improved in the first half of the year, in which funding from the ECB decreased by 4,700 million euros. In addition, the commercial gap narrowed by 3,600 million euros, bringing the loan-to-deposit ratio to 118.2% at 30 June, compared to 120.4% in December 2012.

At 30 June customer deposits accounted for 79% of the Group's funding, compared to 76% in December 2012.

Risk management

Bankia succeeded in reducing the balance of NPLs for the second quarter running, achieving a cumulative reduction in the first half of the year of 514 million euros, or 2.6%, to a total of 19,305 million euros.

Even so, because of the sharper decline in lending, which was down 5.3%, the NPL ratio rose from 12.99% to 13.36%. Provision coverage, meanwhile, improved from 61.77% to 63.04% during the first half.

As of June 2013 Bankia had a portfolio of 22,113 million euros of refinanced loans in gross terms, 44.2% of which are already classified as non-performing loans on the balance sheet. The level of coverage of total refinanced loans is 24.4%. At the end of the first half, non-performing and substandard loans accounted for 60.6% of the total portfolio of refinanced loans. Some 87% of performing loans are loans to individuals. 

Following the transfer of assets to SAREB, developer loans account for slightly over 3% of the total credit portfolio, with provision coverage of over 50%. The coverage of the portfolio of business loans (not including developer loans) is around 15% and that of retail loans is 3.5%. The provision coverage of the credit portfolio as a whole thus went from 8% in March to 8.4% in June.

Solvency

In May this year the BFA-Bankia Group brought the recapitalisation of the Bank to a conclusion, with the start of trading, on 28 May, of the new shares issued by Bankia.

As of 30 June the core capital ratio of the BFA Group was 10.04% and that of Bankia, 10.32%.

Bankia maintains a self-sustainable capital model, generating 754 million euros (82 basis points) of capital organically in the first half through profit and a reduction in risk-weighted assets.

Discounting the adjustment arising from the integration of the additional 50% of Aseval, which reduces the core capital ratio by 23 basis points, Bankia improved its solvency ratio by 59 basis points in the first half (without taking the effects of the capital increase into account).

In the case of BFA, even after recording 525 million euros of provisions to meet possible contingencies arising from the arbitration process, ordinary capital generation allowed the Group to end the half with a core capital ratio of 10.04%. Arbitration has no impact on the capital of Bankia, as its effects are limited to the parent.

As regards progress in the Bank's restructuring process, in the first half of the year the BFA-Bankia Group executed or announced transactions that are expected to generate more than 1,700 million euros of cash.

With respect to the branch network, Bankia has already completed 58% of the planned closures, having closed 666 branches out of a total of 1,143.

The restructured network accounts for 86% of the Bank's deposits and 80% of the gross income generated in the first half of the year. Bankia maintains its goal of completing the branch network restructuring in the first quarter of 2014.

On 23 April Bankia completed the acquisition of the remaining 50% of Aseval.

On 15 May the Bank signed an agreement with the Valencian government to finance 450 dual vocational training grants.

On 22 May the director Alfredo Lafita replaced Fernando Fernández on the Bank's Nomination and Remuneration Committee.

On 23 May Bankia announced the adoption of measures to reinforce the Bank's corporate governance.

On 24 May the Board of Directors of Bankia agreed on the sale of 100% of the shares of City National Bank of Florida to the Chilean bank Banco de Crédito e Inversiones.

On 29 May Bankia and Telefónica signed an agreement under which Telefónica will provide the Bank with telecommunications and IT maintenance services.

On 4 June the Bank agreed to allocate 200,000 euros to facilitate access to rental housing for resource-poor families in the Valencian Community.

On 24 June Bankia rejoined the Eurostoxx 600.

On 25 June the Bank held the Annual General Meeting of Shareholders in Valencia.

On 27 June Bankia sold the whole of its interest in IAG.

On 28 June the Bank reached an agreement with Banco de Madrid for the transfer of its interest in Inversis. Subsequently, on 12 July Banca March exercised its pre-emption right in the sale of Inversis on the economic terms agreed with Banco de Madrid.