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Bankia approves merger agreement with BMN

27 June 2017

Category: Corporate

Related information

  • Bankia will issue 205.6 million new shares, 6.67% of its post-merger capital, for delivery to the shareholders of BMN
  • The merger values BMN at 825 million euros, 0.41 times its book value
  • The transaction will generate synergies of 155 million euros, most of them as from the second year, equal to 40% of BMN’s cost base
  • The integration creates value from year one, boosting Bankia’s earnings per share by 16% and yielding an expected return on invested capital (ROIC) of 12%, in both cases in year three
  • Bankia leverages its strong capital position built up through organic capital generation over the last four years and expects to reach a pro forma CET1 Fully Loaded ratio of 12% by the end of 2017
  • Goirigolzarri: “Bankia is entering a phase of growth with the clear objective of creating value for all shareholders”

The Board of Directors of Bankia has decided to enter into a business integration agreement with BMN, under which Bankia will carry out a merger by absorption of BMN.

The transaction will be implemented through delivery of 205.6 million newly issued shares of Bankia to the shareholders of BMN. This entails valuing BMN at 825 million euros (0.41 times its book value).

The shareholders of BMN will hold 6.7% of Bankia's capital after the merger has been completed. They will then be the owners of liquid shares which are listed on the stock market and which pay a dividend that has been growing ever since the first dividend was paid in July 2015, out of profit for 2014.

The merger reinforces Bankia's position as the fourth largest bank in the Spanish market and comes at a time when the outlook for the financial system is improving, both in terms of expected business growth and as regards the foreseeable trend in interest rates.

Repayment of state aid

Bankia's chairman José Ignacio Goirigolzarri highlighted that, "after successfully completing its restructuring process, Bankia is now ready to embark on a new stage of growth, in which the integration of BMN is tremendously positive because it allows us to build out our franchise in some areas of strong growth in which we had a very limited presence".

Goirigolzarri pointed out that "the merger is very good for all of Bankia's shareholders because of the value creation it entails. And it is very good news for the taxpayers because the union of the two institutions increases the capacity to repay the aid received."

The chairman of BMN, Carlos Egea, stated that "the merger is good for our shareholders, employees and customers, as BMN will be joining the country's fourth largest financial group, which is also its most solvent, most efficient and most profitable".

Egea added that this is the best way to "continue being useful to households and businesses in the regions in which we are based, where the merged bank will give customers access to a new range of products and services, as well as more advanced commercial practices".

Value generation

The merger is positive in terms of value creation for Bankia's shareholders. Earnings per share are expected to grow 16% and the expected return on the invested capital (ROIC) will be 12% in year three. Bankia's profitability, measured by return on equity (ROE), will grow by around 120 basis points.

With the integration of BMN, Bankia makes efficient and effective use of the capital it has generated organically in recent years, which has pushed its CET1 ratio on a Fully Loaded basis up from 6.82% in 2012 to 13.37% in March 2017. Bankia expects to have a Fully Loaded ratio of 12% at the end of 2017, by which time the effective completion of the transaction will have taken place.

The merger will allow the capture of synergies valued at 155 million euros as from year three, equivalent to 40% of BMN's current cost base, although almost all of these gains, 149 million euros, are expected to be achieved already in year two. 

Balance sheet quality

Through additional provisions and write-downs totalling 700 million euros in BMN's portfolio and of loans and foreclosed assets, Bankia's coverage ratios will be maintained at current levels after the merger.

The resulting entity will have a ratio of real estate developer loans to total loans of scarcely 1.5%, the lowest figure among all the listed banks. And the volume of foreclosed assets net of provisions will be the second lowest, amounting to scarcely 1.4% of the assets.

Resulting entity

The transaction will be implemented through delivery to the current shareholders of BMN of 205.6 million newly issued shares of Bankia, leaving Bankia with a total capital of 3,085 million shares.

With the current composition of the two banks' shareholder base (the FROB - Fund for Orderly Bank Restructuring - is the main shareholder of both banks), approximately 66.56% of the capital of the resulting entity will be held by the FROB; 31.11% by Bankia's current private shareholders; and 2.33% by BMN's private shareholders.

BMN contributes to Bankia approximately 38,000 million euros of assets and a leading franchise in the Region of Murcia, Granada and the Balearic Islands. The volume of loans increases 20% and the volume of deposits, 28%.

Following the merger, Bankia will have market shares of more than 30% in Granada and the Region of Murcia and 25% in the Balearic Islands. These complementary additions will thus reinforce a franchise that is already the market leader in large, economically dynamic areas such as the Community of Madrid and the Valencian Community.

Negotiation process

The exchange ratio was decided after a due diligence process had been completed on both banks. Bankia retained Ernst&Young to conduct financial, legal, tax and labour due diligence and Accenture to carry out IT due diligence. Garrigues and Morgan Stanley have acted as legal and financial adviser, respectively.

For Bankia, the negotiation process with BMN has been monitored and supervised by a committee of independent directors, chaired by Joaquín Ayuso, who is the lead independent director and chairman of the Appointments and Responsible Management Committee. The other members of the committee are Antonio Greño, chairman of the Audit and Compliance Committee; Eva Castillo, chairman of the Remuneration Committee; and Javier Campo, chairman of the Risk Advisory Committee.

Morgan Stanley and Rothschild each issued a fairness opinion, in which they judged the merger valuation to be fair for Bankia's shareholders as a whole.

Following corporate governance best practice, Bankia's executive directors (José Ignacio Goirigolzarri, chairman; José Sevilla, CEO; and Antonio Ortega, general director of People, Organisation and Technology) abstained in the vote on the agreement.

Next steps

The next step is for Bankia and BMN to apply to the Companies Registry in Valencia to appoint an independent expert to approve the merger plan.

Once this approval is received, notice of the necessary Extraordinary General Meetings of Shareholders will be issued. These meetings are expected to be held in September.

Once the merger has been approved by the shareholders in General Meeting, the necessary authorisations will be sought from the various regulators, supervisors and authorities that must give their approval.

Full information on the merger plan is available on Bankia's corporate website (www.bankia.com).

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