CAM POSSIBLE TAKEOVER BY BANCO DE ESPAÑA

Spain May Take Over CAM After Talks on Merger Falter

By PABLO DOMINGUEZ And JONATHAN HOUSE – WALL STREET JOURNAL

MADRID—Ailing Spanish savings bank Caja de Ahorros del Mediterráneo began discussing its possible nationalization with Banco de España - the central bank - on Thursday, after its merger with three small peers fell apart late Wednesday.

A spokesman said the Alicante-based savings bank, or CAJA, is presenting the Bank of Spain with a new business plan and an application for money from Spain's state-financed Fund for Orderly Bank Restructuring, also known as FROB. He declined to say how much money the bank, known as CAM, needed, but analysts calculate that it would be enough to give the FROB control of more than 50% of the bank.

The nationalization of CAM would be the first since the Spanish government, under pressure to shore up international confidence in the health of the country's banks, in February set new minimum capital requirements. It said it would take equity stakes in those institutions that weren't able to raise new money. The Bank of Spain estimated that 12 banks would have to raise a total of €15.15 billion ($21.4 billion).

The confidence-boosting exercise, however, fell flat, as many independent analyses said Spanish banks would need much more capital. Moody's Investors Service, for example, estimated that banks would need between €40 billion and €50 billion.

The failed merger, which fell apart late Wednesday, comes at a delicate time for Spain. The government is stepping up overhaul efforts and has allayed concerns that Spanish lenders could be hit by the deepening crisis in neighboring Portugal. Spain's borrowing costs have stabilized and have come down slightly in recent months, whereas investors have continued to dump bonds of the smaller Iberian neighbor.

CAM, Spain's 10th-largest lender, was in advanced talks to merge with smaller peers Cajastur, Caja Cantabria and Caja Extremadura that would have formed Banco Base, the country's sixth-largest lender.

The would-be partners had become increasingly concerned about CAM's solvency. These worries led provisional management to request €2.78 billion from the FROB, nearly twice the amount that the central bank had estimated Banco Base needed to satisfy new minimum capital requirements.

Such a hefty capital injection would have implied a significant dilution to stakeholders and given a large holding to the state-financed fund.

CAM's three former partners have started new merger talks among themselves, a Caja Extremadura spokesman said. As they are relatively small entities, they could explore the possibility of adding other cajas to their group, he said.

The breakup of the Banco Base merger "raises, once again, concerns on the amount of losses" in the Spanish banking system, said BPI analyst Carlos Peixoto.

These concerns are especially acute regarding Spain's mutually controlled cajas. With their close ties to local communities and governments, Spain's cajas have born the brunt of the country's housing bust.

Banco Base was forced last week to abandon plans to hold an initial public offering, primarily because of CAM's large holdings of properties on the MediterraneanCoast, ground zero of the country's housing collapse.

Other cajas have encountered similar difficulties to raise funds from private investors. A key test for confidence in the industry will be the success of the offering of the largest caja, Bankia, a lender with €344.5 billion in assets, scheduled for this summer.

Javier Diaz-Gimenez, economics professor at the IESE business school, said he thought CAM's request for a capital injection from the FROB would be the first of many. "The FROB will end up needing to pay out substantially more than the amount originally estimated," he said.

Spain's FROB has invested €11.56 billion into the country's savings banks, given in the form of loans. It has an additional €4.5 billion on hand to invest but can raise up to €99 billion through state-backed debt issuance

CAM drowning

By Per Svensson

The banking sector in Spain is like a drifting ship in danger of capsizing at any moment, with the crew already scrambling for the lifeboats.   Some have found one, whilst others are still in the cold sea, trying to get aboard.  The saving bank CAM (Caja de Ahorro de Mediterraneo) thought it was safely on board the lifeboat “Base” (the merger of four saving banks) but when the other three crew members saw the bad shape of CAM, they scuttled the boat and left CAM to its own devices. The CAM is now in deep and cold water, desperate for a lifebuoy from the FROB boat for the shipwrecked. But will it come in time?

What has happened?

In order to reinforce the banking sector in front of a tsunami of bad debts, the Bank of Spain demanded that all banks and saving banks have a minimum of a 10% reserve fund for capital at risk.  If banks could not achieve this minimum, they were required to merge with other entities in order to be able to comply.  As a last resort, a bank could request the State, through the agency FROB  (Fondo de Reestructuracion Ordenada Bancario) to supply the funds needed, which would though result in an indirect nationalisation of the bank.

For several reasons, which we shall deal with in continuation, CAM lacked almost 2,800 million euros to reach the 10% required and so started negotiations to form a joint bank with CajAstur, Caja Extremadura and Caja Cantabrica.  The four entities subsequently decided to form a new bank which they named Base, however, CAM's three partners got cold feet when they saw the poor state of CAM finances and abandoned the project, leaving CAM with the name Base.

In the last moment CAM had to apply for 2,800 million euros from FROB.  This means the bank has lost its independence and is being managed by the Bank of Spain. The state bank have been trying to interest some solvent banks, including Santander, BBVA, La Caixa, Sabadell and Popular, to purchase the remnants of CAM.

How could this happen?

CAM centre of operation is in Alicante, the principal province affected by uncontrolled property speculation in Spain.  The savings bank had its finger in many of the ridiculous property pies, either as financier of reckless speculators, or directly in it's own promotions. At the same time, it was “raped and pillaged” by the spendthrift Valencia Regional Government.

CAM, encouraged by the Regional Government, invested 420 million in the Terra Mitica theme park in Benidorm in 2000 that was purchased by Aqualandia for only 70 million when the park suspended payments in 2004. CAM also paid the bills for the prestige projects, Ciudad de la Luz and Formula 1 racing in the streets of Valencia City.

The bank has 450 million euros at risk with the biggest property promoter in the region, Enrique Ortiz, and another 800 million connected with Hansa Urbana and its stalled mega projects in Alicante and Valencia.  At the end of 2010 around 80% of the promotions and hotels companies, which the bank participated in, suffered losses.

CAM also appears in the creditors lists of most of the huge property fiascos, including Martinsa, Llanera or Polaris World, and it has a 10% share of non-paid loans on dwellings.

In spring 2010, CAM, together with the other big savings bank of the region, Bancaja, had to lend the Valencia Regional Government 500 million euros so that they could pay their bills.   Last October, again jointly with Bancaja, another 1,000 million went the same way at a preferential interest rate of 4%.

In 2007 CAM paid 132 million euros for 5% of the shares in the Moroccan bank Banque Marrocaine du Commerce Exterieur and in April 2009 acquired the Mexican company Credito Inmobiliario, specialist in mortgages and loans to constructors, for 144 million.  The same year losses of that company amounted to 120 million and in 2010 its financial situation was so bad that CAM had to urgently invest another 150 million.

The result of all this was that in 2010 CAM had to consume one third of its reserves to improve its balance and avoid losses of 600 million euros.  That year the interest margin (the difference between what it earned from loans and what it paid for deposits) plummeted 55%.  Bad loans rocketed to 4,600 million, 65% more than in 2009.  To complicate the situation further, astute clients withdrew deposits of 1,096 million last year.

From juicy fruit to garbage

In 2007 CAM had earnings of 386 million euros and a credit rating of A+.  The bank decided to go public by selling “participation shares” so that it could expand in the international market.  That was exactly the moment the property bubble exploded, an event the incompetent bank managers had not contemplated could happen, and the rot in the juicy apple became apparent.

At the end of last week, the rating agency Fitch reduced the credit rating of CAM from BBB+ to BB+, which is classified as “garbage.”

As I write, the Bank of Spain has not yet intervened, but it seems the solution will be that the state bank will advance the money the bank needs to reach solvency, and, if no other larger bank decides to take a considerable part, it will take control.

We know many foreigners, especially along the Costa Blanca, have deposits with CAM and will now be anxious to know if they are safe.  In principle, bank deposits are guaranteed by the State up to 100,000 euros, per investor, however, if I had an account in CAM, I would have withdrawn the money and placed it somewhere else (you can get 4% interest in other entities) because,  if the bank is forced into bankruptcy, the accounts may be blocked for some time and clients may not be able to access their money for paying bills etc.

Of course, the local branch managers will strenuously deny this could happen, and will continue saying as they said all along,  "The bank is perfect condition."