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BANKIA: MESSAGES FROM THE MEETING WITH ANALYSTS (ANÁLISIS BANCO SABADELL)

Following the breakfast with analysts, here are our impressions of the messages conveyed by the CEO and CFO. The main focus was on the distribution of the € 2.5 Bn (~45% of current market cap) over the 2018-20 period pledged in the Plan. In 2018 the company already paid out € 358 M in dividends.
On this point, the bank has stressed that it continues to be the main target, although in our opinion BKIA has left the door open to at least part of this amount being earmarked for additional impairments (both in structure and NPL reductions), which in principle (and without knowing how the possible funds will be used) would be received poorly.
Nevertheless, before the potential extraordinary dividend is approved (AGM in March’20), BKIA would need to:
(i) Know if the internal mortgage behavioural model is approved. We would expect the density to be cut to around 20-25% vs. the current ~35%. If this is the case, a minimum of €~5.3 Bn of RWAs would be freed up (25% density), which would mean around +90bps of CET1. We would expect the draft to be received by the end of the year or in Jan’20.
(ii) Learn the ECJ’s ruling (expected by late Jan/early Feb) on IRPH clauses. Note that BKIA has € 1.6 Bn of exposure, and in a worst-case scenario, which we rule out (total retroactivity), we estimated an impact of -35bps on CET1.
(iii) Learn the final impact from Basel IV. BKIA has mentioned for the first time that in its case the impact would be between -20bps and -40bps.
Moreover, and as a final point on the matter of capital, BKIA has mentioned that its impression of the regulator is that it indeed tends to offer some flexibility on P2R (Pillar 2 Requirement), as seen in Art. 104 of the CRD-V (which must be transposed to the different members of the EU in 2020 and be in force by the 1st of January, 2021). Note that on the 3rd of December, with the presentation of its new Strategic Plan, Unicredit (“UCG”) was the first bank to comment on its position, which BKIA would now be “backing”.
We recall that according to the current Capital Requirements Directive (CRD-IV), P2R must be met with CET1 capital. Art. 104 of CRD-V, as we have stated, would allow (on a case-by-case basis) the ECB to permit the mentioned P2R in banks to be recomposed of 56.25% with CET1, 18.75% with Tier 1 instruments and 25% with Tier 2 instruments. In other words, the banks would be “freeing up” CET1 from P2R (2% in the case of BKIA) by ~44% (the result of subtracting the full 56.25%), which would be replaced with debt instruments (AT1 and T2). The main reading on the Equity side is that due to a smaller percentage of CET1 being required, the spreads over the MDA (Maximum Distributable Amount) would be increases, and thus the aforementioned capital would be freed up. In the case of BKIA, according to our estimates this would be around +90bps. As with the rest of the banks, we think this will go towards offsetting the adjustments made from Basel IV.