Shares in nationalised Spanish lender Bankia went into free fall on Monday after the country’s bank restructuring fund valued them at just one euro cent.
That revaluation was part of a European Union bailout deal before a planned injection of 10.7 billion euros in new capital into Spain’s fourth-biggest lender.
The move was widely expected as the Madrid government tries to draw a line under Spain’s biggest-ever bank failure and give Bankia a fresh start.
Many of the preference shares were bought by small, unsophisticated Spanish investors – particularly pensioners – when the the lender launched an initial public offering of stock in July 2011.
They paid 3.75 euros each what has been called a national scandal.
Bankia is expected to dip far below that one cent bailout price in coming months as investors focus on the bank’s weak state, a struggling Spanish economy and a new government plan to partially merge Bankia with two other troubled lenders.
Under Bankia’s recapitalisation, hybrid debt and preference shares are due to be converted into discounted ordinary shares.
Analysts believe thousands of the bond and preference share owners will sell their new ordinary stock at the earliest opportunity to try to recoup some their heavy losses, pulling the shares down further.
Analysts expect Bankia shares to progressively adjust to the 1 euro cent valuation before the cash injection due in May, but say it could later fall as low as 0.004 euro.
Bankia has said it hopes to return to profit in 2013 after reporting a 19.2 billion euros loss for 2012.
But analysts said its prospects still looked bleak. Its asset quality – the things it lent money on – is seen as poor, it is beholden to the European Central Bank for funding and the Spanish economy is still in a parlous state, with more than a quarter of working-age people there unemployed.
“Short-term earnings will be pressured by the re-pricing of asset yields at the current interest rates, the need to reduce the reliance on the ECB and asset quality deterioration on the mortgage and SME segment,” analysts at BPI said in a note.
The conservative government also wants to partially merge Bankia with two other rescued lenders – CatalunyaBanc and NCG Banco – that would operate under a single holding company. Both are expected to report losses this year and next.