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A. Núñez-Lagos / G. Núñez Fernández/ R. García Llaneza Madrid, June 8, 2012

The integration of the Cajas and the financial reform: The combined solution for the troubled financial environment. A. Núñez-Lagos / G. Núñez Fernández/ R. García Llaneza Madrid, June 8, 2012. CONTENTS. 2. 1. THE ASSESSMENT: 2010 - A NEED FOR RESTRUCTURING. 3.

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A. Núñez-Lagos / G. Núñez Fernández/ R. García Llaneza Madrid, June 8, 2012

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  1. The integration of the Cajas and the financial reform: The combined solution for the troubled financial environment A. Núñez-Lagos / G. Núñez Fernández/ R. García Llaneza Madrid, June 8, 2012

  2. CONTENTS 2

  3. 1. THE ASSESSMENT: 2010 - A NEED FOR RESTRUCTURING 3

  4. 1. 2010 - A NEED FOR RESTRUCTURING 1.1 Nature and features of savings banks • Origin • local and social purpose • limited scope of activities • Legal nature • Business / foundation • Differences with banks • No share capital • No shareholders • Regulation and supervision: multi-level competence 4

  5. 1. 2010 - A NEED FOR RESTRUCTURING 1.1 Nature and features of savings banks • Non-structural issues • High exposure to real estate and construction businesses • Excess capacity • Weaker internal demand – narrower margins • Dependency on wholesale financial markets • Geographic concentration risk • Structural issues • Corporate governance • Capital difficulties: no capacity to increase share-capital 5

  6. 1. 2010 - A NEED FOR RESTRUCTURING 1.2 Consolidation: drivers and legal alternatives • Enhancing solvency and liquidity is the goal • Consolidation is the answer • Internal capital generation • Downsizing • Corporate governance • Concentration risk • Cost of finance • Volume • Credit rating • Accounting treatment • New capital instruments 6

  7. 1. 2010 - A NEED FOR RESTRUCTURING 1.2 Consolidation: drivers and legal alternatives • Consolidation instruments available • Merger • IPS/Consolidated group of credit institutions • Re-organisation process • 2009-2010: first round of consolidation: mergers and creation of contractual groups • 2011: “bankisation” of the financial business • 2012: second round of consolidation. The market test • Regulatory drivers • increased capital requirements • conditional State support 7

  8. 1. 2010 - A NEED FOR RESTRUCTURING Appendix 1 1.3 Overview of the restructuring process Appendix 2 • 31.12.2009 • 45 cajas. Average size 30bn € Total Assets • 2010 • 7 mergers • 5 contractual groups • 2 cajas resolved and transformed into foundations • Nearly €1,000 bn assets involved in corporate transactions. Only 5 cajas had not taken part in any : Kutxa, Vital, Ibercaja, Pollensa, Ontinyent (6.3 % total assets) • 2011 • All cajas (except for Caixa Pollensa and Caixa Ontinyent (0.1% total assets)) transferred their assets and liabilities to banks • 1 more contractual group (Kutxabank) • 1 caja resolved. Assets assigned to traditional bank. • 3 more cajas + 1 bank taken over by the State • 2012 (Jan-May) • 3 bank mergers • State has sold out 1 out of the 4 entities taken over in 2011. Remainder to go in 2012. Sold-out cajas will merge into assignee entities • 11 operating entities. Average size 103bn € Total Assets Appendix 3 Appendix 4 8

  9. 1. 2010 - A NEED FOR RESTRUCTURING 1.3 Overview of the restructuring process • Limited success of mergers • Practical evidence • Few transactions • Regional scope, except Bankia • Resilience factors • Economic limitations • Higher cost of synergies • Loss of intangible assets • Limited accounting impact • Issues related to corporate governance and capital raising remain unsolved 9

  10. 2. THE DESIGN: INSTITUTIONAL PROTECTION SCHEME/CONTRACTUAL GROUP 10

  11. 2. IPS / CONTRACTUAL GROUP 2.1 IPS and contractual group: fundamentals of the design IPS Institutional Protection Scheme • IPS (Institutional Protection Scheme) • Contractual undertaking to provide liquidity and capital • Immediately available funds • Aggregated capital and risk monitoring • 24 month prior notice to quit • Legal framework: Art. 80.8 Directive 48\2006\CE • Subject to Banco de España consent. • Effect: zero weight of cross-exposures 11

  12. 2. IPS / CONTRACTUAL GROUP 2.1 IPS and contractual group: fundamentals of the design Contractual group • Contractual group • Goals sought: transferring control to a single entity. • Integrated businesses under common direction • Financial solidarity: shared solvency, liquidity and results • Instrument: IPS enhanced with additional elements for financial and operational integration • Legal framework • Until April, 2010, not specifically provided for • Current • article 8.3.d) Law 13/1985 • Royal Decree-law (“RD-law”) 10/2011 • Regional legislation 12

  13. 2. IPS / CONTRACTUAL GROUP 2.2 Establishment of a contractual group Legal features • Requirements for an “enhanced” IPS • Centralised policies, business strategies and levels and measures for internal control and risk management • if the parties are savings banks, central entity must be a public limited liability company (S.A.) under “common control” • Solvency and liquidity commitment. Minimum 40% capital • Pooling of individual results. Minimum 40% • Term. Minimum 10 years. BdE to authorise exit • Consequences of an “enhanced” IPS • Qualifies as group for accounting/regulatory purposes • May be exempted from individual solvency requirements • One player on the market 13

  14. 2. IPS / CONTRACTUAL GROUP “REVERSAL EFFECT” Caja 1 Caja 2 Caja 3 Shareholding structure Central entity (bank) Integration Agreement Central entity (bank) Control structure (unified management) Caja 1 Caja 2 Caja 3 14

  15. 2. IPS / CONTRACTUAL GROUP 2.2 Establishment of a contractual group Integration Agreement • The Integration Agreement • Political structure • Exchange ratio (quotas) • Consolidation and “circular control” • Economic structure • Financial integration ► solvency and liquidity support ► cash pooling ► profit pooling • Functional integration ► policies ► operations ► businesses • Legal structure • Stability and enforcement mechanisms 15

  16. 2. IPS / CONTRACTUAL GROUP 2.3 Rationale for the contractual group • Strategic rationale • High level integration • Limited cost of synergies • Resolves certain issues inherent to savings banks’ legal nature • Wider accounting impact • Economic rationale • Preserves the savings banks and their social role • Dual business structure (franchise-type) / dual, specialised organisation • Parent entity is a bank 16

  17. 3. EVOLUTION TRHOUGH BANKISATION 17

  18. 3. EVOLUTION THROUGH “BANKISATION” 3.1 2010-2011: legal developments New perspectives after RD-law 11/2010 • Transformation into a foundation Italian precedent • Indirect financial business Control/joint control + ≥25% share capital Cajas live on as credit entities • Kick-start:”la Caixa” RD-law 2/2011 A new urge on consolidation • Twofold purpose • Reinforce the solvency of the financial system • New capital requirements (primarily applicable to cajas) • Reform of the FROB legal framework • Promote further restructuring in the savings bank sector 18

  19. 3. EVOLUTION THROUGH “BANKISATION” 3.1 2010-2011: legal developments RD-law 2/2011 A new urge on consolidation • Solvency requirements (additional to BIS III) • Principal capital: • Composition: roughly equivalent to BIS III/CRR IV • Scope: consolidated • Minimum required: • general: 8% RWA • 10% RWA if high dependency on wholesale finance (>20%) and no significant third-party shareholders (≥20%) • Impact on banks / cajas / credit unions • Timeframe for compliance: 30.9.11/31.12.11 • Amendment of FROB legal framework • Ordinary shares become the only instrument available for support • Exception: credit unions • Total bankisation of cajas • Rules on corporate governance 19

  20. 3. EVOLUTION THROUGH “BANKISATION” 3.2 Reasons for “bankisation” Non-compliant entities • Strategic options under RD-law 2/2011 • All cajas (but for a few exceptions) need to recapitalise • Alternatives for recapitalisation • raising capital on the market: public or private placement • corporate transactions • theoretically, disinvestments • Each alternative implies total bankisation • of self-standing entities • of IPSs: the existing structure proves a disadvantage on the market • excessively complex • locates value outside the bank 20

  21. 3. EVOLUTION THROUGH “BANKISATION” 3.2 Reasons for “bankisation” Compliant entities • Even well capitalised entities have strong incentives to “go bank” • Avoid competitive disadvantage of being a caja • Re-organise assets and re-focus strategies • Set up a platform for future corporate transactions • Reduce cost of capital / finance • Split business / charity 21

  22. 3. EVOLUTION THROUGH “BANKISATION” 3.3 contractual group 2.0 • A contractual group without the substance • No dual business structure • Virtual merger becomes actual: • full business integration • full financial solidarity • Integration Agreement becomes a Shareholders’ Agreement • Present and future • Contractual groups remain as a safe harbour... • ... but are not likely to live for ever • no room for new groups • interaction with banks will dilute the cajas’ shareholding • preserving the legal form of a caja may probably cease to be a priority 22

  23. 4. THE 2012 REFORM 23

  24. 4. THE 2012 REFORM 4.1 Spanish Capital Adequacy Requirements • RDL 2/2011 • Required new minimum capital: • Non-listed entities or • Entities highly dependant on wholesale finance • Others: • RDL 2/2012 • Reinforcing provisions related to NPLs and foreclosures. • RDL 18/2012 • Reinforcing provisions related to all real estate risks. • Asset Management Companies. 8% 10% 24

  25. 4. THE 2012 REFORM 4.2 Some figures Increase level of provisions: € 54,000 M Increase level of provisions: € 30,000 M Source: Ministerio de Economía y Competitividad 25

  26. 4. THE 2012 REFORM Financial sector reform 2nd phase. May 2012: Additional increase in provisions for Performing assets (around € 30 bn) Source: Ministerio de Economía y Competitividad 26

  27. APPENDICES Source: statistical information of the ConfederaciónEspañola de Cajas de Ahorros (www.cajasdeahorros.es) 27

  28. APPENDIX 1 - SAVINGS BANK SECTOR 31.12.2009 APPENDICES 28

  29. APPENDIX 1 - SAVINGS BANK SECTOR 31.12.2009 APPENDICES 29

  30. APPENDIX 1 - SAVINGS BANK SECTOR 31.12.2009 APPENDICES 30

  31. APPENDIX 2 - SAVINGS BANK SECTOR 1.1.2010 / 31.12.2010 APPENDICES • Mergers N.B.: (1) Last Balance Sheet before the Merger: 31.03.2010; (2) Last Balance Sheet before the Merger: 30.06.2010; (3) Last Balance Sheet before the Merger: 30.09.2010 * As of 31.12.2010 Cajasol was integrated in Banca Cívica 31

  32. APPENDIX 2 - SAVINGS BANK SECTOR 1.1.2010 / 31.12.2010 APPENDICES 2. Contractual Groups 32

  33. APPENDIX 2 - SAVINGS BANK SECTOR 1.1.2010 / 31.12.2010 APPENDICES 3. Resolved Saving Banks N.B: * Acquisition was effected by end of 2009. (1) Caja Castilla La Macha´s total assets value as of 31.03.2010. Cajastur’s total assets value as of 30.06.2010 (2) Cajasur’s total assets value as of 31.12.2010. BBK´s total assets value as of 31.03.2011 33

  34. APPENDIX 3 - SAVINGS BANK SECTOR 1.1.2011 / 31.12.2011 APPENDICES 1. A New Contractual Group: Kutxabank N.B: * First consolidation date was 01.01.2012 34

  35. APPENDIX 3 - SAVINGS BANK SECTOR 1.1.2011 / 31.12.2011 APPENDICES 2. Transfer of Assets and Liabilities to Banks N.B.: * Liberbank is the Contractual Group resulting from the integration of Cajastur, Caja Extremadura y Caja Cantabria, after the breaking up of Banco Base. ** Actual first consolidation date was 01.01.2012 35

  36. APPENDIX 3 - SAVINGS BANK SECTOR 1.1.2011 / 31.12.2011 APPENDICES 2. Transfer of assets and liabilities to banks 36

  37. APPENDIX 3 - SAVINGS BANK SECTOR 1.1.2011 / 31.12.2011 APPENDICES 3. One caja is resolved. 4. Four entities are taken over by the State 37

  38. APPENDIX 4 - SAVINGS BANK SECTOR JAN 2012 / MAY 2012 APPENDICES 1. Two bank mergers 2. Sale of the cajas taken over 38

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