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Nationalised lender Bankia is expected to post first-half losses of more than 4 billion euros ($5.02 billion US) on Friday, highlighting the need for capital from a European rescue of Spanish banks that is unlikely to arrive before the end of September.
Bankia was taken over by the government in May when it asked for 19 billion euros of state aid after anticipating the steep losses from real estate investments which soured after the property market crashed four years ago.
Spain has asked Europe for money to keep its banks afloat after a surge in bad debts as the economy sank into recession and is considering asking for a broader economic bailout. It will also set up a bad bank to take on troubled assets from the rescued banks to clean up the sector.
Three analysts and a banking source with knowledge of the matter said they expected Bankia to report more than 4 billion euros in losses for the first half, worse than the total for the whole of 2011.
"The losses will be around 4 billion euros taking into account the new provisioning criteria already announced by the lender (when it was nationalised last May)", the banking source said.
Bankia, Spain's fourth largest lender after seven different savings banks were merged into one in 2010, is expected to report results for the first half of the year on Friday, the last day it is allowed to do so.
After it took over Bankia in May, the government asked for a 100-billion-euro lifeline from the euro zone to shore up its ailing banks, burdened with an estimated 184 billion euros in bad loans to property developers.
Banks are also facing rising loan defaults from other areas of the economy due to the recession and austerity measures aimed at reducing Spain's deficit and making its debt more manageable.
A number of banks are expected to need aid but Bankia is expected to be the biggest taker because it is the most exposed to the real estate sector.
Europe made available emergency liquidity for Spain's banks in August, but Bankia and the economy ministry say it can wait until the publication of a new bank-by-bank stress test due by the end of September.
According to the conditions attached to the European assistance for Spanish banks, Spain must provide details on how the aid would be used before it is disbursed.
The debt crisis has made it hard for banks in Spain and other euro zone countries to borrow from other banks so they are relying heavily on the European Central Bank for liquidity. The ECB reported record borrowing from Spanish banks in July.
Bankia's first half troubles are mainly due to provisions from adjustments in its loan portfolio.
"If they stick to the same criteria they used when they presented their recapitalisation plan losses will be huge due to high provisionings to clean up its credit portfolio," said Nuria Alvarez, banking analyst at Madrid-based brokerage Renta 4.
Bankia originally reported a 300 million euros profit for 2011, but after the government bailout was announced, it began writing down bad loans, repossessed property and restated the results to show a 2.979 billion euros loss.
"Losses could be even higher in the first half of 2012 than for the whole of 2011 when they had to restate their figures", Alvarez said.
In a recent research note, Barclays said that a complete cleanup of Bankia's balance sheet and the full implementation of its recapitalisation plan would mean losses of 10.6 billion euros for 2012.
Bankia's new head, Jose Ignacio Goirigolzarri, announced in May the bank must come up with provisions of up to 14 billion euros before taxes this year, to cover the losses.
"Taking into account the provisioning needs and fiscal effects, net losses for this year could be around 9 billion euros", said a banking analyst at a Spanish institution.
Bankia's recapitalisation plans and final provisioning needs could be revised depending on the conditions imposed by the government after it reaches a deal with the ECB, Bank of Spain, European Commission and the International Monetary Fund on the creation of a "bad bank" that will take on troubled assets from all of Spain's rescued banks.
"There is a lot of uncertainty about the bad bank. It is absolutely necessary to know all the details of the discounts that will be imposed on the assets to be transferred, the kind of assets, financing of the structure and its accounting rules", said one analyst who asked not to be identified.
On Friday the Spanish government is expected to approve a legislative framework for the establishment and functioning of the asset management company, or "bad bank".
The government is also set to grant its central bank new powers to intervene more rapidly in struggling lenders and the country's bank rescue fund (FROB) will gain more capacity to wind them down if they fail, according to the draft for a new law obtained by Reuters.