Auditor “gave warning” before collapse that Bankia was not viable
Testimony of Deloitte partner Francisco Celma at odds with that of failed lender’s managers
Francisco Celma, a partner in Deloitte and auditor of Bankia and its parent Banco Financiero y de Ahorros, on Wednesday told the High Court that on March 26 of last year he had indicated to the audit committee of the now-nationalized bank that there were serious doubts about its viability.
He also told Judge Fernando Andreu that he had advised BFA that it should reduce the valuation of Bankia on its books to a reasonable level. If the bank had heeded his words, the group would have seen its capital reduced to below the statutory minimum.
The BFA-Bankia group resulted from the amalgam of seven savings banks, or cajas, led by Caja Madrid. Bankia listed on Spanish stock exchanges in July 2010 at an initial offer price of 3.75 euros a share. The shares closed Wednesday at 0.320 euros, leaving some 350,000 small investors with huge losses. Part of the High Court’s investigation into events surrounding Bankia is to determine if fraud was committed in the listing.
BFA-Bankia was nationalized in May of last year shortly after its chairman Rodrigo Rato, a former Popular Party (PP) economy minister and ex-IMF managing director, stepped down. Its earnings were subsequently restated to show a huge loss, requiring a capital injection of 23.4 billion euros. A number of former managers of BFA-Bankia, including Rato, have been formally implicated in the case.
Celma acknowledged in court that he did not specifically tell the audit committee that the bank’s financial situation was unviable, but explained that it was easy for any professional to deduce from the bank’s books that that was the case.
The Deloitte partner’s testimony is at odds with that given to the court by members of the audit committee, which was chaired until April 2012 by a former interior minister in a PP government, Ángel Acebes. He claimed Deloitte did not make any objections to the accounts that had been presented to the auditor.
Acebes told the High Court that he had not hidden any problems from the board that might have been identified by the auditor and that the last report submitted by Deloitte only pointed to “some items pending analysis.”
Celma admitted he did not specifically tell the auditors that the bank’s financial situation was unviable
Judge Andreu may recall some of the members of the audit committee to explain the apparent contradictions between their testimony and that of Celma.
Judicial sources present during Celma’s testimony said the auditor explained that Bankia had booked tax credits worth 3.3 billion, which would have required the bank to generate profits of 11 billion euros in the future, a scenario that pushed the bounds of credibility. He also explained that additional provisioning requirements to cover losses imposed by the government in February of last year would also have an impact on the bank, as would new capital requirement rules imposed by the European Banking Authority.
Celma went on to say that he had warned the bank of the potential problems posed by the tax credits and Bankia’s valuation as far back as October 18, 2011. He also said he was unaware of the reasons why he was not invited to four meetings of the audit committee. Celma said Bankia failed to reply to an email sent by Deloitte in February 2012 asking for information about the situation at its real estate division. He then threatened not to audit the bank’s financial results for 2011.
During five hours of questioning by Judge Andreu, Celma said the accounts submitted to him in March of last year were not signed, which was the reason he could not submit an audit report. He let it be understood that the accounts were not signed in order to avoid an audited report that would have contained reservations. The 2011 results initially showed a profit of 309 million euros, which was later restated as a loss of 2.927 billion euros.
Under Rato’s stewardship, BFA-Bankia estimated its capital injection needs at seven billion euros to meet capital adequacy requirements. Celma said Wednesday that the recapitalization plan approved by the Bank of Spain on April 17 did not guarantee that the bank could survive on its own in the following years.
The Deloitte partner denied there was any collaboration between the auditor and the Economy Ministry, whose decision it was to force Rato to stand down. Celma also denied any prior agreement had been reached with Rato’s successor, José Ignacio Goirigolzarri.
Spain eventually borrowed 40 billion euros from its European partners to recapitalize Bankia and three lenders that had been nationalized, as well as to help set up a so-called bad bank to absorb their toxic real estate assets, the core of their problem. The bulk of those funds went to Bankia.