Tel: Fax: BANKIA, S.A.

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1 Tel: Fax: Alameda Mazarredo 18 bis Bilbao España BANKIA, S.A. Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of the revised text of Spain s Capital Companies Act Valencia, 29 June 2017 BDO Auditores, S.L., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

2 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 2 SPECIAL REPORT ON THE ISSUANCE OF PERPETUAL SECURITIES CONVERTIBLE INTO ORDINARY SHARES WITHOUT PREFERENTIAL SUBSCRIPTION RIGHTS AS PER ARTICLES 414, 417 AND 511 OF THE REVISED TEXT OF SPAIN S CAPITAL COMPANIES ACT To the shareholders of Bankia, S.A. For the purposes set out in articles 414, 417 and 511 of the Capital Companies Act (Ley de Sociedades de Capital, hereinafter CCA ) and in accordance with the assignment received from Bankia, S.A. (hereinafter Bankia or the Bank ), by appointment made by the XV Companies Registrar for Valencia, Laura Mª de la Cruz Cano Zamorano, we issue the following Special report on the issuance of perpetual securities convertible into ordinary shares of the Bank (hereinafter the securities ) without preferential subscription rights, accompanied by the attached report from the Bank s Board of Directors (hereinafter the Board of Directors Report ) which they put at the disposal of the Company s shareholders. The purpose of our work is not that of certifying the price of the issue or conversion of the Securities but exclusively to state, from the application of the procedures set out in the pertinent technical standards relating to the preparation of this type of special report relating to the provisions of article 414 of the CCA, whether the Board of Directors Report dated 29 June 2017 (attached as an annex to this report, contains the required information, which includes an explanation of the conversion bases and methods. We have also been engaged to issue an opinion, as independent experts, pursuant to article 417 of the CCA, on the sufficiency and reasonableness of the information contained in the Board of Directors Report, and on the appropriateness of the conversion calculation and, where applicable, the adjustment formulae for compensating for the potential dilution of shareholders economic interests. Bankia s directors have prepared the accompanying report, providing a detailed description of the conversion bases and methods and justification for removing the preferential subscription rights of the Bank s shareholders. In accordance with articles 414 and 417 of the CCA and the aforementioned pertinent technical standards, the following procedures were performed during our engagement: a. Collation and analysis of the following information: - Document requesting the appointment of an independent expert and auditor filed at the Madrid s Company Registry. - Resolution of Bankia s Annual General Meeting authorising the directors, or to whom said powers are so delegated, to issue convertible bonds and remove preferential subscription rights. - Bankia Board of Directors Report on the issuance of perpetual securities convertible into ordinary shares of the Bank without preferential subscription rights. BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

3 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 3 - Bankia s audited separate and consolidated financial statements for the year ended 31 December The Bank s consolidated interim financial statements at 31 March Internal document of the Bank on the planned transaction, including details of the financial terms of the issuance, and the conversion bases and methods established by the Bank s management. - Minutes of the Bank s Ordinary General Meeting of Shareholders of 15 March 2016 and 24 March Minutes of the Bank s Board of Directors meeting of 9 February 2017, 27 April 2017 and 25 May Other information considered to be of interest for the performance of our work. b. Review and analysis of the main points of the aforesaid information regarding the issuance of the Securities. c. Holding of several meetings with the Bank s management for the purpose of gathering all information considered to be of use in the performance of our work. d. Evaluation as to whether the Board of Directors Report contains the information considered to be necessary and sufficient for its adequate interpretation and understanding by its addressees. e. Verification of the calculations used by Bankia management to determine the conversion bases and methods and other rights, where applicable, guaranteed to the subscribers of the Securities. f. Confirmation that the issue price of the Securities is not below their par value, and that the conversion price thereof is not less than the par value of the shares into which they would have to be converted. g. Verification that the accounting information contained in the Board of Directors Report concurs, if applicable, with the Bank s accounting records that served as a basis for preparing its audited financial statements h. Assessment of the reasonableness of the data contained in the Board of Directors Report justifying the removal of the preferential subscription rights of shareholders subscribing the Securities. i. Assessment of the suitability of the conversion calculations and, where applicable, the adjustment formulae to compensate for the potential dilution of shareholders economic interests. j. Obtaining a letter signed by the Company s management confirming to us that we have been provided with all the information necessary for preparing our report, as well as confirming that there have been no subsequent events between 31 March 2017 and the date of this report that have not been reported to us and which could have a significant effect on the results of our work BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

4 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 4 With regard to the procedures applied, we should mention that certain aspects of our work implicitly involve, in addition to objective factors, others that imply judgement and working hypotheses, compliance with which depends to a great extent on future events for which it is not possible at present to know the final outcome and, therefore, it is not possible to ensure that third parties will necessarily be in agreement with the interpretation and opinions expressed in this report. We must also point out that, as established in the Board of Director s Report, the conversion calculation for the Bank s Securities is performed using the Bankia share price at the time of conversion. Alternatively, a minimum conversion price will be used, which will be set at the date on which the Securities are issued, as 66% of the Bankia share price, if the share price is lower than said minimum conversion price, without the conversion price being below the par value of Bankia s shares at the time of conversion. Consequently, as the conversion price will be the minimum at the market value and taking into account the other features of the proposed issuance and the context thereof, the underlying value of the preferential subscription right associated with the Securities would be zero. It should also be noted that our work is independent and therefore, does not comprise a recommendation to the Bank s management, its shareholders, or third parties on the position they should take in relation to the Securities placement, or regarding any swaps offered to third parties in this connection. Based on the information and procedures used and described in the previous paragraphs, and solely to fulfil the requirements laid down in articles 414, 417 and 511 of the CCA, our professional opinion is that: The Bankia Board of Directors Report contains the required information as set out in the pertinent technical standards relating to the preparation of special reports of this nature as per article of the CCA. The information provided in the Bankia Board of Directors Report justifying the removal of preferential subscription rights is reasonable, since it is adequately documented and presented. The calculation for converting the Securities and, where applicable, the adjustment formulae for compensating for the potential dilution of shareholders economic interests is appropriate, while the underlying value of the preferential subscription rights is zero, at the date of this report, taking into account the features and context of the proposed placement. This special report has been prepared exclusively for compliance with the provisions of articles 414, 417 and 511 of the CCA, and so it may not be used for any other purpose. BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

5 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 5 BDO Auditores, S.L.P. Jesús Gil Ferrer Statutory Auditor and Partner BDO Auditores, S.L.P. Valencia, 29 June 2017 Eduardo Pérez Ruiz Partner BDO Auditores, S.L.P. Madrid, 29 June 2017 BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

6 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 6 ANNEX: REPORT PREPARED BY BANKIA, S.A. S BOARD OF DIRECTORS FOR THE PURPOSES SET FORTH IN ARTICLES 414, 417 AND 511 OF SPAIN S COMMERCIAL COMPANIES ACT ON THE RESOLUTION TO ISSUE PERPETUAL SECURITIES CONVERTIBLE INTO THE BANK S ORDINARY SHARES WITHOUT PREFERENTIAL SUBSCRIPTION RIGHTS, AND THE CORRESPONDING CAPITAL INCREASE REQUIRED, ADOPTED PURSUANT TO THE AUTHORISATION GIVEN BY THE ANNUAL GENERAL MEETING ON 24 MARCH 2017 BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

7 Special report on the issuance of perpetual securities convertible into ordinary shares without preferential subscription rights as per articles 414, 417 and 511 of Spain s Capital Companies Act 7 BDO Auditores, S.L.P., a Spanish limited company, is a member of BDO International Limited, a company limited by guarantee in the United Kingdom and forms part of the BDO international network of associated independent firms. BDO is the trade mark for the BDO network and for all of its member firms.

8 REPORT PREPARED BY BANKIA, S.A. S BOARD OF DIRECTORS FOR THE PURPOSES SET FORTH IN ARTICLES 414, 417 AND 511 OF SPAIN S CORPORATIONS ACT ON THE RESOLUTION TO ISSUE PERPETUAL SECURITIES CONVERTIBLE INTO THE BANK S ORDINARY SHARES WITHOUT PREFERENTIAL SUBSCRIPTION RIGHTS, AND THE CORRESPONDING CAPITAL INCREASE REQUIRED, ADOPTED PURSUANT TO THE AUTHORISATION GRANTED BY THE ORDINARY GENERAL MEETING ON 24 MARCH 2017 I. PURPOSE OF THE REPORT Pursuant to articles 414, 417 and 511 of the current wording of the consolidated text of the Spanish Corporations Act (Ley de Sociedades de Capital) approved by Legislative Royal Decree 1/2010 of 2 July 2010 ( the Corporations Act ), this report has been prepared by Bankia s Board of Directors ( Bankia, the Bank or the Company ) in relation to the resolution to issue preferred securities convertible into newly issued Bankia ordinary shares ( the Securities ). The former will be issued in accordance with the first additional provision of Act 10/2014 of 26 June on the regulation, supervision and solvency of credit institutions ( Act 10/2014 ) and Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms ( Regulation (EU) No. 575/2013 ). The issue will be for a maximum par value of 750,000,000 euros and will be without preferential subscription rights ( the Issue ). The report also covers the corresponding capital increase. This resolution has been adopted by virtue of the authorisation conferred by the Company s Shareholders Ordinary General Meeting on 24 March 2017, under point seven of the agenda. Article of the Corporations Act states that, unless stipulated in specific laws, securities recognising or creating a debt, issued by limited liability companies (such as the Securities) shall remain subject to the provisions on bonds under Title XI of the Corporations Act. The Securities are also subject to the rules on convertible bonds laid down in Chapter III of said Title, given the contingent convertibility of these securities as per Act 10/2014 and Regulation (EU) No. 575/2013. In this regard, it is worth mentioning that the aforesaid articles 414 et seq. of the Corporations Act establish that limited liability companies may issue convertible bonds, provided the general meeting determines conversion conditions and ratios and adopts a decision to increase the capital by the required amount. To this end, the directors must draft a report explaining the conversion conditions and ratios, to be submitted together with a report drafted by an statutory auditor other than the company s own statutory auditor, appointed for this purpose by the Mercantile Register. Convertible bonds may not be issued for an amount under their par value, and may not be convertible into shares when their par value is below the share par value. Further, in the case of listed limited liability companies, article 511 of the Corporations Act enables the general meeting to delegate the power to issue convertible bonds to directors, and may also grant them the power to waive the preferential subscription right for convertible bonds issued under delegated powers, if in the company s best interests. The notice of the general meeting that includes the proposal to vest the power to issue convertible bonds in the directors must therefore also contain explicit mention of the proposal to waive the preferential subscription right. In capital increases agreement approved in the exercise of the powers granted by the general meeting, the aforesaid directors and the auditor s reports must refer to each specific issue. Therefore, as per article 417 of the Corporations Act, the aforementioned directors report must justify the proposal of waiving the preferential subscription right in detail. The independent expert s report must contain a technical judgement on the reasonableness of the data contained in the 1

9 directors report and the appropriateness of the conversion ratio and, where applicable, adjustment formulae to compensate any possible dilution of shareholdings. Consequently, and given the intention of the Company s Board of Directors to perform the issuance of the Securities without preferential subscription rights for shareholders, this report aims to explain the conversion ratio and conversion methods of this Issue and justify the waiving of shareholders subscription rights and the correlative capital increase which will eventually be carried out if any of the circumstances for the conversion of the Securities prevail, all in fulfilment of the requirements of the articles of the Corporations Act explained in the previous paragraphs. As per article of the Corporations Act, this report will be made available to shareholders at the same time the notice of the next general meeting of the Company is published. The Company has called on the Mercantile Register of Valencia to appoint an statutory auditor other than the company s own statutory auditor, and an independent expert to issue a special report containing a technical judgement on the reasonableness of the data contained in this report and the appropriateness of the conversion ratio and, where applicable, adjustment formulae to compensate any possible dilution of shareholdings, all in accordance with article 511 of the Corporations Act visà-vis articles and of the Corporations Act. 2

10 II. SECURITIES ISSUE 1. Delegation by the general meeting of powers to issue the Securities The Securities Issue will be performed by virtue of the authorisation conferred by the Company s Ordinary General Meeting on 24 March 2017, under point seven of the agenda. 2. Reasons for Issue 2.1. Regulatory environment and capital requirements The approval and definitive entry into force of Basel II in Europe, enacted through Regulation (EU) No. 575/2013 and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms ( Directive 2013/36/EU, along with Regulation (EU) No. 575/2013, CRD IV ), lay down the new capital adequacy framework for financial entities. This new CRD IV framework has been transposed in Spain through Act 10/2014, Royal Decree 84/2015 of 13 February 2015 implementing Act 10/2014 and Bank of Spain Circulars 2/2014 and 2/2016, all without prejudice to the direct applicability of Regulation (EU) No. 575/2013. It is supplemented by various binding technical standards and other recommendations and guidelines issued by various Spanish and supranational bodies. This regulation on capital adequacy and own funds requires credit institutions to avail of a raft of capital instruments to cover the various regulatory capital requirements which, to a certain extent, comprise their own funds requirement, all taking into account the composition and size of their balance sheets. In this regard, CRD IV has established, inter alia, a minimum capital requirement ( Pillar 1 ) and has raised the level of capital required through the combined buffer requirement which entities have been required to meet since It must be fulfilled using common Tier 1 capital ( CET1 ) in addition to that needed to fulfil the Pillar 1 minimum capital requirement. Moreover, after the annual supervisory review and evaluation ( SREP ) by the European Central Bank ( ECB ) for the first time in 2015, specific prudential capital requirements ( Pillar 2 ) have been imposed for each credit institution as part of their supervisory review and evaluation. These new regulatory requirements establish a total capital requirement for credit institutions that is higher than the own funds requirement stipulated in CRD IV. At the end of 2016, the ECB informed Bankia of the decision on the prudential capital requirements imposed on the Bankia Group for This decision requires the Bankia Group to have a minimum Common Equity Tier 1 (CET1) ratio of 7.875% of phase-in regulatory capital. The decision establishes that the required 7.875% ratio include: (i) the minimum Pillar 1 requirement (4.5%); (ii) the Pillar 2 requirement (2.0%); (iii) the capital conservation buffer (1.25%); and the requirement deriving from Bankia s classification as an Other Systemically Important Institution (O-SII) for 2017 of 0.125%. The Bankia Group currently complies with all its capital requirements. Nevertheless, the regulator may activate in the future additional capital buffers that are not currently applicable, while prevailing Pillar 2 measures will be reviewed annually, based on the conclusions drawn by the ECB from forthcoming SREPs. Bankia must therefore avail of an adequate capital conservation buffer. Further to all of the aforesaid, on 23 November 2016 the European Commission published a package of proposals to reform the CRD IV, among others, including measures to boost the resilience of 3

11 European credit institutions and increase financial stability. The CRD IV framework described beforehand could therefore be significantly amended. The definitive content and implementation thereof is still uncertain. The European Commission s proposed measures to amend CRD IV includes the option of covering up to 25% of the Pillar 2 requirement using additional Tier 1 capital instruments, although there is no proposal to change the nature and main features required for instruments to be considered as additional Tier 1 capital, described in the following section Additional Tier 1 capital To be considered as having sufficient capital, CRD IV stipulates that credit institutions must have different capital instruments to cover the various regulatory capital categories which, to a certain extent, make up their own funds requirements. Thus, as well as common Tier 1 capital, CRD IV establishes two further regulatory capital categories making up the own funds requirement: additional Tier 1 capital and Tier 2 capital. These must be covered using specific instruments or, if none are available, with common Tier 1 capital; the latter being burdensome and less efficient. CRD IV also establishes that instruments issued by credit institutions that have been qualified to date as additional Tier 1 capital and that do not fulfil the new requirements laid down in Regulation (EU) No. 575/2013, will gradually lose their eligibility until 2023, at which point they will no longer be considered as additional Tier 1 capital instruments. The Company s Board of Directors therefore consider it prudent and diligent to issue certificates such as the Securities that can be included as additional Tier 1 capital pursuant to CRD IV. Bankia s additional aim with this Issue is to exploit the prevailing favourable climate in the financial markets to issue this type of instrument (which may change in the future), given the interest and demand among some institutional investors. In light of this, the Board of Directors proposes issuing a fixed-income instrument that qualifies as additional Tier 1 capital pursuant to CRD IV. Regulation (EU) No. UE 575/2013 establishes that such securities must, meet the following conditions, among others: (i) (ii) (iii) (iii) They must be perpetual; They only rank above shares (and therefore, they rank below Tier 2 instruments in the event of the insolvency of the institution); Distributions under the instruments are solely paid out of distributable items, and the institution has full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis; and They include a possible or contingent mechanism for conversion into the institution s shares when the conversion scenario stipulated in this regulation (described in section II.4.1 below) prevails, and can effectively absorb losses if the issuer s solvency is put at risk. Nevertheless, this possible conversion scenario will only prevail in the event of the very particular circumstance of a common equity Tier 1 deficit at the issuer or its group. Consequently, the Securities that the Board of Directors proposes to issue will be perpetual fixedincome securities convertible into Bankia shares in the event of a decline in the solvency of Bankia or the Bankia Group. These would bolster the Bankia Group s regulatory capital immediately, as the shares issued on conversion of the Securities would qualify as common Tier 1 capital at the consolidated level, in accordance with CRD IV. 4

12 3. Financial terms of the Issue The Issues would be performed with a maximum par value of 750 million euros, with each Security having a minimum par value of at least 200,000 euros. To qualify as additional Tier 1 capital, the Securities must fulfil the conditions stipulated in CRD I, especially those indicated in section II.2.2 above. Investors may be remunerated as per the final terms and conditions of the Issue and distributions will be in line with market prices for such instruments. In accordance with CRD IV, distributions will depend on the existence of distributable items, which will be stipulated in the terms and conditions of the Issue. Equally, Bankia will have full discretion at all times to cancel the distributions, in part or in full, for an unlimited period and on a non-cumulative basis, while the Company will be able to use the cancelled distributions without restriction to fulfil its obligations as they expire. Distributions on the Securities will also be subject to any restrictions that may be established in prevailing legislation, especially, in article 48 of Act 10/2014, or in circumstances where the supervisory authorities may impose restrictions and conditions on distributions. If the conversion scenarios described in the following section arise, the Securities would be converted into ordinary Bankia shares using the following variable conversion rate, which will depend on the Bankia share price at the time of conversion: Where: NUM Share= PAR Convertible/P Share Num Share: Number of Bankia shares to be delivered per Security. PAR Convertible: Par value of the Security being converted (minimum 200,000 euros). P Shares: Conversion price (as defined in section II.4.2 below). 4. Conversion bases and methods The conversion bases and methods for the Securities will, essentially, be as follows: 4.1. Conversion scenarios The Securities will be converted into newly issued ordinary Bankia shares if Bankia, or its group, has a common equity Tier 1 ratio of below 5.125%, calculated by the Company as per Regulation (EU) No. 575/2013 or any other rules on own funds and capital adequacy applicable to the Bank at any given time. The terms and conditions of the Issue may also establish further full or partial obligatory conversion scenarios if required, to safeguard the Bank s solvency or to ensure the Securities qualify as additional Tier 1 capital Conversion ratio The ratio for converting the Securities into newly issued ordinary Bankia shares ( the Conversion Ratio ) will be the ratio of the unit par value of the Securities (which will be at least 200,000 euros) 5

13 and the value attributable to the ordinary Bankia shares for the purposes of the conversion (the latter, the Conversion Price ). The Conversion Price will equal the market value of Bankia shares at the time of conversion of the Securities, subject to the limits specified hereon. Consequently, the number of shares delivered for each Security through the conversion will be the result of multiplying the Conversion Ratio by the number of Securities held. Should fractions arise on conversion, they will be treated as specified in the terms and conditions of the Issue. The Conversion Price will be the greater of: a) the Benchmark Price; b) the Minimum Conversion Price (without prejudice to any changes in this amount should the anti-dilution mechanism be applied); and c) the par value of the ordinary Bankia shares at the time of conversion. Where: The Benchmark Price will be the arithmetic mean of the average prices weighted as per the volume of Bankia shares during the five trading days prior to the corresponding conversion scenario arising or being announced, rounded to the nearest euro cent and, in the case of half a cent, rounded up to the next euro cent. The Minimum Conversion Price will equal the result in euros of applying the percentage determined once the final terms and conditions of the Issue are established, which will be 66% of the Bankia share price on one day or the average of several days, also determined once the terms and conditions of the Issue are established. If Bankia shares are not admitted to trading on one of the Spanish stock exchanges, the Conversion Price will be the greater of (b) and (c) above. Notwithstanding this, the Conversion Price cannot, in any event, be lower that the par value of Bankia shares at the time of conversion, thereby complying in all circumstances with the provisions of article 415 of the Corporations Act Anti-dilution mechanism With regard to article of the Corporations Act, anti-dilution mechanisms will be applied to the Conversion Price as per normal practice in this type of arrangement, in accordance with the terms and conditions of the Issue. These anti-dilution mechanisms must take into account the conversion bases and methods set forth previously, and that the Conversion Price cannot be lower, in any event, than the par value of ordinary Bankia shares at the time of conversion. 5. Capital increase As per article 414 of the Corporations Act, a capital increase must be approved that is equal to the maximum needed for the potential conversion of the Securities issued. To this end, the maximum number of shares to be issued to complete the conversion will be determined by the ratio between the amount of the Issue and the Conversion Price. 6

14 This capital increase will be executed by the Board of Directors pursuant to the agreement granting them powers to issue securities convertible into shares adopted by Bankia s Shareholders Ordinary General Meeting on 24 March 2017, under point seven of the agenda. The capital increase will involve the issuance of new ordinary shares with the same par value and conferring the same rights as the Bankia shares currently outstanding on the date of the capital increase. If executed, the capital increase will give rise to the rewording of the article on capital in the Bylaws. It is not possible at this time to determine the exact amount of the capital increase that would be needed to complete the potential conversion of the Securities, given that, pursuant to the conversion bases and methods, this would depend on the market price of Bankia shares at the time of conversion. However, once the Minimum Conversion Price has been set, and assuming no anti-dilution adjustment is made prior to the date on which the Securities are converted, the maximum number of newly issued ordinary shares to be issued may be calculated as the ratio (rounded by default, if necessary) of dividing the total par value of the Securities by the Minimum Conversion Price. Pursuant to article of the Corporations Act, preferential subscription rights shall not be in order when the resulting capital increase is the result of converting the Securities into ordinary shares. 7

15 III. JUSTIFICATION FOR WAIVING PREFERENTIAL SUBSCRIPTION RIGHTS As indicated beforehand, Bankia s Ordinary General Meeting on 24 March 2017 voted under point seven of the agenda to grant the Board of Directors powers to issue the securities convertible into shares and increase capital as well as bestowing powers upon them to waive the preferential subscription rights relating to the convertible securities issue the Board performs under this delegation. For the purposes of this Ordinary General Meeting, the Board of Directors of Bankia therefore approved and provided to shareholders a report justifying the proposal to authorise the Board to waive the preferential subscription rights. Article 511 of the Corporations Act, meanwhile, stipulates that the waiving of preferential subscription rights for convertible bonds must be in a company s best interests. Exercising said powers, Bankia s Board of Directors has decided to waive the preferential subscription rights associated with the Securities Issue, on considering that said waiver is fully justified and fulfils the requirements established in the act, and is in the Company s interests, as explained hereon. As set forth beforehand, although the Bankia Group currently meets the own funds requirements imposed on it, the Board of Directors deems it appropriate to bolster the Group s own funds by issuing the Securities, which will qualify as additional Tier 1 capital pursuant to CRD IV, targeting qualified investors. This requires waiving the preferential subscription rights of the Bank s shareholders because of the conversion option stipulated in the terms and conditions of the Securities. The Board of Directors considers that the structure of the proposed Issue, excluding preferential subscription rights, is fully compliant with the substantive requirements laid down in the Corporations Act, especially regarding the conditions that the waiver must be in a company s interests. This is the case because it will enable a transaction that is not only appropriate but also necessary to fulfil the proposed objective and because, after taking into account the potential dilution of shareholdings, it retains the appropriate level of proportionality between the intended aim and the method for achieving it. The following remarks should be made justifying in more detail the appropriateness of the proposed structure: (i) Need to place issue with qualified investors In order to qualify as additional Tier 1 capital, pursuant to CRD IV, these fixed-income instruments must be perpetual, subordinate, and with a discretionary distribution and be convertible into newly issued ordinary Bankia shares in the event of a common equity Tier 1 deficit. Issuance of the Securities is therefore proposed as they are the only instruments meeting these conditions, which are described in section II.2.2. above. These complex characteristics, set forth in CRD IV, and the sophisticated nature of the issue, and the latest regulatory developments especially concerning the placement of this type of instrument, means that the Securities are only suitable for placement with professional investors (which the Issue targets) and not open to all types of investor, especially retail investors who make up a significant part of Bankia s shareholders. As a result, not removing preferential subscription rights would entail offering a product that is not suited to the investment profile of all the Bank s shareholders and therefore, would compromise the 8

16 viability of the Issue due to the high risk of it not being subscribed within the time frame and amount initially envisaged. First, this would have a very negative impact in the market for Bankia as an issuer. It would also require a subsequent additional placement among non-shareholders under possibly less favourable terms for the Bank from an operational and actual cost perspective, and regarding execution times and capital. This would clearly prejudice Bankia s interests. However, interest has been shown by qualified investors who are familiar with and regularly subscribe this type of instrument, as proven by the success of recent similar placements by several Spanish and international credit institutions targeting this type of investor. In order to ensure the success of the Issue and directly target this type of investor, it is essential to waive the preferential subscription rights of current Bankia shareholders. (ii) Accelerated bookbuild. Exploiting windows in the market, less exposure to market volatility and cost savings The proposed Issue is intended to generate capital, exploiting current funding conditions in the market and investor interest in products such as that Bank has put forward for issue. Waiving preferential subscription rights allows the Issue to be executed through an accelerated bookbuild, which is best suited to the requirements of international capital markets, means possible windows in the market and opportunities to perform financial transactions can be exploited, reducing funding costs, enabling more favourable financial conditions to be achieved for the Issue than those that would be obtained with preferential subscription rights, and generally increases the likelihood of the transaction being a success. Without approving the waiver of preferential subscription rights, it would not be possible to configure the Issue as it has been designed, which would impede the bookbuild at a time when it is deemed to be especially ideal. The waiver of preferential subscription rights would therefore allow the Issue to be targeted at qualified and institutional investors from which it is proposed expressions of interest in subscribing the Securities be obtained through the bookbuild carried out in relation to the Issue. This process will enable the Company to: a) exploit the existing market window (which are often of limited duration) that the Bank has identified during which it is proposed the Issue be performed, eliminating uncertainty as to whether this window will remain open during a hypothetical preferential subscription period of at least 15 days; b) facilitate the placement work of the management companies regarding the type and geographical location of potential investors who could be targeted, which is expected would pave the way to raising the maximum amount on the market from the Issue; c) benefit from the opportunity to conduct a transaction that will enable the Bank to enhance the composition and quality of its financial liabilities and determine the amount of the Issue and remuneration payable at the end of the corresponding bookbuild rather than having to do it before the preferential subscription period begins, which would be the case if preferential subscription rights were not waived. This should allow the Bank to optimise the cost of the remuneration relative to that had it been necessary to determine it beforehand, as would be the case in a transaction with 9

17 preferential subscription rights, as it is determined based on the response from the market and the share price at the time of the accelerated bookbuild; and d) reduce the impact of the Issue on the Company s share price as firm subscription commitments could be obtained from qualified and institutional investors in a very short time frame, compared to the longer period that would be required to complete the Issue from the point of informing the market of the Bank s proposal if it included the recognition of preferential subscription rights. (iii) Bolstering of capital The proposed Issue will enable the Bank to generate additional Tier 1 capital, without the need to increase capital. Assuming the Issue is subscribed for the maximum (750 million euros), the effect on the Bank s main solvency indicators would be as follows: 31/03/2017 Items Actual ratios (1)(2) Proforma, post-issue CET1 (%) Tier 1 (%) Total Capital (%) (1) Ratios at 31 March 2017, calculated as per prevailing prudential solvency rules. (2) In March 2017, the Bank completed a subordinated debt issue totalling 500 million euros, which is not included in the regulatory ratios. In May 2017, the Bank obtained the necessary approval from the regulator to include said issue in the capital calculation, whereby the Total Capital ratio increased by 66 basis points. (iv) Proportionality of the waiver, due to limited or non-existent dilution effects Lastly, the Board of Directors considers that the waiving of preferential subscription rights is in line with the due proportionality that must exist between the benefits for the Bank and any inconveniences for shareholders due to the dilution of their political and/or economic rights. a) Firstly, the Securities are configured as contingently convertible securities not as "obligatorily convertible securities, whereby it is possible that there is no dilution (of political or economic rights) for the Bank s shareholders, as the conversion may never take place. In this regard, it is not the natural conclusion that the Securities will be converted, in contrast to issues of obligatorily convertible securities, as the latter would only be converted in certain situations involving a deterioration of Bankia s solvency. b) Secondly, should conversion take place, a variable conversion ratio is established which would ensure shareholders do not experience any dilution of their economic rights, since shares would be issued at their market value at the time of conversion (or, if the minimum conversion rate was applicable, at a price above their market value at the time). Consequently, the underlying value of the preferential subscription rights which it is proposed be waived would be zero (or, if the minimum conversion rate was applicable, even negative). c) Thirdly, the established conversion ratio includes a minimum conversion price, which would limit the maximum dilution of political rights that Bankia shareholders could experience in the event of conversion. This minimum conversion price will be adjusted, if necessary, by applying anti-dilution clauses that are normal in convertible security issues and, in any event, would never be below the share s par value. 10

18 In light of the aforesaid, considering (i) the Securities specific features; (ii) the fact that the conversion scenarios are very limited; and (iii) the Conversion Price would be marked to market or, where applicable, with a premium over and above the market price, the underlying value of the preferential subscription rights deriving from the Issue is zero, whereby current shareholders will not lose any economic value as a result of the preferential subscription right waiver. 11

19 IV. FULL TEXT OF THE PROPOSED RESOLUTION RESOLUTION.- ISSUANCE OF PERPETUAL SECURITIES POTENTIALLY CONVERTIBLE INTO BANKIA SHARES WITHOUT PREFERENTIAL SUBSCRIPTION RIGHTS, BY VIRTUE OF THE POWERS GRANTED BY THE GENERAL MEETING ON 24 MARCH Issuance of perpetual securities potentially convertible into Bankia, S.A. shares In accordance with the powers granted by the Ordinary General Meeting of Bankia, S.A. ( Bankia or the Company ) on 24 March 2017 under agenda point seven, it is hereby agreed to issue preferred securities potentially convertible into newly issued ordinary shares of the Company ( the Securities ), pursuant to additional provision one of Act 10/2014 of 26 June on the regulation, supervision and solvency of credit institutions ( Act 10/2014 ) and Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms ( Regulation (EU) No. 575/2013 ). The issue will be for a maximum par value of 750,000,000 euros and will be without preferential subscription rights ( the Issue ). under the following terms: Issuer: Nature of the Securities: Target of Issue: Maximum par value of the Issue: Bankia, S.A. Preferred securities potentially convertible into newly issued ordinary Bankia shares, pursuant to additional provision one of Act 10/2014 of 26 June and Regulation (EU) No. 575/2013. The Issue is aimed at qualified investors, notwithstanding any sell restrictions that may be established in the terms and conditions of the Issue. 750,000,000 euros. It is expressly stated that the Issue may not be fully subscribed. The definitive par value of the Issue will be established in light of the aforesaid by individuals expressly authorised to do so and as per the corresponding stipulated conditions. Issue currency: Unit par value: Maximum number of Securities: Issue type: Remuneration: Euros. The Securities will have a unit par value determined as per the terms and conditions of the Issue, of a minimum 200,000 euros. The maximum number of Securities will be the sum of dividing the total amount of the Issue by the unit par value. All Securities will be of the same series, and subject to the same terms and conditions. The Issue will be at par, i.e. for one hundred percent of its par value. The holders of the Securities may receive predetermined, noncumulative remuneration which will be set according to the interest rate on the par value of the Securities. It will be paid provided that the conditions established in the terms and conditions of the Issue are met ( the Remuneration ). 12

20 In particular, the Issuer will have full discretion at all times to cancel the Remuneration, in part or in full, for an unlimited period and on a non-cumulative basis, while the Issuer will be able to use the cancelled distributions without restriction to fulfil its obligations as they expire. This is understood notwithstanding any other scenarios for cancellation of the Remuneration that may be established in the terms and conditions of the Issue or set forth in applicable legislation. Expiration date and early redemptions: The Issue is perpetual, and thus has no expiry date. The Securities may be redeemed, in part or in full, if Bankia so decides, as per the terms and conditions of the Issue, provided at least five years have elapsed since their issuance and prior authorisation, where applicable, has been obtained from the competent authority. Other scenarios involving early redemption by Bankia may also be included in the terms and conditions of the Issue. Representation of the Securities: Ranking: The securities will be represented by certificates. The Securities are subordinated credits, ranked as follows: (i) (ii) below ordinary credits; below the subordinated credits and subordinated securities Bankia has issued or guaranteed or which it may issue or guarantee, which have a higher ranking that the Securities; (iii) pari passu with the credits and securities Bankia has issued or guaranteed or which it may issue or guarantee, which have the same ranking as the Securities; (iv) above the credits and securities Bankia has issued or guaranteed or which it may issue or guarantee, which have a lower ranking that the Securities; and (v) above ordinary Bankia shares. Over-the-counter market: Applicable legislation: A request will be filed for the admission to trading of the Securities on the Global Exchange Market of the Irish Stock Exchange. A request may also be filed for the admission to trading of the Securities on other unregulated and regulated over-the-counter market in Spain and abroad. The Securities will be issued in accordance with Spanish law, especially the first additional provision of Act 10/2014, and Regulation (EU) No. 575/2013 and other specific applicable legislation. 13

21 2. Conversion bases and methods The conversion bases and methods for the Securities will be as follows: (i) Conversion scenarios The Securities will be converted into newly issued ordinary Bankia shares if Bankia, or its group or subgroup, has a Common Equity Tier 1 ratio of below 5.125%, calculated by the Company as per Regulation (EU) No. 575/2013 or any other rules on own funds and capital adequacy applicable at any given time. The terms and conditions of the Issue may also establish further full or partial conversion scenarios if required, to safeguard Bankia s solvency or to ensure the Securities qualify as additional Tier 1 capital. (ii) Conversion ratio The ratio for converting the Securities into newly issued ordinary Bankia shares ( the Conversion Ratio ) will be the ratio of the unit par value of the Securities and the value attributable to the ordinary Bankia shares for the purposes of the conversion (the latter, the Conversion Price ). The Conversion Price will equal the market value of Bankia shares at the time of conversion of the Securities, subject to the limits specified hereon. Consequently, the number of shares delivered for each Security through the conversion will be the result of multiplying the Conversion Ratio by the number of Securities held. Should fractions arise on conversion, they will be treated as specified in the terms and conditions of the Issue. The Conversion Price will be the greater of: a) the Benchmark Price; b) the Minimum Conversion Price (without prejudice to any changes in this amount should the anti-dilution mechanism be applied); and c) the par value of the ordinary Bankia shares at the time of conversion. Where: The Benchmark Price will be the arithmetic mean of the average prices weighted as per the volume of Bankia shares during the five trading days prior to the corresponding conversion scenario arising or being announced, rounded to the nearest euro cent and, in the case of half a cent, rounded up to the next euro cent. The Minimum Conversion Price will equal the result in euros of applying the percentage determined once the final terms and conditions of the Issue are established, which will be 66% of the Bankia share price on one day or the average of several days, also determined once the terms and conditions of the Issue are established. If Bankia shares are not admitted to trading on one of the Spanish stock exchanges, the Conversion Price will be the greater of (b) and (c). 14

22 Notwithstanding this, the Conversion Price cannot be, in any event, lower that the par value of Bankia shares at the time of conversion, thereby complying in any event with the provisions of article 415 of the consolidated text of the Corporations Act approved by Legislative Royal Decree 1/2010 of 2 July ( the Corporations Act ). (iii) Conversion procedure The conversion procedure will be as per the terms and conditions of the Issue. (iv) Anti-dilution mechanism With regard to article of the Corporations Act, anti-dilution mechanisms will be applied to the Conversion Price as per normal practice in this type of arrangement, in accordance with the terms and conditions of the Issue. These anti-dilution mechanisms must take into account the conversion bases and methods set forth previously, and that the Conversion Price cannot be lower, in any event, than the par value of Bankia shares at the time of conversion. Without prejudice to other proxies that may be conferred pursuant to the prevailing agreements, the widest possible powers are granted to Mr. José Sevilla Alvarez, a Spanish national, with ID card number (DNI) Y; Mr. Leopoldo Alvear Trenor, a Spanish national, with ID card number (DNI) D; Mr. Fernando Cuesta Blázquez, a Spanish national, with ID card number (DNI) W; and Mr. Julio Gilsanz Usunaga, a Spanish national, with ID card number (DNI) M. All these individuals are of legal age and domiciled for the purposes of this agreement, at Paseo de la Castellana 189, (Madrid) ( the Proxies ). These powers are granted so that any of them can, indiscriminately and jointly, establish, develop and amend the terms and conditions of the Issue, and determine or develop any other particulars not covered by this resolution. This includes, for information purposes and not limited to, the Minimum Conversion Price. They are also authorised to amend, adapt and/or determine other conversion scenarios, as well as those set forth in this resolution, under the terms and conditions they consider necessary or appropriate for the transaction to be completed successfully. 3. Share capital increase to complete potential conversion In accordance with the powers granted by the Ordinary General Meeting of Bankia on 24 March 2017 under agenda point seven, and pursuant to article 414 of the Corporations Act, it is hereby resolved to increase share capital by an amount and number of shares needed to complete any potential conversion of the Securities, as per the Conversion Ratio, with partial subscription expressly envisaged. It is not possible at this time to determine the exact amount of the capital increase that would be needed to complete the potential conversion of the Securities, given that, pursuant to the conversion bases and methods, this would depend on the market price of Bankia shares at the time of conversion. However, once the Minimum Conversion Price has been set, and assuming no anti-dilution adjustment is made prior to the date on which the Securities are converted, the maximum number of newly issued ordinary shares to be issued may be calculated as the ratio (rounded by default, if necessary) of dividing the total par value of the Securities by the Minimum Conversion Price, and consequently the maximum amount of the capital increase. 15