REPORT OF THE BOARD OF DIRECTORS OF BANKIA, S.A.

Transcription

1 REPORT OF THE BOARD OF DIRECTORS OF BANKIA, S.A. ON THE COMMON DRAFT TERMS OF THE MERGER BETWEEN BANKIA, S.A. (as absorbing) AND BANCO MARE NOSTRUM, S.A. (as absorbed) 21 July 2017

2 CONTENTS 1. INTRODUCTION 1 2. REASONS FOR THE MERGER Rationale for the Merger Procedure for negotiating the Merger 2 3. LEGAL ASPECTS General characteristics Conditions precedent Applicable laws and regulations Implications of the Merger for shareholders, creditors and employees Implications for shareholders Implications for creditors Implications for employees Legal procedure for the Merger Draft Merger Terms Publicity of the Draft Merger Terms Share exchange ratio Independent expert's report Report of the directors Call of the General Meetings of Shareholders to deliberate on and approve, or otherwise, the Merger Publication of the merger resolutions and time limit for opposition by creditors Equivalent document Merger deed and its filing for registration Execution of the share exchange Listing of the new Bankia shares 9

3 3.6 Capital increase in Bankia and Merger share exchange Capital increase in Bankia Procedure for exchange of BMN shares Amendment of the Bankia bylaws Appointment to the Bankia Board of Directors Tax regime Other considerations ECONOMIC ASPECTS Merger balance sheets and financial statements Share exchange ratio Justification of the exchange ratio. Measurement methods used Fairness opinion Date of economic effect and accounting aspects CONCLUSION ABSTENTION OF EXECUTIVE DIRECTORS

4 REPORT OF THE BOARD OF DIRECTORS OF BANKIA, S.A. ON THE COMMON DRAFT TERMS OF THE MERGER BETWEEN BANKIA, S.A. (as absorbing) AND BANCO MARE NOSTRUM, S.A. (as absorbed) The Board of Directors of Bankia, S.A. ( Bankia ) has issued this report to describe and explain the rationale for the common draft terms of the merger between Bankia (as absorbing) and Banco Mare Nostrum, S.A. ( BMN, as absorbed, and, together with Bankia, the Participating Entities ) as regards the legal and economic aspects and the implications of that merger (the Merger ) for the shareholders, creditors and employees, all as provided in Article 33 of Act 3/2009 of 3 April 2009 on structural modifications of business corporations ( Law 3/2009 ). 1. INTRODUCTION On 26 June 2017, the Boards of Directors of Bankia and BMN formulated common draft terms of the merger in which BMN would be absorbed by Bankia in accordance with Articles 30 and 31 of Act 3/2009 (the Draft Merger Terms ). The Draft Merger Terms will be submitted for approval to the General Meeting of Shareholders of Bankia and of BMN under Article 40 of Act 3/2009. According to article 33 of Act Ley 3/2009, the directors of each of the companies taking part in the Merger must prepare a report giving an explanation and justification of the legal and financial terms of the Draft Merger Terms, with special reference to the ratio for the exchange of shares and any particular valuation difficulties that may exist, and setting out the implications of the Merger for the shareholders, creditors and employees. 2. REASONS FOR THE MERGER 2.1 Rationale for the Merger As noted in the Draft Merger Terms, the projected merger consolidates the combined entity (the Merged Company ) as one of the country's leading banks, ranked fourth as measured by total assets in Spain. The geographical fit of the customer base and branch network increases its diversification and reach, reinforcing a solid competitive position. Furthermore, the operation allows the shareholders of both parties to reap significant value to be generated through the expected synergies. Both entities have a business model focused on retail mortgages and a similar customer profile, which points to large potential synergies through the reduction of redundant costs and limited risk of integration. The Merger exchange via the delivery of Bankia shares will not only allow BMN shareholders to benefit from those synergies, it will also give them liquidity in the form of shares admitted to trading on the Spanish Stock Exchanges

5 The fact that Bankia currently enjoys a comfortable capital position, far above the regulatory minimums and higher than that of its peers, means it will not have to tap public markets to fund the operation. Bankia will be able to optimise the use of its current surplus capital by achieving a return that surpasses its cost of capital and which thus creates value for its shareholders. 2.2 Procedure for negotiating the Merger On 15 March 2017, the Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria) notified Bankia that its Governing Committee had agreed that the merger of Bankia and BMN was the best strategy for optimising the capacity to recover State aid in anticipation of a future disinvestment, in order for the two institutions to begin making the relevant arrangements. That notice, which Bankia made public in a formal material disclosure on that same day 15 March 2017, was evaluated by the Board of Directors of Bankia at their meeting of 24 March 2017, in which it was resolved to undertake the studies and analysis which, prepared with full independence, would allow the Board of Directors, if applicable, to adopt a well-founded decision in the institution's interest on the proposed merger. At that meeting, the Bankia Board of Directors, pursuant to the final provision of the Board Regulations, voted to set up within the Board a committee of independent directors to monitor and supervise the merger of Bankia and BMN (the Monitoring and Supervision Committee ) composed of the following directors of Bankia, all of whom are classified as independent directors: Chairman: Mr. Joaquín Ayuso García (Lead Independent Director and Chairman of the Appointments and Responsible Management Committee). Members: Mr. Antonio Greño Hidalgo (Chairman of the Audit and Compliance Committee). Ms. Eva Castillo Sanz (Chairwoman of the Remuneration Committee). Mr. Francisco Javier Campo García (Chairman of the Risk Advisory Committee). The Monitoring and Supervision Committee named Mr. Miguel Crespo Rodríguez (Secretary of the Board of Directors of Bankia) as non-member Secretary. According to the terms of said Final Provision of the Board of Directors Regulations, the Monitoring and Supervision Committee will have powers of information, advising, proposal and, in particular, the essential function of continuous monitoring and supervision of the merger of Bankia and BMN, both in the preliminary phase of prior study and analysis and, if applicable, as regards compliance with the legal requirements laid down in the applicable Spanish and European Union laws and regulations that allows, after approval by the Boards of Directors and the General Meetings of Shareholders of both entities, the merger process to be culminated, reporting to the Board of Directors on the development of those studies and analyses and on the fulfilment of said legal requirements, with special emphasis on safeguarding the interests of Bankia and hence of all of its shareholders, ensuring autonomy and independence in the pursuit of the merger both in the preliminary phase and, if applicable, in the decision-making stage

6 The Merger is proposed to the General Meeting of Shareholders of Bankia after full analysis and negotiation of the deal, under the direction of the Monitoring and Supervision Committee to ensure the autonomy and independence of the process, which has included: a) A complete due diligence review of financial, legal, tax and employment aspects of BMN, for which purpose Bankia has engaged Ernst & Young, as well as of the technological aspects, in which it has been supported by Accenture. b) A detailed review of the legal aspects of the operation and compliance with the relevant legal requirements (including as regards the resolutions brought before the General Meeting of Shareholders for approval), on which Bankia has been advised by the Garrigues law firm. c) Rigorous negotiation of the economic and legal terms of the Merger by the management team, from the standpoint of Bankia's corporate interest, in which process it has relied on financial advising from Morgan Stanley. Lastly, subsequent to the aforesaid process of analysis and negotiation and after reaching an agreement with BMN on the legal and financial terms of the Merger, the Bankia Board of Directors agreed (with the abstentions, as per corporate governance best practices, of its executive directors given their potential conflict of interests) to sign the Draft Merger Terms, considering that, on the terms negotiated, the Merger operation makes sense and has a sound economic and business rationale for Bankia and creates value for its shareholders, having drawn on the following reports and opinions: a) Favourable report dated 26 June 2017 of the Audit and Compliance Committee pursuant to article 14.8 of the Bankia Board of Directors Regulations, on the economic terms of the Merger and its accounting impact and, especially, giving a favourable assessment of the proposed share exchange ratio. b) Favourable report dated 26 June 2017 of the Monitoring and Supervision Committee, which informed the Board of Directors that the merger process had been carried out with autonomy and independence and giving its positive assessment of the final financial and legal terms of the proposed Merger from the standpoint of the interests of Bankia and hence of all its shareholders. c) Favourable report dated 26 June 2017 of the Appointments and Responsible Management Committee on the proposal included in the Draft Merger Terms to appoint a director in BMN as additional member of the Bankia Board of Directors effective as from the registration of the Merger deed. On 26 June 2017, Morgan Stanley and Rothschild, engaged by Bankia for these purposes (the latter, at the behest of the Monitoring and Supervision Committee), issued fairness opinions for the Board of Directors and for said Monitoring and Supervision Committee, respectively, concluding that, at said date and based on the facts, limitations and assumptions contained in each opinion, the proposed exchange ratio is fair from a financial standpoint for the Bankia shareholders

7 3. LEGAL ASPECTS 3.1 General characteristics According to the terms of the Draft Merger Terms, which are deemed reproduced herein insofar as necessary, the proposed Merger consists of BMN being absorbed by Bankia, with the termination by winding up without liquidation of BMN and en bloc transfer of all its assets and liabilities to Bankia, which will acquire by universal succession the whole of the rights and obligations of the absorbed, all on the terms and conditions provided in the Draft Merger Terms. Said universal succession implies acquisition in a single act of all assets and liabilities of BMN, which thus assigns all assets, rights and obligations and, in general, all legal relationships of the absorbed, which will remain in effect notwithstanding the change in ownership. Simultaneously, and as a consequence of the Merger, the shareholders of BMN will receive newly issued ordinary shares of Bankia in proportion to their respective ownership interest in the absorbed, according to the exchange ratio set out in the Draft Merger Terms. The identifying particulars of the Participating Entities are set out in section 3 of the Draft Merger Terms. 3.2 Conditions precedent The effectiveness of the proposed Merger is conditional, as described in section 16 of the Draft Merger Terms, upon authorisation from the Minister of Economy, Industry and Competitiveness, as stipulated in the twelfth additional provision of Act 10/2014 of 26 June 2014 on regulation, supervision and solvency of credit institutions, as well as upon attainment of all such other authorisations as may be required from the Spanish Directorate General for Insurance and Pension Funds, from the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores), from the Spanish Markets and Competition Commission (Comisión Nacional de los Mercados y de la Competencia) and any other administrative body or entity. In particular, in addition to said authorisation from the Minister of Economy, Industry and Competitiveness, the following administrative authorisations will be required for the Merger to be executed: a) Non-opposition by the European Central Bank to Bankia acquiring a significant holding in Banco Europeo de Finanzas, S.A. (article 17 of Act 10/2014 of 26 June 2014 on regulation, supervision and solvency of credit institutions). This authorisation will not be needed if the European Central Bank states its non-opposition to the loss of a significant BMN holding in Banco Europeo de Finanzas, S.A. before the Merger is executed. In any event, it is expected that said non-opposition will requested as a precaution. b) Non-opposition by the Spanish Directorate General for Insurance and Pension Funds to Bankia acquiring a significant holding in Caja Granada Vida, Compañía de Seguros y Reaseguros, S.A., Cajamurcia Vida y Pensiones de Seguros y Reaseguros, S.A., Sa Nostra Compañía de Seguros de Vida, S.A. and Caja de Seguros Reunidos, Compañía de Seguros y Reaseguros, S.A. (article 85 of Act 20/2015 of 14 July 2015 on the regulation, supervision and solvency of insurers and reinsurers)

8 c) Non-opposition by the Spanish Directorate General for Insurance and Pension Funds to Bankia acquiring a significant holding in BMN Brokers Correduría de Seguros, S.A. (article 28 of Act 26/2006 of 17 July 2006 on mediation in private insurance and reinsurance). d) Authorisation from the Spanish Markets and Competition Commission for the economic concentration arising from the Merger (article 9 of the Spanish Competition Act 15/2007 of 3 July 2007). 3.3 Applicable laws and regulations The proposed Merger, and the formalities and acts needed to carry it through, will be executed in accordance with the provisions of Act 3/2009, the consolidated text of the Spanish Corporations Act (Ley de Sociedades de Capital), the Regulations of the Commercial Registry and the result of the legal and regulatory provisions that apply. 3.4 Implications of the Merger for shareholders, creditors and employees Implications for shareholders As a result of Bankia's takeover of BMN the shareholders at that time of the absorbed BMN will become shareholders of Bankia. This will be done by allocating to BMN shareholders shares of Bankia in proportion to their respective shareholding in the absorbed per the exchange ratio set out in section 4.1 of the Draft Merger Terms. For BMN shareholders the Merger thus entails the assignment, on equal terms with the current Bankia shareholders, of the rights and duties to which they are entitled and bound by law and under the bylaws as shareholders once they receive their Bankia shares in the Merger share swap. For their part, it is noted that, in accordance with the provisions of article of the Corporations Act, the current shareholders of Bankia will not enjoy preferential subscription rights in respect of the new shares issued to execute the Merger exchange in relation to the absorption of BMN, as those shares will be allocated solely to BMN shareholders in exchange for their shareholding in BMN. As from the effective date of the Merger, BMN will be wound up and the bylaws that govern the post-merger company (i.e., Bankia) will be those that are annexed to the Draft Merger Terms, in which the only amendment made as a result of the Merger will be as regards the share capital figure as a result of the capital increase made to execute the Merger share swap. The new shares to be issued by Bankia as a consequence of the Merger will entitle their holders to share in the company profits as from the date the Merger deed is registered in the Commercial Registry of Valencia Implications for creditors The Merger will entail en bloc transfer to Bankia, by universal succession and in a single act, of the whole of BMN's assets and liabilities, with all associated rights and obligations. As from the time the notice of the Merger resolution is published, creditors of the Participating Entities with credit rights that have not yet fallen due and which arose prior - 5 -

9 to the date the Draft Merger Terms was published may, during a period of one month and until their credit rights are secured, exercise their right to object to the Merger on the terms regulated in article 44 of Act 3/2009. Creditors whose credit rights are already sufficiently secured shall not have said right of objection Implications for employees As provided in section 13 of the Draft Merger Terms, according to what is provided in article 44 of the consolidated text of the Spanish Employees' Statute (Estatuto de los Trabajadores) approved by Legislative Royal Decree 2/2015 of 23 October 2015, which regulates events of corporate succession, Bankia will be subrogated to the position of BMN as regards the employment rights and obligations of the BMN employees. Bankia will comply with its disclosure obligations and, if applicable, its obligations to consult with the legal representatives of its employees, as provided in the relevant labour laws. The proposed Merger will likewise be notified to the relevant government bodies, in particular to the General Treasury of the Social Security system. After the Merger has been executed, the existing employment rights of BMN employees will be respected as provided by law. Similarly, after the execution of the Merger, Bankia will analyse the overlaps, redundancies and economies of scale arising from the process and will carry out the employment restructuring it deems necessary, applying the relevant employment law provisions. The Merger is not expected to have any gender impact on the governing body of the absorbing. 3.5 Legal procedure for the Merger Draft Merger Terms In order for the Merger to be carried out, Act 3/2009 requires the directors of the merging companies to draw up common draft terms of the operation. Toward that end, on 26 June 2017 the Boards of Directors of Bankia and BMN approved and signed the Draft Merger Terms referred to by this report and which is deemed reproduced herein insofar as necessary Publicity of the Draft Merger Terms In accordance with article 32 of Act 3/2009, the Draft Merger Terms has been posted on the corporate websites of Bankia ( since 27 June 2017 and of BMN ( since that same date, where it may be downloaded and printed out. The fact of the Merger Project Proposal being posted on the Bankia and BMN corporate websites has been or will be published in the Commercial Registry Official Gazette (Boletín Oficial del Registro Mercantil), in all events prior to the publication of the notice calling the General Meetings of Shareholders that will resolve on the Merger, as required by article 32 of Act 3/

10 3.5.3 Share exchange ratio The Draft Merger Terms envisages a share exchange ratio that has been determined on the basis of the real value of the net assets of the Participating Entities, without any supplementary cash compensation, of ONE (1) ordinary share of Bankia, with a par value of one euro, for every SEVEN POINT EIGHT TWO NINE EIGHT SEVEN ( ) ordinary shares of BMN, with a par value of one euro each Independent expert's report In accordance with the provisions of article 34 of Act 3/2009, KPMG Auditores, S.L., independent expert appointed by the Commercial Registry of Valencia (competent for the registered office of the absorbing), issued the prescribed report on the Draft Merger Terms on 14 July In said report, KPMG Auditores, S.L. concluded as follows: According to the information sources used and the procedures applied, and subject to the significant aspects and special valuation difficulties regarding the conclusions of our work, all as described in the foregoing sections, and for the sole purpose of complying with the mandate given in the appointment as independent expert, we believe that: a. The exchange ratio proposed ( shares of BMN for each share of Bankia) by the Boards of Directors of the Participating Entities in the merger is justified, the valuation methods used by said Boards of Directors are adequate and the ranges of values they yield are reasonable. b. The net assets provided by the absorbed are equal, at least, to the maximum amount of the capital increase in the absorbing envisaged in Draft Merger Terms Report of the directors The directors of Bankia, upon the prior favourable report of the Audit and Compliance Committee and of the Monitoring and Supervision Committee, have on the present date approved and signed this report giving a detailed explanation and rationale for the Draft Merger Terms as regards its legal and economic aspects, with special reference to the share exchange ratio and to such particular valuation difficulties as may exist, as well as to the implications of the Merger for the shareholders, creditors and employees, all as provided in Article 33 of Act 3/2009 of 3 April The BMN Board of Directors, for its part, is also expected to issue a report giving a detailed explanation and rationale of the Draft Merger Terms as regards its legal and economic aspects, all as provided in article 33 of Act 3/ Call of the General Meetings of Shareholders to deliberate on and approve, or otherwise, the Merger The Merger will be brought before the General Meetings of Shareholders of Bankia and of BMN for approval. For these purposes, the Board of Directors will issue a call, as provided by law and in the bylaws, of an extraordinary General Meeting of Shareholders of Bankia to deliberate on and approve, or otherwise, the proposed Merger

11 In accordance with the terms of article 39 of Act 3/2009, before the publication of the notice calling the General Meeting the following documents will be posted on the Bankia website ( where they may be downloaded and printed out: a) Draft Merger Terms. b) This report and the report of the BMN directors on the Draft Merger Terms. c) The report of the independent expert on the Draft Merger Terms. d) The annual financial statements and management reports of the last three years of the Participating Entities, together with the related reports of the statutory auditors. e) The merger balance sheets of the Participating Entities, which will be the last annual balance sheet at 31 December 2016 that forms part of their respective annual financial statements for 2016, with the related report of the statutory auditors. f) The current Bylaws of Bankia and BMN. g) Full text of the Bylaws of Bankia as the absorbing that will apply after the Merger is executed. Those Bylaws will be the current Bankia Bylaws (as set out in Annex to the Draft Merger Terms), in which there will only be amended, as a consequence of the Merger, the share capital figure (article 5 of the Bankia Bylaws) as a result of the capital increase carried out to execute the Merger share swap. h) Identity of the directors of the Participating Entities, with the dates since when they have held their directorships, and the same information for the BMN director who it is proposed be included in the Bankia Board of Directors as a consequence of the Merger Publication of the merger resolutions and time limit for opposition by creditors In accordance with the provisions of article 43 of Act 3/2009, once adopted, the merger resolution will be published in the Commercial Registry Official Gazette and in one of the daily newspapers with the largest readership in the provinces where each one of the Participating Entities has its registered office (Valencia and Madrid). The notice must set out the right of shareholders and creditors to obtain the full text of the resolutions adopted and of the merger balance sheets, as well as the right to object that rests with the creditors of the Participating Entities, all as provided in article 43 of Act 3/2009. The proposed Merger cannot be carried out until one month has passed after publication of the last of the resolutions approved, during which time creditors of the Participating Entities with standing to do so may oppose the Merger in accordance with the provisions of article 44.3 of Act 3/ Equivalent document Before the Merger deed is executed and the share exchange carried out, a document will be submitted to Spain's National Securities Market Commission (Comisión Nacional del - 8 -

12 Mercado de Valores) containing the information said body considers equivalent to that of a prospectus, taking into account the requirements of European Union legislation, in accordance with the provisions of articles 26.1.d) and 41.1.c) of Royal Decree 1310/2005, which partially implemented the Spanish Securities Market Act (Ley del Mercado de Valores) in matters of admission of securities to trading in official secondary markets, public sale or subscription offerings and the prospectus required for such purpose. Said equivalent document will be made timely available on the website of the National Securities Market Commission ( Merger deed and its filing for registration Once the Merger has been approved by the General Meetings of Shareholders, the related notices have been published, and the legal time limit has expired without any creditors with rightful standing having exercised their right to object or, as applicable, the credit rights of those who have duly exercised said right have been discharged or duly secured, the relevant administrative authorisations have been obtained, the National Securities Market Commission has approved the equivalent document referred to in the preceding section and all prescribed legal formalities have been completed, the deed of the Merger will be executed and filed, no earlier than 2 January 2018, for registration in the Commercial Registries of Valencia and Madrid Execution of the share exchange Once the Merger deed has been registered in the Commercial Registry of Valencia, the BMN shares will be exchanged for newly issued Bankia shares, on the terms set out in the Draft Merger Terms, as described in section 3.6 below Listing of the new Bankia shares Bankia will request to have the new shares it issues to execute the Merger swap admitted to trading on the Madrid, Barcelona, Valencia and Bilbao Stock Exchanges, to be traded through the Spanish stock market interconnection system known as the Sistema de Interconexión Bursátil (Continuous Market), complying with all legal formalities required for that purpose. 3.6 Capital increase in Bankia and Merger share exchange Capital increase in Bankia Bankia will carry out the exchange of BMN shares, according to the ratio provided in the Draft Merger Terms, using newly issued ordinary shares. Toward this end Bankia will increase its capital in the amount necessary to be able to execute the exchange of BMN shares by issuing and placing in circulation the requisite number of new ordinary shares with a par value of one euro each, of the same single class and series as the ones currently outstanding, represented as book entries. Those shares may only be subscribed for by the BMN shareholders, and, in accordance with the provisions of article of the Spanish Corporations Act, there will be no preferential subscription right

13 Considering the total number of BMN shares outstanding at the date of the Draft Merger Terms that may be tendered in the exchange (i.e., 1,613,653,104 shares, with a par value of one euro each, less 3,171,205 own shares, which will be maintained as treasury stock until the Merger is executed and will therefore not be exchanged), the maximum number of Bankia shares to be issued to carry out the Merger exchange is 205,684,373 ordinary shares of Bankia with a par value of one euro each. This would imply a capital increase for a maximum total nominal amount of 205,684, euros. The amount of the capital increase may vary as a function of the BMN own shares and of Bankia's shareholding in BMN at the time the Merger is executed. The new Bankia shares will be issued at their par value of one euro per share with an issue premium calculated as specified in the Draft Merger Terms; that is, the issue premium will be the difference between: a) the fair value of the net assets that Bankia receives from BMN in the Merger and b) the nominal value of the new shares issued by Bankia to execute the Merger swap as described above. For these purposes a proposal will be brought before the Bankia General Meeting of Shareholders that resolves on the Merger to delegate to the Board of Directors, with authority to subdelegate and in accordance with article a) of the Corporations Act, the authority to stipulate the terms of the capital increase as regards any aspects not provided for in the merger resolution itself, including, in particular, authority to fix the exact amount of the capital increase and the issue premium, without prejudice to such premiums and reserves as may be generated in the absorbing for accounting purposes when the merger is recognised in its accounting. Both the nominal value of the capital increase and the aggregate amount of the issue premium will be fully paid in as a result of the transfer en bloc of the whole of BMN's assets and liabilities to Bankia in the Merger Procedure for exchange of BMN shares The procedure for exchange the BMN shares for Bankia shares is described in section 4.3 of the Draft Merger Terms. The exchange will take place once the pertinent administrative formalities have been completed and the Merger deed registered in the Commercial Registry of Valencia, and it will be effected, as from the date specified in the notices to be published under the applicable laws and regulations, through the custodians of the BMN shares, in accordance with the procedures stipulated for the book-entries system and, in particular, according to the terms of Royal Decree 878/2015 of 2 October 2015 on clearing, settlement and registration of negotiable securities represented as book entries and applying the provisions of article 117 of the Corporations Act insofar as relevant. The owners of a number of BMN shares that according to the agreed exchange ratio does not allow them to receive an integer number of Bankia shares may acquire or transfer shares in order to proceed to exchange them according to that exchange ratio. Without prejudice to the above, the Participating Entities may set up mechanisms to facilitate the exchange of the BMN shares for Bankia shares, by appointing a fractions

14 agent to act as counterparty for the purchase of fractions or remainders. Thus, all BMN shareholders who, in view of the stipulated share exchange ratio and the number of BMN shares they hold, are not entitled to receive at least one whole share of Bankia or are entitled to receive an integer number of Bankia shares and who have a remaining number of BMN shares that is not sufficient to allow them to receive one additional Bankia share, may transfer those excess BMN shares to the fractions agent, who will pay their cash value. As a consequence of the Merger, all BMN shares will be redeemed and retired Amendment of the Bankia bylaws The capital increase in Bankia to execute the Merger share exchange will entail modifying its share capital and the number of shares into which it is divided, and will thus require amendment of article 5 of Bankia's current bylaws. Consequently, if the capital increase is made for the maximum amount specified in section above, article 5 of Bankia's bylaws will be amended to thenceforth read as follows: ARTICLE 5. SHARE CAPITAL 1. The share capital is fixed at THREE THOUSAND EIGHTY-FIVE MILLION SIXTEEN THOUSAND FIVE HUNDRED NINE euros ( 3,085,016,509.00). 2. It is represented by a single series and class and a total number of THREE THOUSAND EIGHTY-FIVE MILLION SIXTEEN THOUSAND FIVE HUNDRED NINE (3,085,016,509) shares. 3. The shares will have a par value of one euro ( 1.00) each. 4. The shares representing the share capital are fully subscribed and paid up. 3.7 Appointment to the Bankia Board of Directors In accordance with the agreements reached between the Boards of Directors of Bankia and BMN in relation to the Merger, the Bankia Board of Directors will propose to its General Meeting of Shareholders that is to resolve on the Merger, as part of the resolutions thereon, that a director in BMN be appointed as additional member of the Board of Directors of Bankia, effective on the registration date of the Merger deed. The above is without prejudice to the application, insofar as necessary, of the provisions of Act 11/2015 of 18 June 2015 on recovery and resolution of credit institutions and investment firms. 3.8 Tax regime As provided in section 15 of the Draft Merger Terms, the Merger will file for the special tax regime provided in Chapter VII of Title VII and in the second additional provision of said Act. 3.9 Other considerations Section 19 of the Draft Merger Terms sets out the commitments undertaken by the Participating Entities in relation to the interim period until the Merger is executed

15 4. ECONOMIC ASPECTS 4.1 Merger balance sheets and financial statements For the purposes of article 36 of Act 3/2009, the merger balance sheet for Bankia will be its annual balance sheet for the year ended 31 December 2016 included in its 2016 annual financial statements, duly audited by Bankia's statutory auditor and approved by the Ordinary General Meeting of Shareholders held on 24 March In turn, the merger balance sheet for BMN will be its annual balance sheet for the year ended 31 December 2016 included in its 2016 annual financial statements, duly audited by BMN's statutory auditor and approved by the Ordinary General Meeting of Shareholders held on 5 May Furthermore, for the purposes of article of Act 3/2009, it is placed on record that the terms on which the Merger is carried out have been established taking into consideration said annual financial statements of the Participating Entities for the year ended 31 December Share exchange ratio As specified in section 4.1 of the Draft Merger Terms, the exchange ratio for the swap of BMN shares for Bankia shares that is proposed, without any supplementary cash compensation, is as follows: ONE (1) ordinary share of Bankia, with a par value of one euro each, for every SEVEN POINT EIGHT TWO NINE EIGHT SEVEN ( ) ordinary shares of BMN, with a par value of one euro each. In accordance with article 25 of Act 3/2009, this exchange ratio has been determined on the basis of the real value of the net assets of Bankia and BMN. 4.3 Justification of the exchange ratio. Measurement methods used The proposed exchange ratio has been determined on the basis of the real value of the net assets of Bankia and BMN. Those real net assets have been established using different valuation methodologies for each of the entities. As Bankia is a listed company with a free float and adequate liquidity and the Merger exchange entails the delivery of ordinary shares of Bankia to the shareholders of BMN, it was considered that, for Bankia, the best valuation methodology is one based on its market capitalisation. In order to mitigate the impact that the share volatility could have on the market capitalisation benchmark, the market capitalisation was measured over different time periods (the trading day immediately preceding that of the merger agreement, the last five business days, the last month, the last three months, etc.). It was concluded that the closing price on the trading day immediately preceding that of the authorisation of the Draft Merger Terms by the Boards of Directors of the two entities properly reflected the value of Bankia s real net assets and was within the range of variation of the different time periods considered. That quoted price was euros per share, entailing a valuation of 11,549 million euros

16 Valuation by reference to a market price is the method usually considered the preferred method for determining the real value in the case of listed securities. For example, article of the Corporations Act presumes that the fair value of shares to be issued in capital increases in which preferential subscription rights are disapplied is the market price, unless reasons are given to justify otherwise. The target prices published by the independent financial analysts who cover the Bankia share were also taken into consideration. In the case of BMN, as it is an unlisted company, the methodologies used were those commonly used in mergers of this nature, notably comparable multiples, the Dividend Discount Model (DDM) and Warranted Equity Valuation (WEV), which consists of calculating a simplified theoretical intrinsic valuation multiple that relates the return on equity to the cost of equity. a) Valuation by multiples: this valuation methodology combines a market valuation environment (using multiples of listed comparable entities) with adjusted net asset values. The first step is to equate the net book values of the companies by equating their regulatory capital and coverage levels. This will yield a standardised tangible net book value associated with a capital surplus or deficit. Profitability projections over 2/3 years are used. Market multiples based on regression lines are then applied to the standardised metrics. The main multiples used were the expected Price to Earnings Ratio (P/E ratio) for the years 2017, 2018 and 2019, and Price to Book Value (P/BV). Additionally, a regression analysis was performed based on the relationship between the P/BV multiples and the expected return on equity (ROE) for the years 2017, 2018 and The standardised valuation thus obtained is then increased or reduced by the capital surplus or deficit determined when calculating the standardised tangible net book value. b) Dividend discount model: this methodology provides a theoretical intrinsic valuation based on discounting the entity s future dividends. It is based on a projected business plan that takes into account the entity s profitability, balance sheet growth and capacity to distribute dividends. This projection is used to identify a capital surplus that could be distributed each year in the form of dividends. These estimated cash flows are discounted at the entity s cost of equity to give a valuation. c) Warranted equity valuation (WEV): Theoretical intrinsic valuation multiple calculated in a simplified manner, relating the return on equity to the cost of equity. The formula is Where: ROE: Return on equity (ROE g) / (CoE g) = P/BV

17 g: Perpetual growth CoE: Cost of equity This valuation methodology does not differ greatly from the dividend discount model insofar as it can be considered an excess return model, comparing the bank s profitability with its cost of equity. Applying these methodologies gave a valuation for BMN of 825 million euros. The directors of Bankia also carried out a joint study of the potential efficiencies resulting from the Merger and estimated that significant synergies could be generated over the period 2018 to 2020, mainly through cost savings. Shown in the table below are publicly traded Spanish financial institutions and their valuation multiples as at the BMN valuation date. Bank Closing Price (23/6/2017) Market Cap (23/6/2017) P/TBV Multiples 1Q 2017 Banco Santander , x BBVA , x Caixabank , x Bankia , x Banco Sabadell 1.7 9, x Liberbank x Bankinter x Unicaja (1) 1.1 1, x Average 1.03x Median 1.05x BMN x Trading prices in euros. Stock market capitalisation figures in millions of euros. Note (1): Unicaja figures at 30 June 2017, first trading day. 4.4 Fairness opinion On 26 June 2017, Morgan Stanley and Rothschild, retained by Bankia for this purpose (the latter, at the request of the Monitoring and Supervision Committee), each issued a fairness opinion, the former for the Board of Directors and the latter for the abovementioned Monitoring and Supervision Committee, concluding that, at that date, based on the facts, limitations and assumptions contained in each opinion, the proposed exchange ratio is fair from a financial point of view for Bankia s shareholders. The abovementioned fairness opinion by Morgan Stanley and Rothschild are annexed to this report. 4.5 Date of economic effect and accounting aspects The date as from which the operations of the absorbed will be considered executed for accounting purposes for the account of the absorbing will be the one that applies under the

18 Spanish General Accounting Plan (Plan General de Contabilidad) approved by Royal Decree 1514/2007 of 16 November 2007 and, in particular in standard 19 thereof, as well as under International Financial Reporting Standard 3, and, in particular, paragraphs 8 and 9 thereof, with which the former is consistent. In any event, in the event of inconsistency between the two standards, the latter will prevail. According to said standards in effect at the date of the Draft Merger Terms, the effective accounting date of the Merger will be the date on which, the Merger having been approved by the General Meetings of Bankia and of BMN, there is obtained the last of the administrative authorisations to which the Merger's effectiveness is subject under section 16 of the Draft Merger Terms, as that is the date on which the absorbing will be considered to have acquired control of the absorbed on the terms referred to by said standards. In accordance with the applicable accounting standards, the identifiable assets, the liabilities taken on and any non-controlling interest in the absorbed will be recorded in Bankia on the acquisition date (effective accounting date of the merger as explained above), and separately from the goodwill, at their fair values. For these purposes and irrespective of the date the Merger is registered in the Commercial Registry (and hence of the dissolution of the absorbed), the BMN directors have expressly undertaken to draw up a balance sheet of the absorbed the last day of the closed month before the acquisition date (effective accounting date of the Merger), which will be audited by BMN's present statutory auditor. 5. CONCLUSION Based on all of the above, the directors of Bankia consider that the Merger and its terms as set out in the Draft Merger Terms, as well as the resolutions that will be proposed to the General Meeting of Shareholders called to deliberate and decide on the Merger, are in the best interest of Bankia and of its shareholders as a whole, and that the proposed share exchange ratio is justified, is supported by adequate valuation methods and is fair from the financial point of view for the Bankia shareholders. 6. ABSTENTION OF EXECUTIVE DIRECTORS It is noted that pursuant to corporate governance best practices the executive directors of Bankia Mr. José Ignacio Goirigolzarri Tellaeche (Executive Chairman), Mr. José Sevilla Álvarez (Chief Executive Officer) and Mr. Antonio Ortega Parra have abstained from taking part in the Bankia Board of Directors' deliberations and voting on this Report as they are in a potential conflict of interests. Said directors also hold directorships in BFA Tenedora de Acciones, S.A.U., a company wholly owned by the Fund for Orderly Bank Restructuring and majority shareholder of Bankia. Mr. José Ignacio Goirigolzarri Tellaeche holds a seat on the board of directors of BFA Tenedora de Acciones, S.A. in his capacity as individual representative of the directorship held by the Fund for Orderly Bank Restructuring as a legal person, whereas Mr. José Sevilla Álvarez and Mr. Antonio Ortega Parra are individual directors of BFA Tenedora de Acciones, S.A.U. * * * Madrid, 21 July

19

20

21

22

23

24

25