Spain expands deadline to privatise Bankia by two years - government source

By Sonya Dowsett

MADRID (Reuters) - The Spanish government will pass a law on Friday giving it until end-2019 to privatise state-rescued lender Bankia (BKIA.MC) in order to recoup the most possible from its injection of funds as part of a 2012 bailout, a government source said on Thursday.

Bankia (BKIA.MC) became the symbol of Spain's financial crisis when it lost more than 19 billion euros (20.67 billion pounds) in 2012 because of soured real estate holdings.

Spain injected more than 22 billion euros in public money to save Bankia from collapse in 2012, almost half of a 41.3-billion-euro European aid package for Spain's ailing lenders.

The Spanish government, which owns a majority stake of 65.5 percent of Bankia, had vowed to sell it off by the end of 2017 and announced plans in September to merge the lender with state-owned Banco Mare Nostrum, known as BMN.

However, the head of Spain's bank restructuring fund, the FROB, said last month that falling market values amongst banks were making divestment harder.

Bankia bounced back quickly from huge losses on property assets after these were transferred to an external 'bad bank' backed by the state. Third quarter results in October showed the bank making further progress in strengthening its capital reserves and cleaning its loan book.

The bank underwent broad cost-cutting measures as a condition for its bailout and is shifting lending to small businesses and away from mortgages although, like most Spanish banking peers, it is suffering from squeezed margins.

The European Central Bank and the European Commission have said Spain should move ahead with the process of selling off both Bankia and BMN. The European Commission was not immediately available for comment. Bankia declined to comment.

(Additional reporting by Tomas Cobos; Editing by Alexandra Hudson)