Portugal: New auction looms as Novo Banco sale fails

By:
Dominic O’Neill
Published on:

Stress tests and China hurt bids; new mandate for management.

Novo Banco-600
Protesters demand payback of investments at Novo Banco’s bank office in Lisbon in early September


The cancellation of the Novo Banco auction in September has raised fresh doubts over the financial health of Portugal’s banks and the sovereign. It has also brought new ideas for how to get a better price for the lender, which was created last year as the successor to Banco Espírito Santo.

When the Portuguese central bank called off the sale, it pointed in part to market volatility in China, saying this contributed to an environment that was "hardly conducive to attracting investment for a major transaction". As China’s Fosun International and Anbang Insurance were known to be among the three final bidders for Novo Banco, the sale could have been the biggest example yet of Chinese investment in Europe’s financial sector

The delay in the sale raises as many questions about the overseas expansion plans of Chinese banks as it does about the health of those in Portugal.

Bank of Portugal indicated it could relaunch an auction after the European Central Bank publishes a postponed stress test on Novo Banco later this year. It seemed to say the possibility of new ECB capital demands after the tests made the sale process harder. It suggested reviving the auction process will be straightforward – particularly as much of the preparation, such as getting data ready for bidders, has already been done. 

However, in court documents earlier this year, according to Bloomberg, the central bank itself said a case brought by Goldman Sachs over an $835 million loan to BES could discourage bidders. That case has since continued in the UK courts. 

Protests

Retail investors in commercial paper issued by BES continue to fight for their money back too – not just in the courts, but also in noisy street protests outside Novo Banco branches, which hardly makes for welcoming images. 

The authorities are keen to see a rapid sale of the bank and by extension repayment of the €4.9 billion the state injected into Novo Banco last year via the central bank’s resolution fund, mostly provided by a government loan. It has become an emotive issue in Portugal ahead of parliamentary elections in October, not least because the cancelled sale has meant the bank’s capitalization has had to be added to the 2014 government deficit. 

The longer a sale is delayed, the more uncertainty it gives the banking sector regarding the resolution fund’s losses
Stefan Nedialkov, Citi

"It’s not an easy task – the buyers know the pressure is on the seller," says André Rodrigues, banks analyst at CaixaBI, the investment-banking arm of the country’s biggest bank. 

Portuguese banks, rather than the state, are normally supposed to back the resolution fund, and shares in Portugal’s biggest private lender, Millennium BCP, dropped in the days following the news of the cancelled sale. 

"The longer a sale is delayed, the more uncertainty it gives the rest of the banking sector regarding the resolution fund’s losses," says Stefan Nedialkov, banks analyst at Citi. 

If banks are asked for an upfront repayment of any big shortfall between the government’s contribution to the resolution fund and the eventual sale value of Novo Banco, they might need to raise capital themselves, notes Rodrigues. A fire-sale would then amount to "closing one problem to open another". In addition, Caixa Geral de Depósitos, the biggest bank, is state-owned. Meanwhile, staggered repayments by banks could be a drag on local lenders for years to come. 

Bank of Portugal argues the bids it received provide evidence of the attractiveness of Novo Banco, the country’s third biggest bank. It says some of the bidders expressed interest in participating in a new auction, and not only the three that submitted binding offers. That has fuelled talk in the market of a return to the negotiating table by Spain’s Santander or perhaps BPI, Portugal’s second-biggest private lender, which is partly owned by Catalan lender CaixaBank.

It remains to be seen how quickly the sale process might be restarted. There are growing calls in the financial community for the authorities to find ways for the bank to be given a much longer period, perhaps three years, to prepare for a sale, or eventually a gradual stock market sell-down along the lines of the UK government’s approach to Lloyds Banking Group.

"They have to restructure the bank in terms of people, branches, assets and business activity," says João Duque, professor at Lisbon’s School of Economics and Management. "At the moment, Novo Banco is like scrap metal. It needs to be reforged." 

Rationale

The central bank admits there is a rationale for extending its 2016 deadline for selling the bank, even if it still clings to the possibility of a quick sale. While Novo Banco management’s mandate previously was only to minimise losses, the central bank has said it will now "strengthen the mandate of the board", and ask it to submit a new plan to rationalize Novo Banco and build up its capital. 

The bank’s senior management is highly regarded locally. Novo Banco’s chief executive, Eduardo Stock da Cunha, played a part in the success of Santander’s Portuguese operation, working alongside António Horta-Osório, now chief executive of Lloyds. Chief financial officer Jorge Freire Cardoso was previously head of CaixaBI, which is also respected. 

One banker in Lisbon agrees there is much that Novo Banco could do to be more attractive to buyers – selling non-core assets and refocusing on small and medium-sized Portuguese businesses, for example, while closing or selling foreign operations. The international network might be better out of the way for non-Chinese buyers, who are less likely to use Novo Banco as a European or global springboard.