BCP licks its wounds

The new rights issue from Banco Comercial Português, the largest privately owned bank in Portugal, may not have come as a surprise to shareholders, who have long been aware that it has a weak capital base. But the size of the deal and the level of the discount have certainly raised some eyebrows.

The bank announced the plans for an issue after a shareholder meeting late last month. The move came just over a month after disappointing 2002 annual results were issued. At e930 million, the deal is the largest global equity offering so far in 2003.

The rights issue follows a e700 million mandatory convertible in the third quarter of last year.

In a statement, Jorge Jardim Gonçalves, BCP’s chairman and founder, said: “This operation is an important initiative to attain adequate conditions to pursue sustainable consolidation and development for BCP.”

Not a junk issue
The rights issue is underwritten by Merrill Lynch and UBS, which is a reassuring sign for investors. “This is not junk,” says Jean-Baptiste Bellon, an analyst at Deutsche Bank. “If it was junk, no-one would have been interested in helping. BCP has a healthy core business but it is too leveraged as a group.” Standard & Poor’s reacted positively, saying that it was a clear sign that BCP was committed to improving its solvency. S&P also says it may soon upgrade BCP’s short-term outlook from negative to stable. Even so, the deal came as a shock to some. “We are surprised by the timing because when we discussed the mandatory convertible we chatted a lot about the advantages of doing a straight capital increase, but BCP was afraid to do that,” says Baptiste. “This was four months ago. What may have changed is that maybe BCP sees no further hope of a recovery in the capital markets in 2003.”

Investors, starved of fresh equity, are likely to respond well. But with the rights issue at a 43.2% discount, it is difficult for BCP to avoid having the move seen as a desperate step. It is certainly a repair job.

The January annual report from the bank revealed stable operating performance, and it demonstrated the firm’s continuing strength with its domestic retail franchise. But net earnings fell by a whacking 57% year on year at e272 million, partly because of a e200 million risk provision. Without that extraordinary charge, earnings would still have been 17% down on 2001 at e473 million. Analysts across the board reduced their forecasts for the bank’s stock.

Other factors out of the bank’s control contributed to its plummeting earnings, including an increase in its pensions contribution of e100 million demanded by new rules from the Bank of Portugal. But other unrealized losses appeared to be mounting, and the e200 million provisioning seemed to be designed to plug any further gaps.

These gaps may come from unwinding industrial investments, such as a stake in Electricidade de Portugal. The Portuguese energy sector is under review as part of a government report that may recommend horizontal mergers. If that happens, BCP might lose out, but having already accounted for hefty shocks, it is in a good position. Similarly, it has already pumped cash into its pension funds, as other European banks will probably be forced to do later.

Nonetheless, the 2002 results were a disappointing blow for BCP, which was built from nothing less than 20 years ago by Jardim Gonçalves, who still remains at the helm of what is now the country’s biggest privately owned bank. Expectations for the bank are high, and poor results are rare. Suddenly to find itself on JPMorgan’s top five underweight list for European banks – a position that was confirmed after its results were announced – is unpalatable.

Problems started for BCP when, having established itself in Portugal, the bank developed plans for foreign expansion. This seemed astute and far-sighted during the boom years, but since then the deals have put pressure on the bank’s finances. Its investments in Polish and Greek banks are still central to BCP’s long-term strategy. But the firm was forced to sell almost all of its holding in Eureko, an international insurance venture that has failed to yield results. That failure, and the unwinding of this BCP investment, prompted a further drain on the bank’s finances. BCP swapped half of Seguros e Pensões, its insurance arm, in return for an increased stake in Eureko, which was at the time scheduled for an IPO. Now that Eureko has failed for BCP, the bank is buying back its Seguros e Pensões stake.

Conservatism in fashion
Of all the privately held Portuguese banks, BCP has perhaps had the most ambitious expansion strategy, while other firms, such as Banco Espirito Santo (BES), have maintained their focus on domestic retail business more firmly. “There was a time when we were seen as excessively conservative,” says Manuel Pinho, a member of the board at BES, the country’s second-largest privately held bank. “Now we are praised.” That conservatism, combined with a period of cost-cutting in 2002, have contributed to solid results from BES. When it issued its 2002 annual report, it revealed an increase in consolidated net profits of over 12%, at e222.1 million. Some of this came from shedding around 10% of the bank’s staff. The firm also divested from Brazil and Poland and scaled back IT investments. Earnings per share and dividends were lower than they had been in 2001, but its solvency levels were stable after a share capital increase in the first quarter of the year. The bank concedes that it was lucky to complete that deal before the equity markets deteriorated further throughout 2002.

Similarly, Banco Portugal Investimentos’s operating costs fell by 3% and its net consolidated profit rose by 5% in 2002. Totta cut operating costs by 11% and boosted profits by 6% at e210 million – close to BES’s figure despite being 40% of the size.

All of this confirms that it is not an endemic problem with the Portuguese economy that is dragging BCP down. If that were the case, other banks would be suffering similar problems. But then, it is easy to say that with retrospect. When this capital restructuring is out of the way, BCP will be able to get on with what it knows best: banking. Indeed, this rights issue may be the first of many from European banks. Then suddenly BCP will look like a shrewd capital markets operator rather than an overstretched bank.