Western Europe: Portugal’s banks receive life support, at a cost

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By:
Dominic O’Neill
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Lone Star enters final talks on Novo Banco takeover; BCP heads to Chinese and Angolan control; CaixaBank takes BPI majority.


Mario Centeno-600
Finance minister Mario Centeno has turned down Lone Star’s rumoured requests
for state guarantees over legacy risks


Portugal made progress on securing desperately needed international investment in its banks in February, as the balance of power in Lisbon’s financial sector tipped definitively in favour of foreign control. To the regret of many in Lisbon, oversight of a sector only a few years ago dominated by local bankers and local regulators, has now turned to figures in Brussels, Frankfurt and Spain, and increasingly the US, Angola and China. 

Barcelona-based CaixaBank concluded its tender offer earlier in the month for the remaining shares in Portugal’s fifth-biggest bank, BPI, raising its stake from 45.5% to 84.5%. Another Spanish group, Santander, already owns the country’s highest-rated and fourth-biggest bank, Santander Totta. Also in February, Banco Commercial Portugues (BCP) completed a €1.3 billion rights issue. Private Chinese conglomerate Fosun International raised its stake in BCP to 24% in the issue, and Angola’s national oil company, Sonangol, slightly increased its stake to 15%. 

Although there remains no majority shareholder in BCP, one Lisbon-based analyst notes Fosun’s investments dramatically consolidate its shares. The Chinese firm initially acquired a 17% stake in a €175 million private placement in November. Theoretically, at least, it will now be easier for a small group of foreign investors (in this case, Fosun and Sonangol) to reach consensus and steer the bank, or even take formal control, if one or both were to buy more shares.

US money has also swooped in, as the Bank of Portugal said in late February it had accepted US private equity firm Lone Star “to a concluding round of exclusive negotiations” for the sale of Novo Banco. This is Portugal’s second biggest lender, housing the healthier assets of collapsed Banco Espírito Santo (BES).

Analysts say the Lone Star takeover remains uncertain, partly due to the possibility of additional losses, including those which might arise from legal disputes over the €2 billion transfer of senior bonds to BES in late 2015, after Novo Banco’s 2014 creation. Finance minister Mario Centeno has turned down Lone Star’s rumoured requests for state guarantees over legacy risks. 

Alternatives

Yet Centeno has left open what analysts say is an alternative way for Lone Star to share potential losses, by allowing the country’s bank resolution fund to retain a minority stake. In addition, the central bank has reportedly written to local corporations, asking them to take smaller stakes in Novo Banco. That could further limit the bank’s impact on public accounts and reduce the possibility of the European Commission blocking the sale on state-aid rules.

Portugal cannot easily afford alternatives to ceding power of its banks to foreigners, as it has almost no budgetary or regulatory scope to recapitalize banks using taxpayer money. Far-left politicians allied with the government have pushed for the nationalization of Novo Banco. Last year, rumours suggested the vehicle for a nationalization could be the state-owned Caixa Geral de Depósitos (CGD), the country’s biggest bank. The more likely alternative, however, given the need for approval from Brussels, would be a breakup and wind down of Novo Banco, however destabilizing that might be. 

Lone Star’s offer will almost certainly leave billions of euros of losses at the resolution fund, which must be borne by the other banks, principally CGD. But getting to a final round of negotiations on Novo Banco has surpassed the expectations of many in the local financial community. 

Lone Star is reportedly prepared to pay €750 million to the resolution fund for control of the bank, in which it could inject a further €750 million. The successful conclusion of BCP’s capital raising came as another positive surprise. It has already allowed BCP to pay back a remaining €700 million of contingent convertible bonds owed to the state.

Importance

These latest boosts to local banking stability and the loss of local financial control will increase the strategic importance to Portugal of CGD, notes Maria Almaça, Lisbon-based analyst at Axia. 

“Before, right-wing governments would try to privatize CGD; now that won’t be possible,” she says. Almaça says the increased strategic importance of CGD could be to the further detriment of its balance sheet, if it means it is more likely to be relied upon to prop up ailing corporate employers, should they find it harder to borrow from newly foreign-controlled banks. 

CGD, however, already has its fair share of worries, not least negotiating an affordable coupon on the €1 billion additional tier-1 capital it needs to raise concurrently to a vital injection of €2.7 billion of new state money. In February, it mandated Barclays, Citi, Deutsche Bank, JPMorgan and its own investment banking arm, CaixaBI, for an initial issuance of €500 million.

One financial institutions-focused investment banker in Madrid notes that Spanish banks – mostly in much better health than the Portuguese lenders – have steered clear of AT1 issuance, as uncertainty over AT1 bondholders’ rights has made the instrument not much cheaper than equity. 

AT1’s relative benefit in the eyes of the government, he notes, is that it allows the bank to stay in state hands.