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Scant hope for full recovery of €4.9B Novo Banco bailout bill

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Scant hope for full recovery of €4.9B Novo Banco bailout bill

ThePortuguese government may find that a fresh attempt to sell draws bids that are evenlower than those received previously, experts said.

in recent days by the Financial Times and Diário de Notícias have indicated that Novo Banco is planning tomeet with potential investors, although CEO Eduardo Stock da Cunha said plans for U.S. and U.K. road shows have not beenconfirmed. Meetings have been held at headquarters in Lisbon, he added,according to a March 29 Jornal de Negóciosreport.

NovoBanco, the good bank carved out of Banco Espírito Santo SA in 2014, must be fully sold byAugust 2017 under the terms of a bailout agreement. The most recent attempt tooffload the lender in September 2015 failed after offers from all bidders werereportedly deemed toolow.

Portugal'sbanks, which have to finance the resolution fund used to rescue Novo Banco, andthe government are hoping to recover as much as possible of the €4.9 billioninjected into the lender. Rumors had indicated that China's hadoffered about €3.5billion for the good bank.

But since the failure of that sale attempt, valuations of Portuguese banks havedeclined amid concerns about the sector's overall profitability, observedAlbino Oliveira, an analyst at advisory firm Fincor. 's price-to-book ratiofell to 51.6% from 127.8% in the year to March 29, according to data from SNLFinancial. That of Banco BPI SAdropped to 72.5% from 100.2%.

Takinginto account the multiples at which other Portuguese banks are trading, NovoBanco could now be valued at some €1.5 billion, Oliveira said in an interview.

Portugalis a low-growth banking environment and it's difficult to attract someone"to pay to be in that market," said CreditSights analyst JohnRaymond. At Novo Banco, for instance, net loans declined 9.6% yearover year in 2015, and the bank reported a full-year consolidated net loss of €980.6million, driven by provisions of €1.06 billion.  

Oliveiraand Raymond said the government is likely to get a better deal if it finds adomestic buyer than if it were to sell to an outsider.

"[Portugal]is not a particularly buoyant market," Raymond said, "so moving intoit as an outsider you want to make sure that you've got plenty of room formaneuver. If you are paying a full price, it's higher risk." A domesticbuyer, on the other hand, could combine the Novo Banco business with itsexisting operations and create synergies, he suggested.

Onepotential domestic acquirer could materialize should succeed in Portugal's BPI,enabling the latter to bid for Novo Banco. BCP is also looking forways to participate in the Novo Banco sale, but getting permission from theEuropean Commission may be difficult, Jornalde Negócios reported March 30, noting that because BCP has yet to repay€750 million in state aid, it is banned from making acquisitions.

Oliveirasaid a positive development at Novo Banco since the last sale attempt isstronger capital levels. The Banco de Portugal in late 2015 transferrednonsubordinated securities from Novo Banco back to BES, potentially making thebonds worthless but filling a €1.4 billion capital shortfall revealed by theECB's comprehensive assessment and stress test.

Drivenby uncertainty over whether a capital injection would be needed, Anbang'sacquisition proposal reportedly had included a capital increase of up to €1billion for Novo Banco and a discount on the purchase price should the lenderrequire more than that.

"Thelast time the issues [revolved around] the price and the capitalization of thebank. This time, at least the last point is not such a worry," Oliveirasaid.

NovoBanco reported a 2015-end phased-in common equity Tier 1 ratio of 13.6%, upfrom 9.5% a year earlier. Its estimated fully implemented CET1ratio was 11.5%, up from 7.5% a year earlier. For 2016, Novo Banco is targetinga CET1 ratio of 12.0% or more and net operating income of at least €230million, compared to €125 million in 2015.

SNL Financial is part ofS&P Global Market Intelligence.