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BPI deal another piece in Portuguese jigsaw as bad bank mooted

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery


BPI deal another piece in Portuguese jigsaw as bad bank mooted

's deal paving theway for it to take over Banco BPISA will slide one piece into place in Portugal's banking jigsawpuzzle, as question marks remain over the future of two of the country'sbiggest lenders and the government moots a bad bank.

BPIsaid April 10 that CaixaBank had agreed with a company owned by Isabel dos Santos on a dealto reduce the Portuguese bank's exposure to Angola as required by the ECB. Suchan agreement had been central to CaixaBank's aim to buy the Angolanbillionaire's 18.6% of BPI, giving the Barcelona-based company control of afirm in which its 44% share is restricted to only 20% of the voting rights.

Takingfull control of Portugal's fifth-largest bank by total assets could leadCaixaBank to consider a bid for Novo Banco SA, the good bank created out of the wreckageof the failed Banco EspíritoSanto SA, which the Portuguese government has been , Fincor analystAlbino Oliveira said.

Novo Banco's fate, along with how the government will deal with a reported capital short-fallat state-owned Caixa Geral deDepósitos SA, are the next questions to be answered aboutPortugal's banking system now that BPI's future is clearer. But reviving abanking system that officials say is not providing sufficient loans tocompanies may require more than changes in ownership. The government shouldconsider setting up a bad bank, Prime Minister António Costa told Diário de Notícias and TSF in an interviewpublished April 9.

Althoughusing public money to buy nonperforming loans could be risky at a time whenPortugal could potentially lose access to the ECB's quantitative easing programif it is downgraded by rating agency DBRS later in April, there are ways that abad bank could be structured to limit the negative effect on public finances,according to David Schnautz, a bond analyst at Commerzbank. Apossible model might be the upcoming Italian bad bank, Schnautz said in aninterview.

Ratherthan taking bad loans onto its own balance sheet, the Italian government aimsto provide guarantees for nonperforming assets that banks then sell on toprivate investors. But the Rome government is assisted by the factthat its biggest lenders are in better shape than their Portuguese peers.

"Ifyou share the burden with the banks and you have to bail out the banks at thesame time, then there is no burden-sharing at the end of the day,"Schnautz said.

Portuguesebanks, facing credit impairments still rising almost eight years after thecollapse of Lehman Brothers, have slashed their balance sheets by a fifth since2010, central bank data shows. Credit impairments rose to 8.2% ofgross credit at the end of 2015, up from 7.7% a year earlier and 3.2% in 2010,according to the central bank.

Thegovernment has relaunched its sale of Novo Banco, which fell through in 2015after bids came in below the €4.9 billion of aid pumped into the bank in 2014.Caixa Geral is another headache for officials, with the prime ministerreportedly saying it needs an injection of state cash.

Althougha BPI under clear control of CaixaBank might find Novo Banco, the country'sthird-largest lender, an attractive target, it may face competition. is also lookingat ways to bid, even though this would force it to raise €3.85 billion incapital and pay back €750 million in state aid, according to Jornal de Negócios.

BCPwould face "regulatory headwinds" against any offer for Novo Banco,not least because it is already Portugal's largest private-sector bank,Oliveira said, adding that it is nonetheless likely that either it or BPI wouldlikely end up as the successful bidder.

"Nowwe have to see will be CaixaBank's strategy for the Portuguese market,"Oliveira said.

Detailsof CaixaBank's deal with dos Santos have yet to be released. The Spanish bankmight have to raise €1.2billion in fresh capital to maintain its capital ratios if it endsup acquiring all of the rest of BPI, according to Mirabaud Securities.

Alsolooming over Portugal's financial landscape is the April 29 review of thenation's credit rating by DBRS, the only agency that still considers the country'sdebt to be investment-grade. Losing investment-grade status would renderPortuguese bonds ineligible for inclusion in the ECB's asset purchase programand would push up financing costs for both the government and companies.