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Wind-down a last resort for Novo Banco as Portugal continues hunt for buyer

Caught between a potentially loss-making sale of and a politicallycontentious injection of more capital, the Portuguese central bank haspresented a third option: A wind-down of the bank if a suitable buyer is notfound by August 2017.

The government mooted the option in a letter that was partof its response to the European Commission's threat to impose sanctions overPortugal's violations of budget deficit rules. It said further state aid forNovo Banco is out of the question and that should the country's central banknot complete a sale by the new deadline, the lender would be placed in "aprocess of orderly winding down."

Yet analysts speaking to S&P Global Market Intelligencesaid it was premature to talk about a wind-down as a serious possibility.

"The liquidation of Novo Banco is not a centralscenario at this stage," said André Rodrigues, a bank analyst atLisbon-based Caixa Banco de Investimento. Speaking in an interview, he said theBanco de Portugalappears hopeful that one of the four bids that it from unnamed suitors at the endof June will result in a sale.

Press reports indicate that the central bank "considersthat 'there is room to work' on the proposals that has received andconsequently, believes that it is still possible to conclude thisoperation," he added.

A previous attempt to offload Novo Banco — the good bankcarved out of Banco EspíritoSanto SA — collapsed in September 2015 when all of the offersreceived came in below the €4.9 billion of state aid that was pumped into thebank in 2014. The bestoffer came from China's Anbang Insurance Group Co. at €3.5 billion, a price thatwould have meant a €1.4 billion loss for the Portuguese resolution fund.   

Another analyst, who asked not to be named, said thewind-down announcement may have been a political maneuver by Prime MinisterAntónio Costa, whose Socialist Party came second in Portugal's October 2015elections but was able to form a government by cobbling together a coalition ofleft-leaning parties.

"The left parties tend to be strongly opposed toputting any more money into Novo Banco, especially the Portuguese CommunistParty," the analyst said in an interview. "Statements like this canbe useful for the purposes of keeping the left onside. We've seen several banksgo through recapitalizations in the past few years, and there has been somenegative political sentiment towards them."

One example is Banif-Banco Internacional do Funchal SA, which receiveda €2.26 billion capital injection from the state as a sweetener ahead of itssale to 's .Portugal's Communist Party has previously called for Novo Banco to benationalized, while there have been calls from another leftist party to mergeit with state-owned lender CaixaGeral de Depósitos SA.

Events elsewhere in Europe over the summer will undoubtedlyhave a bearing on the fate of Novo Banco, said João Lampreia, an equity analystat Lisbon-based Banco de Investimento Global. European Banking Authority stresstest results to be released July 29 will provide a clearer view of the level ofdistress in the European banking system, while the outcome of the ongoingdebate about an Italian bank "bail-in" will have a knock-on effect when it comesto attitudes toward state-backed recapitalizations in other countries, Portugalincluded, he said.  

"The framework of capitalization that other Europeanbanks decide on will have an influence on what is decided for Novo Banco,"he said. "I think it is premature to talk about a wind-down."

Despite being the "good bank" of the former BES,Novo Banco is still beset with problems, having posted a net loss of €980.6 millionin 2015 on the back of more than €1 billion in impairment provisions, thenlosing a further €117.8 million in the first quarter of 2016. The ratio ofloans more than 90 days overdue to total loans was 15.1% as of March 31, a riseof 0.6 percentage point from three months earlier, although coverage of suchloans also increased over the period, to 110.8% from 107.8%.

The bank's capital ratio received a helping hand in December2015 when some €1.94 billion of bonds were transferred to the bad bank, a move that enabled it tocomply with ECB rules but proved unpopular with institutional debt investors.It had a common equity Tier 1 ratio under transitional rules of 12.4% as ofMarch 31, down from 13.5% three months earlier. On a fully implemented basis,the ratio was estimated at 10.7%, down from 11.3% at year-end 2015.