DBRS warns: Political impasse in Portugal creates uncertainty in Novo Banco's capital

"This news was unexpected and represents challenges for Novo Banco, as it creates uncertainty for the bank's capital and the ongoing risk reduction plan, in addition to increasing the potential for litigation," says the rating agency.

Cristina Bernardo

Following Wednesday night's news, that the Portuguese parliament approved a proposal that prevents the Resolution Fund from transferring funds to banks and other financial institutions. It includes funds that were to be transferred to Novo Banco (NB) under the existing Capital Contingency Agreement (CCA), DBRS issued a warning note.

"This news was unexpected and represents challenges for Novo Banco, as it creates uncertainty for the bank's capital and the ongoing risk reduction plan, in addition to increasing the potential for litigation," says the agency.

The CCA is a key part of the process that led to the approval by the European Commission (EC), under EU state aid rules, of the sale of Novo Banco in 2017. Under the CCA, the Resolution Fund agreed to compensate Novo Banco up to the limit of 3,89 billion euros for losses recognized in a predefined portfolio of assets, or if the capital ratios of NB fall below a certain limit. As of January 2020, this limit was set at 12% for the common equity tier 1 ratio (CET1). The NB's CET1 ratio at the end of September 2020 was 12% including the expected capital injection from the Resolution Fund.

“So far, CCA support has been timely and predictable. Despite its complexity, CCA proved to be effective in supporting the Bank's restructuring plan and the risk reduction process ”, says DBRS.

Capital support by the Resolution Fund remains critical for the future of Novo Banco, as despite progress in reducing problematic assets inherited from BES (legacy), the Bank still has a large stock of non-productive assets and profitability remains weak, warns DBRS.

At the end of the 2019 fiscal year, NB received a CCA compensation of 2,98 billion euros, of which approximately 2019 billion were received for the 900 losses. After this payment, the CCA amount still available for the NB is approximately 2025 million. The CCA is expected to remain in effect until the end of XNUMX, according to the agreement.

DBRS Morningstar will continue to monitor legislative developments in Portugal and the implications for NB and the Portuguese banking system as a whole, the statement said.

DBRS currently assesses NB's long-term debt at B (high) with a negative trend.


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