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.

 

Read more
Related

Costa assures Lagarde “scrupulous compliance” of the agreement with Novo Banco

According to a tweet published by the Prime Minister this Thursday, António Costa ensures that he has guaranteed the President of the ECB “the scrupulous fulfillment of the commitments assumed in connection with the sale of Novo Banco.

Veto on the injection of Novo Banco creates capital problems and puts the State in default

The lead to the capitalization of Novo Banco creates serious solvency risks, which could be aggravated by the expected increase in bad debts, at the end of the default, if the parliamentary lead to the injection of Novo Banco is not reversed in May, in an amending OE.

Court of Auditors says it is working on the audit of Novo Banco and does not advance with deadlines

The Court of Auditors does not advance with deadlines for the delivery of the audit. If it does not arrive by the end of April, the capitalization of Novo Banco may be compromised.
Recommended

Morgan Stanley reports higher than expected profit and revenue in the fourth quarter

Revenue, in turn, rose from $ 10,9 billion in the last three months of 2019 to 13,6 billion in the months from October to December last year, exceeding analysts' forecasts.

EIB mobilizes 50 billion euros to help SMEs in the first half

The European Investment Bank (EIB) plans to mobilize around 50.000 billion euros of financing in the first half to help SMEs through the new guarantee fund created to deal with the consequences of the pandemic, it was announced.

Goldman Sachs and Bank of America surprise profits in full pandemic

The largest banks in the United States resisted the recession brought about by the coronavirus pandemic, but they were not immune to the low interest rates that the crisis generated. Goldman Sachs had the best stock trading revenue in 10 years, which offset banking activity.
Comments