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Following the news on Wednesday night, the Portuguese parliament approved a proposal that prevents the Resolution Fund from transferring funds to banks and other financial institutions. Includes funds that were to be transferred to Novo Banco (NB) under the existing Capital Contingency Agreement (CCA), DBRS issued a cautionary 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, as well as increasing the potential for litigation,” the agency says.
The CEC 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 CEC, the Resolution Fund agreed to compensate Novo Banco up to the limit of € 3,890 million for recognized losses on a predefined portfolio of assets, or if NB’s capital ratios fall below a certain limit. As of January 2020, this limit was set at 12% for the Common Equity Tier 1 Index (CET1). BN’s CET1 ratio at the end of September 2020 was 12%, including the expected capital injection from the Resolution Fund.
“So far, CCA’s support has been timely and predictable. Despite its complexity, CCA proved effective in supporting the Bank’s restructuring plan and risk reduction process, ”says DBRS.
The capital support of the Resolution Fund remains critical to the future of Novo Banco, as despite progress in reducing problem assets inherited from BES (legacy), the Bank still has a large stock of non-performing assets and the profitability remains weak. warns DBRS.
At the end of fiscal year 2019, NB received a CCA compensation of 2.98 billion euros, of which approximately one billion was received for the 2019 losses. After this payment, the amount of the CCA is still available for the NB is approximately 900 million. The CEC is expected to remain in effect until the end of 2025, 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, according to the statement.
DBRS currently evaluates NB’s long-term debt at B (high) with a negative trend.
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