Portugal's Novo Banco Has $1.5 Billion Shortfall in Stress Test

  • Preparation for Novo Banco sale to start immediately
  • Novo Banco to sell assets such as stake in insurer GNB Vida

Novo Banco SA, the Portuguese bank that emerged from the breakup of Banco Espirito Santo SA last year, had a 1.4 billion-euro ($1.5 billion) shortfall in the European Central Bank’s stress tests.

The ECB found that Novo Banco had a Common Equity Tier 1 ratio of 2.4 percent under its adverse stress-test scenario, which simulates an economic downturn, the Lisbon-based Bank of Portugal said in statement on Saturday. Novo Banco had an adjusted 8.24 percent ratio in the baseline scenario.

The Bank of Portugal “interrupted” the sale of Novo Banco in September because offers weren’t high enough and the possible need to improve capital ratios following the ECB test generated “uncertainty,” the central bank said at the time.

The Portuguese central bank said on Saturday that Novo Banco would address the shortfall through a strategic plan to be presented in a few weeks that will include the sale of assets such as a stake in insurance company GNB Vida. The Bank of Portugal said the preparation to resume Novo Banco’s sale will start immediately.

Bank executives including Banco Comercial Portugues SA Chief Executive Officer Nuno Amado and Banco Santander Totta SA CEO Antonio Vieira Monteiro said earlier this month that the Bank of Portugal’s Resolution Fund, which received a loan from the state for the rescue, shouldn’t be used to recapitalize the bank further.

Bank Rescue

European state aid rules don’t allow further use of the Resolution Fund. “Portugal will not provide any additional capital or liquidity support” to Novo Banco, the European Commission said after Espirito Santo’s collapse in August 2014.

The Bank of Portugal is seeking to recoup some of the 4.9 billion euros injected in Novo Banco. Most of the assets and deposits of Banco Espirito Santo, once Portugal’s biggest bank by market value, were transferred to Novo Banco.

If the Resolution Fund, which Portuguese financial institutions contribute to, has to sell Novo Banco for less than the value of its rescue then the country’s banks will have to make up the difference.

The stress test results come at a time of political wrangling in Portugal. Socialist leader Antonio Costa wants to become prime minister with support from left-wing parties that have been critical of the bank’s rescue. Premier Pedro Passos Coelho was ousted on Tuesday, less than six weeks after the Oct. 4 election that let him form a short-lived minority government.

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