Ailing Novo Banco could require €1.49Bn cash injection

Novo Banco, the bank that rose from the ashes of Banco Espírito Santo which collapsed in 2014, is to ask for an extra €1.49Bn cash injection from the Resolution Fund after posting massive accumulative losses of €5Bn since 2014
The bank, led by CEO António Ramalho, faces its accounts being analysed with a fine tooth comb in an audit if the request is made formal.
The Resolution Fund is the Portuguese national entity created to finance the application of resolution measures by the Bank of Portugal to provide emergency cash injections to ensure capital ratios in the country’s banks are stable. Funds come from the banking and financial sector.
In the case of Novo Banco, the Fund was initially financed after the collapse of BES by €3.9Bn from the Portuguese state and other banks that are members of the Resolution Fund. In its annual report for 2106 the bank recognised the full loss of a €4.9Bn cash injection made to Novo Banco at the time the resolution measure was taken back in 2014.
Novo Banco’s losses since it was formed in 2014 amount to €5Bn not counting the restatement of accounts for 2017 and almost €6Bn in losses as a result of this restatement.
The bank’s imparities have steadily been climbing since 2014 with the exception of 2018.
In a press conference given on Friday, António Ramalho said the bank’s objective was to ensure comparability and consistency in the data presented for 2017 and 2018 results.
Apart from the first quarter of 2018 when the bank made a modest profit of €60 million, Novo Banco has consistently been in the red.
In the third quarter of last year it posted a shocking loss of €1.8Bn.
“All the data regarding 31 December 2017 have been re-expressed so as to reflect other reserves and results carried forward, the activation of the Contingent Capital Mechanism and the alteration of the initial register of losses related to the Liability Management Exercise operation undertaken in the last quarter of 2017”, he said to explain why the bank has this year posted losses of €2.2Bn after losses of €1.39Bn in 2017.
In practice it means that in 2017 the bank accounted for a capital injection of €792 million from the Resolution Fund as a receipt which had an impact on this year’s results, and now this fresh capital worth €1.15Bn to cover past losses, and registered on the books as capital. “It reflects capital compensation and not the bank’s activity results.
The latest application for a capital injection to prop up the ailing bank has been met with widespread criticism from political party commentators.
The Minister of Finance, Mário Centeno has stated his availability to address parliament this week over the fiasco. The ECOFIN president said that an audit should be commissioned to carefully study the capitalization process of Novo Banco.
Novo Banco was the supposed “good bank” that was created from the ashes of failed bank Banco Espírito Santo which was bailed out by the Portuguese government in the summer of 2014.
Since October 2017, it is 75% owned by the US fund Lone Star with 25% owned by the Resolution Fund managed by the Bank of Portugal and supplied by cash from the Portuguese Central Bank and banking sector.
Lone Star did not pay a dime for the bank but agreed to inject €1Bn into Novo Banco while the Resolution Fund would inject up to €3.89Bn into the bank over 8 years to cover losses resulting from a number of toxic assets and the sell-off of non-strategic operations.
It is intended that the bank will eventually be sold with the Spanish bank Santander considered the favourite contender.