Novo Banco could cost Portuguese tax payer and banks nearly €11Bn

Portuguese tax payers and the banks may well have spent nearly €11Bn on propping up a bank that otherwise would have failed since it was created in 2014.

An audit carried out by Deloitte Portugal for the Portuguese Audit Office (Tribunal de Contas) found there was a lack of transparency over the impact that BES and Novo Banco had (and still has) on Portugal’s public accounts, but saw no reason why the Bank of Portugal and Resolution Fund should not continue to permit scheduled injections of funds agreed and sanctioned by the EU Commission into Novo Banco up to the permitted amount.
Although the final total cost evaluated by the Portuguese auditor Tribunal de Contas is not yet in, the estimate is at least €10.8Bn.
What is known, however, is half of the €11.2Bn injected into the bank since 2014 – some €6Bn — has been “lent” by the State and, as a consequence, the tax payer.
It still begs the questions why when Novo Banco was sold to the US fund Lone Star in 2017 after being effectively temporarily nationalised when created in 2014, has the Portuguese State and banking system been pumping money into it ever since? Why it has not been successfully sold, and for how much longer the bank will continue to require funds and what Lone Star plans to do with the bank if it cannot find a buyer?
One of the arguments for the Portuguese State and banks lending it money is, of course, that had BES been allowed to collapse in a disorderly manner, it would have cost its clients and creditors up to €25Bn in losses, with a serious contagion impact on the rest of Portugal’s banking sector, thereby averting disaster.
The Tribunal de Contas has done a back-of-the-envelope calculation of all the State financial measures given to Novo Banco since Banco Espírito Santo was wound up in 2014, including cash injections that have yet to be made, but are foreseen in the 2017 sale agreement that was negotiated with the European Commission.
After BES was wound up, the Resolution Fund that was created to support the new “good” bank through its infant teething problems (with the begrudged support from Portugal’s other banks) injected €4.9Bn to help capitalise it. But criticisms were made by its first CEO Vítor Bento that the bank hadn’t been given sufficient credit from the start with up to a €2Bn shortfall.
Then there was the question of why the bank’s current CEO, António Ramalho sanctioned a €1.86 million bonus to his team in 2020 when the bank was some €1.3Bn in the red.
The argument was “this bonus was based on the individual and collective performance of the staff as evaluated by the Salary Committee” (Comité de Remunerações, adding that the bonus was “deferred” with “no payments until the end of the Restructuring Period, currently set for the 31 December 2021.”
Problems have also lain with the quality of some of the borrowers themselves. This week, when quizzed at the parliamentary inquiry into the bank’s management and the way it has sold off assets, Bernardo Moniz de Maia, who owed the bank over €500 million, could seemingly remember nothing about the offshore accounts and funds his own company, Sogema, had set up.
At the hearing he argued that the “Moniz da Maia family had never risked borrowing more than it could afford to take on and when BES has requested additional guarantees, the family provided them.”
A question and answer session in the parliament was widely lampooned by a popular TV comedian who portrayed Moniz de Maia showing an astonishing amnesia bordering on Alzheimer’s into certain questions over the family’s assets foundations and possible offshore accounts.
Another former leader of the bank after Vítor Bento’s brief tenure, Eduardo Stock da Cunha (who preceded António Ramalho at Novo Banco) admitted that the bank’s big debtors were “an abscess” for the institution, but rejected the way the bank, its management and staff had been treated like “a band of crooks”.
He said that as in all sectors of business, a barrel of 9,000 apples would inevitably contain a few rotten ones”.
“But to put all 9,000 staff, who suffered physical threats, who lost a lot because of what happened to Banco Espírito Santo, into the same basket is not only unfair, but incorrect,” he said, adding that the “overwhelming majority of staff at Novo Banco were of the highest calibre.”
“Despite everything that happened at BES, the bank was still able to come through it and Novo Banco continues to be a reference for companies and Portuguese account holders and people will once again have confidence in Novo Banco,” he said at the hearing.
“It is important to separate the wheat from the chaff” said the man who ran Novo Banco between 2014-2016. “I was rather offended when at a public level it was decided to treat Novo Banco, including its staff as a band of crooks,” he said on Tuesday in a question and answer session with Bloco Esquerda MP Mariana Mortágua.
The money that has sustained Novo Banco’s balance sheets since 2014 and is contained within the Resolution Fund came from Portuguese State loans and the other banks to finance this capitalisation. Three years later, at the time of the sale to Lone Star, the Resolution Fund led by Máximo Santos (a public entity) took on further financial commitments by injecting €5.9Bn.
This was broken up into €3.9Bn relative to the contingent capital mechanism, €400 million relative to a level 2 Novo Banco capital instrument issue and €1.6Bn of additional ‘backstop’ capital if Novo Banco’s capital ratio was less the capital requirement applicable in terms of the amount necessary to ensure the bank’s long term viability under the terms of the European Commission decision of 11 October 2017.
“The amount of Portuguese State financial support to Novo Banco via capital injection corresponds to 23% (€10.8Bn) of BES risk-weighted assets from the date of the bank’s winding up.
The auditor also made a couple of comparisons: “In 2014 the Bank of Portugal estimated that the costs of a disordered winding up of BES at between €20-25Bn in losses. That estimate was later confirmed by a report undertaken by Deloitte which calculated that creditors would have lost €22Bn if BES had just been allowed to collapse with no State or banking system intervention.
On Monday, the governor of the Bank of Portugal, Mário Centeno referred to the €1.6Bn backstop mechanism by which the State would inject money into Novo Banco to ensure the bank’s long-term viability in an adverse situation. But Mário Centeno ruled out that contingency by stating “The best estimate from the backstop is zero”.
On Monday afternoon, the governor and vice-governor of the Bank of Portugal (Mário Centeno and Máximo dos Santos (the latter heading the Resolution Fund), gave a press conference in reaction to the Tribunal de Contas audit carried out by Deloitte.
The governor of the Bank of Portugal said some of the criticisms from the State auditor resulting from the Deloitte findings were “wrong” and the fund would continue to pay public-backed loans into Novo Banco this year from a Resolution Fund which he himself in 2020 called the “worst resolution fund ever created” in the history of the European Union.
According to the Bank of Portugal regarding the failures and criticisms as to the way money had been transferred to the bank, the central bank stated that it had the complete conviction that the “strict conditions for carrying out the contracts (for the transfers) had been met and that this opens the door to a new injection of cash into the bank from the Resolution Fund.
“It is therefore the full conviction of the Bank of Portugal that the strict conditions have been met for the normal execution of contracts, thereby meaning its mission to preserve financial stability, as now confirmed by the Tribunal de Contas has been met” stated the central bank supervisor.