Novobanco management failed to protect public interest

 In Banks, News, Novo Banco

Portugal’s public spending watchdog Tribunal de Contas has concluded that a bank that has received around €11Bn to detoxify its balance sheets and keep it afloat since 2014, did not act in the public’s interest.

It was a damning and critical conclusion levied at its administration led by António Ramalho after a second audit in the bank’s financial health and management concluded that not only was the management at fault, but also the Portuguese State and the Bank of Portugal.
The report, which follows hard on the heels of an internal Novobanco report commissioned from Deloitte which also made some criticisms, chiefly criticised the way the bank was publicly funded by the Resolution Fund set up to ensure it had a enough capital to keep it in operation until a restructuring programme had been completed and the bank could turn a profit.
The TdC concluded that Novobanco’s management “did not safeguard the public interest because it had not optimised (controlled) its recourse to this financing”.
In other words, it went too often cap-in-hand to get money from the Resolution Fund which was part-funded by the Portuguese State and the Portuguese banking system.
On the back of the Contingent Capital Agreement (CCA), Novobanco could take up to €3.89Bn from the Resolution Fund and has already spent €3.4Bn.
The bank is 70% owned by US asset management fund Lone Star with a plan to eventually sell the bank on to private owners.
The mechanism was set up by the State and the Bank of Portugal while Lone Star drew up a restructuring plan. The 7 conclusions of the audit were:

The bank was incapable of generating adequate levels of capital to cover its risks.
The bank’s restructuring plan will now have to be extended beyond the date foreseen (31/12/2021) because the bank has not achieved sufficient levels of profitability, with a risk of needing a further €1.6Bn to ensure its viability because of the effects of the war with Ukraine and the Covid-19 pandemic.
When it was sold to Lone Star, there were not sufficient assets which required provisions to cover losses. Neither the State nor Bank of Portugal when it negotiated the CCA safeguarded the minimal recourse to the public purse to ensure effective public control.
In 2018 and 2019 NB sold assets at a knockdown price of 75% of their gross accountable value and 33% on their net accountable value of impairments. When they were sold on, the buyers raked in capital gains of 60% — an other words, they were laughing all the way to the bank which undersold them.
There were conflict of interest risks and other potential impediments identified.
Practices were detected which were avoidable on the part of the senior management, but ended up damaging public finances.
A year on, the bank’s management has made no attempt to tackle the recommendation set out in Report 7/2021 on demonstrating and validating the amount of financing needed, who was responsible, segregating functions and complacency risks or other conflicts of interest.
To sum up, the management of NB using public financing had not safeguarded the public interest because it had not minimised recourse to the Resolution Fund by verifying the conditions identified by the TdC in line with what had been requested by the Portuguese Parliament.