Is BCP likely to buy Novobanco?

International Club of Portugal: What we really learnt from BCP Chairman Nuno Amado and Novobanco outgoing CEO António Ramalho.

The presentation on Portugal, its economy and banking system from the Chairman of Portugal’s private high-street bank BCP, Nuno Amado, was interesting. Not so much in what he said, but in what was hinted at, or wasn’t said at a luncheon organised by the International Club of Portugal (ICPT) on Tuesday.
And what was even more interesting were the sideline comments made by a senior banking figure to this publication — who we will not mention out of respect — about the trials and tribulations of Novobanco which was created from the ruins of Banco Espírito Santo in 2014.
As the former president of the Portuguese Banking Association (APB), Fernando Faria de Oliveira pointed out during the questions and answers session: “The presentation was excellent and enlightening” and even the answer to a question posed by the Novobanco CEO on “what would happen if there was some specific risk from upping the level of risk for Portuguese companies given the percentage of Spanish capital in Portuguese banks?” was almost certainly already well known by its asker. “Today, we’re better prepared”.
“I think that with Spanish banks having a 40% share (in the Portuguese market), in terms of diversity and competition we’re in a better situation than we were before. At a European level and in terms of size we’re a small market and we don’t count in terms of problems resulting from bank mergers,” said Amado.
In other words, there would be few screams of protest from monopolies and competition authorities if BCP were, hypothetically, to merge with Novobanco. (Now there’s a thought!)
So, of course, the BCP chairman banged on about high levels of taxation hamstringing Portuguese businesses and capital, preventing companies from scaling up, which again is well known and true.
“We need policies that encourage companies to scale up, ones which encourage companies to restructure, and they need capitalisation” Amado said in a nod to the huge amounts of funding coming in from Brussels via the ‘bazooka’ or Recovery and Resilience Programme.
Nuno Amado says that the banking system in Portugal is geared up for a more dynamic economy and a country which is more inclusive and sustainable. (Unfortunately, Portugal still isn’t)
The seasoned banker also believes that inflation is here to stay and that businesses and the general public need to understand that the low inflation rates and consequent negligible interest rates on borrowing and mortgages seen over the past 20 years was an aberration which was never the normal state of affairs, or even desirable. (certainly not for the banking sector or savers that made scant returns on borrowing) In fact, Amado pointed out that people under 40 had little experience of anything but cheap money and low interest on savings, and do not remember the situation in the early 1980s and early 1990s when this was not the case.
Nuno Amado says that to 2030 the banks are working with a Euribor fixed-rate benchmark of 2.2% (without bank spreads) and beyond that they were looking at 2%.
However, he did warn that increases in interest rates (in the short term) to curb inflation could have a negative effect on the banks by increasing the number of loan defaults or Non-Performing Loans (NPLs).
“The difference (with the Great Recession) is that today the banks are better capitalised and have better risk control systems, while the quality of their loan portfolios is “incomparably better” with “a more even and diversified risk” .
“I am not overly worried about the expected increase in NPLs and I think we’ll be able to comfortably increase our lending provisions to deal with them”, said the Chairman of the BCP.
“The banking sector is prepared for the expected challenges and the sector is a lot better prepared, with balances that are more robust and balanced, with more deposits than loans, less NPLs, more provisions, greater core capital levels, and more systems of control at a banking and supervisory level”, said Nuno Amado.
During the last economic crisis (2011-2014) BCP had been forced to slash its credit portfolio, but over the past three years the bank has grown its credit lending to companies by a sustainable 8% to €20Bn with its total loan portfolio now at €40Bn. However, excluding NPLs, credit growth was 23%.
Amado also gave his opinion that we were headed for a major recession caused by a mixture of factors including the pandemic, supply chain problems, increasing energy costs and, of course the War in Ukraine and energy supply anxieties. However, he did not know the length or the severity compared to previous downturns.
On this he warned that this year and next would be particularly tough, with high levels of risk and serious macroeconomic challenges.
“It is vital that we have a sustainable economic-financial situation, get debt (public) down and achieve economic growth and convergence with the European average”, he argued.
Nuno Amado pointed out that Portugal’s public debt (€279Bn in 2022) and budget deficits (€8.7Bn in 2021) determines the creditworthiness of the Portuguese Republic in the eyes of the international ratings agencies which in turn set borrowing costs for companies from lenders.
Then Amado stated the obvious and what is nigh on impossible while the current international crises continue: “Portugal must have balanced budgets, or even budget surpluses and a balanced overseas trade balance. Running a deficit in the two balances is not a good idea”.
Nuno Amado went on to say that there were weaknesses in Portugal’s economy and pointed out that Portugal has one of the lowest productivity rates in the European Union (a situation that has persisted like a rash for over 20 years).
And this returned to the idea of scaling up companies because Portugal’s company network is overwhelmingly made up of small and micro companies, while the State had only become larger, with a pubic administration that was swollen, sluggish, dogged down by red tape, and increasingly over complex.
The banker also expressed the opinion that the age of Neo-liberalism with its free trade policies and globalisation was over, to be replaced by regionalisation which could in some circumstances provide opportunities.
But he said exportation was key. “We need to scale up to support exports to new markets, and for that we need policies that favour company expansion, restructuring, and capitalisation”. Here, Amado also suggested the development of export credit insurance.
“We have to develop existing policies so that size does not bring discrimination as these policies discriminate (now) in terms of investment and taxation, while progressive taxes need correcting”, he added. In other words lower taxes and State guarantees for exporters and the lenders who help them expand.
Amado said that the government could not expect the banking system to finance areas, sectors and initiatives that are part of its national policy or European Union policy, especially when policies can chop and change from one year to the other.
However, he also championed the creation of the Portuguese public development bank Banco Português de Fomento which he said acted as a bridge between public and banking policies and financially supported projects when these fitted within these criteria.
The banker also said that Portugal needed to continue making the most of the European Investment Fund and European Investment Bank financing lines, while focusing on mutual risk systems for SMMEs, with some cover from the State, giving the example of the mutual guarantee system.
But the thing that was most interesting for this publication was the issue of banking consolidation in the market. The idea that Novobanco could be bought by Millennium bcp.
From my chat before the lunch I realised two things; either that Novobanco would be sold — this failed before because the bank had too many NPLs, and one-third of its books were poisoned by toxic assets and rubbish; or that the bank would remain Portuguese, but not public, in its own right and merits.
António Ramalho has spent the past seven years preparing the bank for that eventuality, becoming in the process the most criticised, talked about and vilified banker that hasn’t actually been accused of any crimes, in Portugal.
Still, our contact says he remained unfazed about the publicity, the parliamentary inquires and criticisms in parliament, instead actually loving the challenge that it posed to his tenure as a firefighter and crisis mitigation manager which ends on 1 August where he will vanish to Switzerland on a project for a while and consider his next moves.
During the lunch, when the suggestion that BCP might buy or merge with Novobanco was fielded, António Ramalho didn’t catch the ball and instead remained poker-faced at the suggestion.
And then there was another hint that since Spain already controlled many of Portugal’s banks, there was no reason why a new Portuguese bank or an existing one(ones) might not form to create a greater local presence in the banking system.
In May, the BCP president Miguel Maya made clear that the bank’s policy was centred around “organic growth” when asked questions regarding the possible interest in buying Novobanco. On the other hand, he did say that BCP would “look at all opportunities in the market”.
But the fact that my well-appointed Novobanco insider says that the current administration has achieved all it set out to do, and done so well against all the odds and under “nearly impossible circumstances”, that the bank’s Non-Performing Loans are now down to a healthy amount — even if assets were sold off at knock-down bargain basement prices — and that the bank is now in a more robust situation than it was even three years ago, leads one to think distressed assets and equity management company Lone Star, which currently owns around 70%, will sell.
It was also learnt from the horse’s mouth that Novobanco was undercapitalised from the start when it was set up, that had the government not intervened it would have cost the tax payer €17Bn and not €8Bn, (some put it at €11Bn), as well as having a disastrous contagious effect on other banks in the local system had the government let it fail in 2014. All of these points were also highlighted by the Governor of the Bank of Portugal, Mário Centeno last year.
Nuno Amado admitted the “impact of the cost of financing Novobanco had been significant for Millennium bcp — the banks collectively had to stump up to carry Novobanco by setting up a Contingent Capital Mechanism with funds to be disbursed through the Resolution Fund. “Perhaps it was probably the best solution, but it has cost us. We have to find a new way of financing the process”, he said.
The CEO of the bank Miguel Maya certainly thinks the whole mechanism was unfair. “Why does BCP have to make this contribution, but another bank which operates in Portugal, but is headquartered outside, makes a lesser contribution?” he asked recently?
And also asked: “Why is it that a bank that is not in Portugal, but sells products to Portuguese clients on the back of the European banking licence, doesn’t have to make a contribution?”
But the fact that both the Chairman of BCP and the outgoing CEO of Novobanco were at the same lunch spoke volumes. It was like being at a gipsy matchmaking party. You see the elders sat together, while everyone knows – but doesn’t because nothing is verbalised – that the prospective groom is BCP and the demure girl sat in the corner who had been carefully coached and done up for the occasion is Novobanco.
Of course, speculation is little more than witchcraft, but I’m partial to a bit of fortune telling now and again, and I predict, using the words of a famous Hollywood actress, that a merger between Novobanco and Millennium bcp would be “a hell of a match!” (In a good way)