Financial Times reckons that Novobanco’s Lone Star investor will rake in €4Bn from IPO

Once problematic European banks, like Portugal’s Novobanco that suffered during the great financial crisis 10 years ago, are now in a prime position for IPOs and sell-offs according to the Financial Times.

An IPO (Initial Public Offering) for Novobanco, which after years of crisis has attracted the attention of investors because of high interest rates, would cement Europe’s periphery bank renaissance according to the FT.

In other words, Europe’s once problem banks like Novobanco now appear to be some of those best positioned for growth through take-overs and flotations.

The FT says that the Portuguese bank with the rather “unoriginal name” (New Bank) could be the first European bank ready for an Initial Public Offering in years.

The bank is what remains after the “calamitous break-up and bailout” of Banco Espírito Santo (BES) in 2014 when the country’s second largest bank “failed spectacularly and was placed into resolution.

The good and recoverable assets were placed in a new bank (Novobanco) and separated out from the toxic assets which remained in the ‘bad’ bank BES, while over the next few years the Portuguese government kept the new bank afloat with massive cash injections of public money amounting to an estimated €8Bn – which would have meant paying out €11Bn if BES had been allowed to collapse altogether.

Now, with the costly bailout complete, and after a major restructuring which saw jobs shed, branches closed, Non-Performing Loans sold off, and balances sanitised, Novobanco is said to be ripe for an IPO.

And with balance sheets cleaned up and stricter lending standards, Portugal’s once problem bank is now a highly marketable commodity after posting a net record profit of €743 million in 2023, and a healthy financial margin of €1.143Bn.

If successful, a Novobanco IPO would capitalise on near-peak profits and renewed investor interest in the sector.

Novobanco is Portugal’s fourth largest bank and focuses on private individuals, families and SMEs with a 15% nationwide share in corporate lending and 10% of Portugal’s mortgage market.

The sanitation and restructuring process was carried out by former CEO Antonio Ramalho and current CEO Mark Bourke and involved €8Bn worth of legacy assets from Banco Espírito Santo.

The Portuguese government, with the banking of the European Central Bank, set up a Resolution Fund in 2014 with nearly €4Bn designed to keep the bank’s CET1 capital over 12% following losses.

The mandate of the Resolution Fund over Novobanco will expire in December 2025 and the cash pot now only contains around €500 million.

Until the mandate expires, Novobanco will not be able to pay out dividends, however, according to the FT the bank wants regulators to close the fund’s Capital Contingent Mechanism before hat date.

Novobanco currently has a CET1 ratio of 19.9%, which means it could fund investor payouts. It would also be the trigger for an IPO driven by the bank’s largest shareholder, the US fund Lone Star which had invested €1Bn in the bank in 2017, and would stand to get back up to four times that amount according to Executive Digest.

As to current market value, Novobanco is estimated to be worth €5Bn according to an expected equity valuation at 7 times forward earnings. That would mean Lone Star would get €4Bn back on its initial €1Bn investment.

But BES/Novobanco was the financial institution that most benefited from public funds having received €8.3Bn from tax payers since 2014 according to Portugal’s public spending entity Tribunal de Contas.