Novo Banco is a case of meet the new boss same as the old boss

There are some matters who keep requiring our attention and there are some where it feels like they need supervision 24/7 365 days of the year. The latter includes the worst banking casualties like Monte Paschi, Deutsche Bank and my subject of today Novo Banco in Portugal. Please let us have no sniggering at the back as we remind ourselves that it was originally presented as a new bank as in the literal translation that was clean and in the words of Arcade Fire,ready to start.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

Readers might want to keep the last four words of that statement to mind before we look at the other issue from that statement.

The State will bear no costs related to this operation. The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

Seems clear doesn’t it? Well the bailout water was a fiat bit muddier than that.

Given that the Resolution Fund started its operation only in 2012 and has not available sufficient financial resources to finance the resolution measure applied to Banco Espírito Santo, S.A., the Fund took out a loan from the Portuguese State.

Actually as the 2016 accounts of the Resolution Fund show that the plan for the Portuguese banks to replace this measure only partially happened as we mull yet again the establishment meaning of the word temporary.

in the case of the BES resolution in 2014 the initial capital injection of €4.9 billion by the Resolution Fund in Novo Banco was financed in €3.9 billion by the Portuguese State and only the remainder by the banks that are members of the Resolution Fund. ( Novo Note )

Is this a big deal? Yes it is because you see to quote South Park “And it’s gone”

On January 2018, the Resolution Fund disclosed its Annual Report for 2016, in which it recognizes full loss of the €4.9 billion cash injunction made into Novo Banco at the time the resolution measure was taken back in 2014: ( Novo Note)

But wait there was more

On the 4th of April 2017 I pointed out this.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

Yes just like with the word temporary the word clean seems to have an almost infinite number of variations as some bondholders found that the supposedly new clean bank had bonds which were being shifted to the bad one. Or that their chances of repayment went from being expected to be circa 100% to circa 0%. As you can imagine they were far from pleased and according to the Portugal news last December were joined in the courts by some retail bond investors.

More than 100 small retail investors holding bonds of five series retransferred from former Banco Espirito Santo (BES), Novo Banco, to the ‘bad bank’ BES, which contains the ‘toxic assets’ of the original bank, have filed a lawsuit against the Portuguese state, the representatives announced.

This reminds us that whilst the headlines are about bond funds it is mostly ordinary investors who are hurt by such moves whether explicitly as those above or implicitly by pension or investment holdings in the funds affected.

What about now?

You might think that it could not get any worse as 75% of the bank is now in the hands of Lone Star. Well as I pointed out in April 2017 there were ongoing issues.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The idea that a 25% holding in Novo Banco would eventually pay off the sums listed above always was far-fetched especially as we note something else from back then.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

At the end of last week another tale of woe was produced. From sapo.

he New Bank closed 2018 with losses of 1,412 million euros . It will ask for 1,149 million euros from the Resolution Fund under the contingent capital mechanism created when it was sold to Lone Star in 2017 to offset the large losses it had from the sale of troubled assets.

But you see this is apparently a triumph as last year has been revised downwards.

Last year, the bank led by António Ramalho had reported a negative result of 1,395 million euros and also appealed to the Resolution Fund. It has now been revised to € 2,298.0 million (justified by the fact that the capital injection of the Resolution Fund was counted as capital rather than revenue) , and the losses now presented represent an improvement of 38, 5%.

This is a bit like the famous phrase “tractor production is rising” where bad news is drip fed out in penny packets. So everything is worse but this way round 2018 can be presented as being better than 2017 unless of course it too will later be “discovered” to have been much worse than claimed concurrently.

Also whilst there is some good news in that as you can see below the non-performing loans category is being reduced it seems to be at the cost of pretty much one for one losses.

This negative result is related to the bad credit sale over the past year, including a portfolio of 2.150 million euros in December, , which is recognized as losses in the accounts. Following these operations, the non-performing loans ( NPL ratio fell to 22.4% (from 28.1% last year),while provisions and impairments decreased by 36.7% (or 147.2 million of euros) .

The journalist Patricia Kowsmann who still follows this in spite of the Wall Street Journal moving her from Lisbon to Frankfurt also pointed out some other changes.

The best part of Novo Banco’s 2018 results (a EUR1.4B loss btw) is that they‘ve split the bank ops into “legacy” and “core.” So BES was split between a bad bank and a good bank and the good bank has now been split between a good bank and a bad bank.

Will the new good bank later be split into a good and bad bank too? The metaphor here may well turn out to be one of Russian dolls.


As we pick our way through these events there is much that is familiar. The opening issue is the way that the truth is withheld and doled out later in penny packets.For example in the way that no losses for the taxpayer morphs into this from the European Commission on Portugal.

which mainly reflects the 0.4% of GDP impact of the activation of the Novo Banco contingent capital mechanism.

That is presented as a one-off but there is at least another one coming which reminds me of my timeline for a banking collapse which continues to stand the tests of time rather well.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

The ordinary Portuguese citizen is entitled to be nonplussed and a bit more by this as those in charge of their national finances have not told the truth.What was supposed to happen was that the Portuguese economy would improve and the non=performing loans would fade and the rusty battered can that was kicked into the suture could be picked up later. As we looked at only last week the Portuguese economy has improved but that means that Novo Banco was in a much worse state than claimed. Whether the due diligence of the Bank of Portugal was incompetent or a misrepresentation or both the Portuguese taxpayer faces a deal where they might get 25% of the profits one day but for the moment they seem to be facing a reality of around 80% of any losses.

It all reminds me of this from the film Snatch.

Turkish I fail to recognize the correlation between losing ten grand, hospitalizing Gorgeous, and a good deal.