The credit rating agency Moody's has outlined its opinion on Novo Banco after the botched sale - it does not make cheery reading for Bank of Portugal's givernot Carlos Costa.
In today's commentary the Moody's analyst Pepa Mori writes that "the postponement of the sale of the New Bank has a negative influence on the credit rating for the institution because the suspension of the sale operation introduces the risk of delaying key decisions such as the implementation of restructuring measures that would improve the already very weak credit profile of the bank ."
For Moody's, the postponement of the sale of the Novo Banco "also increases the risk of their assets losing value if the bank is not sold before August 2016."
The Bank of Portugal already has said that the European Commission may extend the sale period beyond the stipulated date of August next year but this, according to Moody's, will mean the bank will be worth less and less as time slips by.
In addition, the delay in the sale and the bank’s "persistent weak credit profile is likely to affect investor interest in the bank and decrease the likelihood that the Bank of Portugal can sell the business at a satisfactory price."
The original plan was to sell Novo Banco anytime before August 2016, 24 months after its creation after the monumental collapse of Ricardo Salgado’s Banco Espírito Santo and associated companies.
Pepa Mori believes that the Bank of Portugal will not be able to find a buyer before August 2016 and that the bank’s value "would have to be revised downwards" and that the authorities "would have to revoke Novo Banco’s banking license."
The rating agency said that the delay in selling Novo Banco "also is negative for the banking system in Portugal, because there is the challenge of achieving a sale price sufficient to repay the Portuguese State its €4.9 billion loan to the resolution fund which was used to recapitalise Novo Banco."
The Portuguese public may have to pay part of the sale deficit if the loan is not fully refunded and also Portugal’s banks "could be required to pay any sale deficit as they are responsible for financing the resolution fund."
Despite making progress in deleveraging, says Mori, "Novo Banco’s financial results for the first half of 2015 confirmed the difficulties faced by the institution to preserve its capital base, taking into account the possibility of a deterioration of asset quality and trading losses."
"The bank's risk absorption capacity remains weak and is limited by its inability to access markets given its status as a transition bank" notes the analyst who says that the European Commission forbids any new injection of public capital into Novo Banco, "which leaves the bank dependent on restructuring measures to improve its solvency ratios." This is hardly ideal.
Whether the Bank of Portugal’s governor Carlos Costa reads the Moody’s report or not, the situation he has created is dire with the public exposed to a banking business that is losing value as time goes on.
By waiting until August next year to sell the bank, Costa is boxing himself in and fresh ideas need to be actioned if the next government is to avoid a large loss to the public accounts and to the banking system as a whole should Novo Banco be sold off for a realistic current value of around €1.5 billion.
