Portugal cancels multibillion-euro auction of Novo Banco

Portugal has cancelled a multibillion-euro auction of Novo Banco, the so-called good bank carved out of the ruins of Banco Espírito Santo, after rejecting offers from Chinese and United States bidders as too low.

Bank of Portugal said on Tuesday it had decided to “interrupt the sales process”, describing the three binding offers it had received as “unsatisfactory”.

A second attempt to dispose of the country’s third- largest lender will be launched after the results of European Central Bank’s stress tests of Novo Banco are released within three months and will probably involve the sale of only a minority stake, according to officials close to the process.

The collapse of the auction means most of the €4.9 billion in fresh capital injected into Novo Banco when it was created in August last year could be added to Portugal’s 2014 budget deficit, a blow to the centre-right government only three weeks ahead of a general election.

Market conditions

Bank of Portugal is hopeful the new auction will begin this year, but it would “depend on market conditions”, the officials said. The central bank is optimistic it can complete the sale by August 2016, a deadline set by the European Union, but it was ready to ask for an extension if required.

Candidates that dropped out of the race had indicated they were interested in a second auction, especially if they were not required to bid for 100 per cent of Novo Banco, the officials added. The central bank was “open to proposals for different modes” of acquiring a stake in the lender.

Bank of Portugal also sees the possibility of Novo Banco selling assets, such as property holdings, ahead of the second auction, the officials said. This would help it address any capital weakness identified by the ECB stress tests.

Ultimately, however, it will fall to a new shareholder to shore up any capital shortfall, which some analysts have said could need up to €1 billion in fresh funds.

The lender’s capital needs would be assured through “capital management, market solutions and private capital”, Bank of Portugal said.

Spain’s Caixabank and Santander are potential bidders, according to people familiar with the talks. Luís Marques Mendes, a former leader of the ruling Social Democrat party, said “at least two big Spanish banks” were interested in participating. He said “a European group” was also considering merging Novo Banco with Banco BPI.

After nine months of talks involving 15 initial contenders, the binding offers by the shortlisted bidders – China’s Anbang Insurance and Fosun International and Apollo Global Management of the US – were rejected as too low. – Copyright The Financial Times Limited 2015