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The name might not be overly original but Portugal’s Novo Banco (New Bank) could live up to the billing for investors. The bank is what remains after the calamitous break-up and bailout of Banco Espírito Santo (BES) in 2014. The country’s second-largest bank at the time failed spectacularly and had to be placed into resolution. Rebirth has been the story since. With a lengthy government-backed bailout practically complete, Novo Banco could be the first European bank initial public offering in years.
Portugal is sharing in the broader comeback enjoyed by what was once Europe’s problematic periphery. Alongside countries such as Italy, Spain and Greece, it is outperforming economically. That is especially true when it comes to banks, which after years in the doldrums have won the attention of investors thanks to higher interest rates. With balance sheets cleaned up and stricter lending standards, Europe’s problem banks now appear to be some of those best positioned for growth. If successful, a Novo Banco IPO would capitalise on near-peak profits and renewed interest in the sector.
Novo Banco is the country’s fourth largest bank, focused on individuals and SMEs with a 15 per cent share in corporate lending and a tenth of the mortgage market. Under the steady hand of former AIB banker Mark Bourke, its transformation under the special regime in place since 2014 is almost complete.
This involved the workout of about €8bn of legacy assets left over from the BES days. A contingent capital agreement worth €3.9bn with the resolution fund was designed to keep the bank’s CET1 capital above a minimum of 12 per cent following losses. That mechanism officially expires in December 2025 and only has about €500mn of capacity left (that is almost certainly not needed). Until then, however, Novo Banco is unable to pay dividends.
The bank wants regulators to close the mechanism early so it can get the ball rolling on capital returns. A CET1 ratio at 19.9 per cent as of June this year means ample spare cash to fund investor payouts. It would also be the trigger for an IPO, pushed by 75 per cent shareholder Lone Star Funds.
Strong growth in net interest income helped achieve returns on tangible equity of more than 20 per cent last year. That has likely peaked, depending on the path of interest rates. Asset quality is also good, the average mortgage loan-to-value is under 45 per cent.
That could earn a multiple at the higher end of where Spanish banks are trading: 7 times forward earnings would value Novo Banco’s equity at just under €3bn. That would mean a return for Lone Star of around double its investment — and another score in the comeback for Europe’s banks.