DBRS COMMENTS ON NOVO BANCO STRESS TEST RESULTS
DBRS
18-Nov-2015 18:54
Date of Release: November 18, 2015
DBRS Comments on Novo Banco Stress Test Results
Industry: Fin.Svc.--Banks & Trusts
DBRS Ratings Limited (DBRS) commented today on Novo Banco S.A.'s (NB or the Bank) results of the European Central Bank (ECB) Comprehensive Assessment (CA) exercise announced on November 13, 2015. Under the CA exercise, NB failed to achieve the minimum 5.5% Common Equity Tier 1 (CET1) capital ratio in 2017 under the adverse scenario (but passed the minimum threshold in 2015 and 2016). This resulted in a capital shortfall of EUR 1.4 billion and a CET1 capital ratio of 2.43%. DBRS considers that NB's weak capital position is already factored into the Bank's Senior Long-Term Debt & Deposits rating and intrinsic assessment of B. However, it is uncertain at present how NB will address the capital shortfall in the required timeframe. As a result, DBRS will wait for information on the Bank's plan to address the required capital to assess if there is any implication for NB's ratings.
NB will need to address the EUR 1.4 billion capital shortfall within a timeframe of around nine months. The Bank has already announced that it is contemplating the sale of some non-core assets, including its insurance company GNB Vida, Companhia de Seguros, and some other non-core equity stakes. DBRS anticipates that these measures might not be sufficient to fully cover the capital shortfall. But NB's capital could also be supported by the sale of NB by its sole shareholder - the Resolution Fund - which we would expect to be accompanied by a reinforcement of capital by a new shareholder.
NB is a transitional Bank created after the resolution of Banco Espírito Santo (BES) in August 2014. DBRS considers that one year and three months since that point, NB's ability to generate capital internally continues to be reliant on the full recovery of its banking franchise along with a supportive economic environment in Portugal. NB's ratings reflect the Bank's significant challenges, mostly related to profitability and capital weaknesses, poor asset quality, and a still fragile funding and liquidity position.
The latest CA exercise was carried out by the ECB and covered a total of 9 European banks and included a stress test with a baseline and an adverse scenario for all covered banks. This time an asset quality review was not carried on NB given the special audits performed on NB during 2014. The starting point of the CA exercise was the static balance sheet at end-2014, only five months after the creation of NB. NB passed the baseline scenario of the stress test with a CET1 capital ratio of 8.24%, slightly above the minimum 8% threshold.
NB was created with an equity contribution of EUR 4.9 billion fully underwritten by the Portuguese Resolution Fund, which remains the only shareholder of the Bank. It is the third largest bank in Portugal, with market shares of around 16% for retail customer deposits and loans and circa 21% for companies at end-2014.
DBRS rates NB's Senior Long-Term Debt & Deposits rating at B with Stable Trend
