The Portuguese state agreed on Sunday to sell troubled bank Banif (
BANIF.LS) to the local unit of Spain's Santander (
SAN.MC) for 150 million euros in a deal that involves heavy costs for the state and the country's banks worth over 2.2 billion euros ($2.4 billion).
This is the second time in as many years that Portugal, which itself only emerged from an international bailout last year, has had to rescue a lender. In August 2014, it had to inject 4.9 billion euros to save the country's second-largest bank Banco Espirito Santo, now known as Novo Banco.
Although Banif is a much smaller bank, the hole to be plugged by the state is significant and the final deal more complex and costly than an initially-expected sale of the state's controlling stake in the bank.
Prime Minister Antonio Costa, whose Socialist government took over earlier this month, said in a late-night televised statement that the costs of the resolution are "very high for taxpayers", but this was the only legally possible solution to safeguard depositors and financial stability.
The Bank of Portugal said that the deal agreed with Santander Totta, Portuguese and European authorities involved an injection of 2.255 billion euros "to cover future contingencies" and would also protect senior debt of Banif.
Portugal's Bank Resolution Fund, to which all financial institutions working in Portugal have to contribute, will provide 489 million euros, while the remaining 1.766 billion euros would come directly from state coffers.
Santander Totta will take over all of Banif's operations, except problematic assets to be transferred to a special vehicle. Banif, which is to be wound down, will retain shareholdings and subordinated debt.
Although calling the solution "painful", Costa said it had "the advantage of being a definitive solution to the problem, ridding the state from future losses", expecting some costs to be recovered further down the road.
The small Madeira-based bank has a market capitalization of 91 million euros ($98 million) and had deposits of 6 billion euros at the end of September.
On Thursday, Portugal's securities market regulator CMVM suspended trading in Banif shares, which had jumped sharply in the last few days, rebounding from huge losses earlier.
Banif has been unable to pay back over 700 million euros in loans injected by the government during Portugal's debt crisis. The state took a 60.5 percent stake in Banif in exchange for the loans. Six financial institutions, including Santander, had been vying to buy the state's stake.
The government sought to sell it to avoid a potential bail-in under new European rules that come into effect on Jan. 1 and which would impose losses on holders of debt as well as deposits over 100,000 euros.
(Reporting By Andrei Khalip)