Bloomberg News

BCP, Banco BPI May Face Part-Nationalization Under EU Bank Plan

October 26, 2011

Oct. 26 (Bloomberg) -- Banco Comercial Portugues SA and Banco BPI SA, two of Portugal’s biggest lenders, may face a capital shortfall equal to twice their combined market value, raising the likelihood they will be among the first of Europe’s lenders to take government money after today’s summit.

European policy makers may force banks to increase their core Tier 1 capital ratio to 9 percent after marking the value of their holdings of government bonds to market prices. The two Lisbon-based lenders, whose biggest holdings of bonds are those issued by their own states, would need about 3 billion euros ($4.2 billion) by July, Daragh Quinn, an analyst at Nomura International Plc in London, wrote in a note today. If the two fail to raise that money privately, they would have to accept government cash, which may come with curbs on pay and dividends.

In April, Portugal became the third euro-area country after Greece and Ireland to receive a bailout from the European Union and the International Monetary Fund after its debt and borrowing costs soared. As part of the 78 billion-euro aid package, 12 billion euros was set aside for banks. Lenders have so far resisted using that money, choosing to increase their capital ratios by cutting risk-weighted assets, converting debt into equity and raising capital from private investors.

“It will be difficult for the whole banking industry to do without accessing this option,” Portuguese Prime Minister Pedro Passos Coelho said yesterday at a conference in Lisbon.

Mark-to-Market

Fitch Ratings said in an Oct. 20 note that Portugal’s biggest banks would have a core capital ratio of more than 9 percent by year-end, assuming they don’t have to mark down their holdings of sovereign debt. If they are forced to mark the bonds down to market value they would need to use the 12 billion-euro fund, Maria Rivas, an analyst at Fitch, said in an interview.

Portuguese 10-year bonds are trading at about 55 cents on the euro, while their 30-year equivalents are at 50 cents on the euro. By comparison, Greek government debt maturing in 2020 trades at about 32 cents on the euro.

BCP and BPI, the country’s second- and third-biggest publicly traded lenders, as well as Banco Espirito Santo SA, the country’s largest, have been taking steps to meet a 9 percent core capital target by the end of the year, one of the stipulations of the April bailout. Espirito Santo sold its stake in Brazil’s Banco Bradesco for 2 billion reais ($1.1 billion) in April. Two months later, BCP completed a 1.4 billion-euro rights offering. Both have announced plans to boost capital further by swapping some existing debt for equity. BPI has reduced lending, Chief Executive Officer Fernando Ulrich said last month.

Espirito Santo may escape raising additional capital because it holds a higher proportion of shorter-dated securities than its peers, Nomura said.

Portugal Bonds

The lenders may struggle to raise capital privately because the amount required exceeds their market value, analysts said.

BCP’s core Tier 1 ratio would drop to 7.1 percent from 8.5 percent if the bank marked down the value of its Greek and Portuguese debt, leaving it with a capital shortfall of 1.5 billion euros, according to Nomura analysts.

BPI’s capital ratio would decline to 4.9 percent from 9.1 percent, creating a shortfall of 1.3 billion euros, more than double the bank’s 540 million-euro market value, the analysts said. Both lenders may also need to write down their holdings of Italian and other Southern European debt not included in the estimates, Quinn said.

“This could pressure the banks to seek state assistance in recapitalizing,” said Quinn in the note.

Basel Rules

Spokesmen for BCP and the Portuguese government declined to comment. A spokesman for BPI didn’t return calls.

Analysts at Fitch and Nomura said the government might need to provide assistance by buying stock to satisfy the Basel Committee on Banking Supervision’s capital rules, meaning a partial nationalization of the Portuguese banking industry similar to the U.K. government’s acquisition of stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc in 2008.

Portuguese lenders are pressing for capital to be given in the form of preference shares that carry a coupon and convert into equity after a set period.

“The state doesn’t intend to get involved in the management of banks,” Passos Coelho said. “It doesn’t intend to nationalize banks or become an owner of banks.”

Shares in Portuguese banks have tumbled as the country’s debt crisis worsened. BCP has dropped 71 percent this year, BPI 56 percent and Espirito Santo 51 percent. European bank stocks have declined 30 percent this year, as measured by the 46-member Bloomberg Europe Banks and Financial Services Index.

Policy Makers Meet

European banks are waiting this week for guidance from policy makers on how much they individually need to raise and when. The region’s lenders may have to find about 100 billion euros to help them to mitigate losses from southern European sovereign debt, according to people with knowledge of the talks who declined to be identified.

Lenders may be able to mark up the value of bonds that are trading for more than face value, including U.K. and German bonds, offsetting the cost of writing down their southern European sovereign debt, said the people, who declined to be identified because the talks are private.

That may help U.K. and German banks avoid raising any additional capital, according to Simon Maughan, analyst at MF Global, while Italian, Spanish and Portuguese banks will be the hardest hit.

--With assistance from Joao Lima in Lisbon and Charles Penty in Madrid. Editors: Edward Evans, Robert Friedman.

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net


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