The Banif collapse - some clarity from the Wall Street Journal

Portugal’s failed lender Banif snapped up by Santander - Portugal’s central bank announced on Sunday 20 December, that Banco Internacional do Funchal, or Banif, will be split into a ‘good’ and a ‘bad’ bank, with the good assets being sold to Spain’s Santander.

Small Portuguese lender Banco Internacional do Funchal SA will be broken up and mostly sold to Spain’s Santander SA, while receiving a large capital injection from the government.

The so-called resolution for Banif, which will protect all depositors but not shareholders and subordinated creditors, is the second in Portugal in a little over a year. Banco Espírito Santo SA, one of the country’s largest lenders, went through a similar process in the summer of 2014 after posting sharp losses over its exposure to its troubled parent.

Both resolutions have been costly for taxpayers. Banif’s resolution will include a state injection of up to €3 billion, the European Commission said Monday.

The government in Lisbon took the decision to wind down Banif less than two weeks before stricter rules for winding down banks are set to go into effect. Under these rules, senior bondholders and uninsured depositors could also face losses.

Late Sunday, newly-appointed Prime Minister António Costa criticized the previous government for not resolving the issue earlier and raised questions over the banking supervision. “This process confirms the need for us to reflect with the Bank of Portugal and other regulators of the financial sector about the supervision framework,” he said.

In the case of Banif, the resolution stems from difficulties in repaying money injected by the state earlier and the need to have a restructuring plan approved by European authorities.

The government injected €1.1 billion of fresh capital into the lender in January 2013 to allow it to meet minimum capital thresholds imposed by the banking regulator. In exchange for €700 million, the state got a 60% stake in the bank. The state also invested in €400 million in contingent convertible bonds, so-called Cocos. But the lender failed to repay €125 million of the Cocos late last year and that triggered close scrutiny by the European Commission, which opened an investigation into the legality of the state aid.

On Monday, December 21^st, the EU’s competition watchdog approved Portugal’s decision to give aid to the lender.

“Banif’s shareholders and subordinated debt holders fully contributed to the cost of resolution reducing the need for state aid, in line with burden-sharing principles,” the commission said, explaining its decision to allow the aid measures.

In a statement, the Bank of Portugal said given the urgency in resolving the issue, authorities found the resolution to be the best solution for the bank and its depositors.

Under the resolution, Santander will buy most of Banif’s assets, including deposits and loans, for €150 million. The state will inject €2.26 billion to cover future contingencies. Souring assets, which include real estate, will be transferred to a vehicle that will later be liquidated. That transfer will cost the state an additional €422 million, according to the European Commission, that said the state has also provided a guarantee to cover “potential recent changes of values” in the parts sold to Santander.

Santander said following the acquisition, which won’t be material to its capital position, its Portuguese unit that will absorb Banif will become the country’s second-largest private lender.

Banif is the eighth-largest commercial bank in Portugal when measured by book-asset value, and has a strong presence in the Azores and Madeira islands. Deposits totaled €6.3 billion. The bank has reported a small net profit for the nine months of this year following sharp losses in 2014, triggered by charges over souring loans.

Last week, Banif Chief Executive Jorge Tomé said the previous government delayed looking for a new private investor to take over its majority stake because it didn’t want the process to clash with the sale of Novo Banco, the “good bank” which resulted from the collapse of Banco Espírito Santo in the summer of last year.

Novo Banco’s sale, however, was shelved in September after the central bank failed to agree on a price with bidders. Novo Banco received a €4.9 billion capital injection in 2014 from a resolution fund fed by Portuguese banks. But because the fund didn’t have enough money, the state had to inject €3.9 billion.

© Wall Street Journal, Dec 2015   

Gabriele Steinhauser in Brussels contributed to this article by Patricia Kowsmann at patricia.kowsmann@wsj.com

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