July 24, 2016 4:49 pm Portuguese banks face potential big losses Peter Wise in Lisbon

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©Bloomberg Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo.

Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break­up or liquidation.

The sale of Novo Banco is among critical decisions that will shortly determine the future shape of ’s banking industry, which the International Monetary Fundhas linked with the problems facing Italian lenders as among potential risks to global growth.

Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state­owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn.

The Bank of Portugal and Lisbon’s eight­month­old “anti­austerity” government are also calling for a “systemic solution” to deal with more than €30bn in bad debts and problem assets, adding to other calls for public bailouts of troubled EU banks.

In a recent report, estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was European banks brace for bringing the country under “close market scrutiny”. downturn with more cost cuts

Investors fear the capital needs of banks could further burden the public finances of a struggling country already facing potential EU sanctions for failing to meet deficit targets.

“Some banks are in need of a large capital injection,” said Antonio Garcia Pascual, chief European economist with Barclays. “This means Lenders grapple with toxic cocktail of sluggish economic any material losses from the sale of Novo Banco could end up having to growth, downward pressure on be met by the sovereign, as the capacity of Portuguese banks to absorb interest rates, rising regulatory them is rather limited.” pressure and political uncertainty

Portugal’s second attempt to sell Novo Banco has attracted four offers. The has not yet identified the candidates, but Lisbon bankers have listed Portugal’s Banco BPI and More private equity firms , and

ON THIS TOPIC Centerbridge as among those potentially interested. Week Ahead European banks brace for downturn with more cost Apollo reached the final stage of the first attempt to sell Novo Banco, but cuts the Bank of Portugal last September rejected all three shortlisted bids. Lex Swedish banks — sensible lenders The central bank is expected to make an announcement next month on German challenger bank gets full banking licence the progress of the second auction, although EU authorities have Markets Insight European banks extended the official deadline for completing the sale by a year to August face fixable profit crisis 2017.

Eduardo Stock da Cunha, Novo Banco’s outgoing chief executive, has Get your essential guide to warned of potential big losses on the sale, drawing a comparison with the impact of the UK­EU Millennium BCP, Portugal’s largest listed bank, whose shares have split every day by email. dropped more than 60 per cent this year and which has a market value of just over €1bn. Exclusive to FT subscribers. “Portugal has to be realistic about Novo Banco when BCP is trading at a Sign up now price/book value of around 0.4 and southern European banks in general at 0.5,” said a Lisbon banking analyst.