Novo Banco’s IPO would cement the renaissance of peripheral banks in Europe

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The name may not be too original, but Portugal’s Novo Banco (new bank) could live up to the payout for investors. The bank is what remains after the calamitous breakup and rescue of Banco Espírito Santo (BES) in 2014. The country’s second largest bank at the time failed spectacularly and had to be put into resolution. Rebirth has been the story since then. With a lengthy government-backed bailout virtually over, Novo Banco could be the first initial public offering of a European bank in years.

Portugal is participating in the wider comeback enjoyed by what was once Europe’s troubled periphery. Along with countries like Italy, Spain and Greece, it surpasses economically. This is especially true when it comes to banks, which, after years of crisis, have gained the attention of investors thanks to higher interest rates. With cleaned-up balance sheets and tighter lending standards, Europe’s troubled banks now appear to be some of the best-positioned for growth. If successful, a Novo Banco IPO would capitalize on near-peak profits and renewed interest in the sector.

Novo Banco is the fourth largest bank in the country, focused on individuals and SMEs, with a 15% share in corporate lending and a tenth of the mortgage market. Under the firm hand of ex-AIB banker Mark Bourke, its transformation into the special regime in place since 2014 is almost complete.

This involved training around €8 billion of legacy assets left over from the BES days. A €3.9bn contingent capital arrangement with the resolution fund was designed to keep the bank’s CET1 capital above a minimum of 12% following losses. This mechanism officially expires in December 2025 and only has about €500 million of capacity left (which is almost certainly not needed). Until then, however, Novo Banco cannot pay dividends.

The bank wants regulators to close the mechanism earlier so it can get capital returns rolling. A CET1 ratio of 19.9% ​​in June this year means there is enough spare cash to fund investor payouts. It would also trigger an IPO, pushed by 75% of Lone Star Funds’ shareholders.

Strong growth in net interest income contributed to returns on tangible equity of over 20% last year. It has probably peaked, depending on the trajectory of interest rates. Asset quality is also good, the average mortgage loan ratio is below 45%.

That could earn a multiple at the top of where Spanish banks trade: 7 times forward earnings would value Novo Banco’s capital at just under €3bn. That would mean a return for Lone Star of roughly double its investment – ​​and another rebounding score for European banks.

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