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The name may not be the most original, but Portugal's Novo Banco (New Bank) may live up to investors' expectations. The bank is what remained after the disastrous break-up and bailout of Banco Espirito Santo (BES) in 2014. At the time, Portugal's second-largest bank spectacularly collapsed and was forced into reorganization proceedings. It has been a turnaround story ever since. With a lengthy government-backed bailout nearly complete, Novo Banco could become the first European bank IPO in years.
Portugal is riding the wave of a broader revival enjoyed by countries that were once Europe's peripheral troublemakers. Alongside countries like Italy, Spain and Greece, Portugal is doing well economically. This is especially true when it comes to its banks, which after years of underperformance have been garnering investor attention as interest rates rise. With balance sheets cleaned up and lending standards tightened, Europe's troubled banks now seem best positioned for growth. A successful Novo Banco IPO would generate near-peak profits and renewed interest in the sector.
Novo Banco is the country's fourth-largest bank, specializing in individuals and small businesses, with 15% of corporate lending and one-tenth of the mortgage market. Under the steady guidance of former AIB banker Mark Burke, the bank's transformation under a special regime in place since 2014 is nearly complete.
This included liquidating around €8 billion in legacy assets left over from the BES era. A contingent capital agreement with the resolution fund worth €3.9 billion was designed to keep the bank's CET1 capital above the minimum 12% even after losses. The mechanism formally ends in December 2025, leaving around €500 million of headroom (which it almost certainly won't need). But until then, Novo Banco cannot pay a dividend.
The bank has asked regulators to shut down the structure soon so it can begin returning capital. Its CET1 ratio of 19.9% as of June this year means it has plenty of headroom to pay dividends to investors. It could also serve as a catalyst for an IPO being promoted by 75% shareholder Lone Star Funds.
Strong growth in net interest income has enabled return on tangible equity to exceed 20% last year, a figure that could have peaked depending on interest rate trends. Asset quality is also strong, with the average mortgage LTV at less than 45%.
That could fetch the Spanish bank a deal price multiple at the top end of its range: At seven times projected earnings, Novo Banco's shares would be valued at just under 3 billion euros. That would mean a return of roughly double its investment for Lone Star, another contribution to the European banking revival.
