Morningstar DBRS Comments on BPCE Share Purchase of Novo Banco

DBRS Ratings GmbH (Morningstar DBRS) notes that Groupe BPCE (BPCE or the Group), one of the largest banks in France and in Europe, has signed a Memorandum of Understanding with Nani Holdings S.à. r.l., an affiliate of the U.S. private equity firm Lone Star Funds, for the acquisition of its equity interest in Novo Banco, S.A. (novobanco), Portugal's fourth largest bank. BPCE agrees to acquire Lone Star's 75% novobanco share capital at an estimated EUR 6.4 billion. The French bank is also in discussions with the Portuguese government (holds 11.5% of novobanco shares) and the Portuguese Banking Resolution Fund (holds 13.5% of novobanco shares) to acquire on identical terms the remaining equity interests in the Portuguese lender. The acquisition represents the largest European cross-border acquisition of the past 10 years.

We consider this transaction as marking the culmination of a multi-year transformation of novobanco and as representative of the structural change to the Portuguese banking sector at large. Novobanco emerged from the collapse of Banco Espirito Santo in 2014, and Lone Star purchased the 75% stake in the struggling bank in 2017 for EUR 1 billion. In the intervening years, novobanco has become one of the most efficient and profitable banks in Europe, posting in the first quarter of 2025 a cost-to-income ratio under 35% and a return on tangible equity above 20%. This healthy profitability coincides with a significant improvement in asset quality and reduction in risk. Gross nonperforming loans (NPL) over gross loans declined to 3.3% at end-2024, down from 12.8% at end-2019.

The implications for the Portuguese banking system with this deal are more limited than with alternative outcomes, including the prospect that domestic or Spanish competitors acquire novobanco. The largest Portuguese and Spanish lenders had also shown interest. In our view, the Portuguese banking sector is already very competitive and was not in urgent need of additional domestic consolidation, and the prospect of Spanish banks making additional inroads into the Portuguese market looked complicated by politics across the Iberian Peninsula. Instead, we expect BPCE's penetration of the Portuguese market to confront less headwinds, and perhaps more importantly, the cross-border interest in novobanco illustrates the renewed confidence in Portugal's banking system. See Morningstar DBRS website for insights on the structural change to the Portuguese banking sector over the last decade (see our commentary Portuguese Banking Sector: A New Normal for Profitability?) and to review the recent ratings upgrades to the Portuguese banks we cover.

For BPCE, the acquisition of novobanco - a highly profitable franchise in a stable and growing market - advances BPCE's strategic plan to diversify operations outside of its home market (see our commentary French Banks: The Hidden Consolidators in European Banking -- https://www.dbrsmorningstar.com/research/442280). BPCE already has a presence in Portugal, currently employing over 3,000 staff locally via Banque Populaire and Caisse d'Epargne banking networks. In addition, the Group is present through Oney Bank (personal credit, credit lines, and insurance), and Banco Primus (auto finance, personal credit, and insurance). On completion of the transaction, Portugal would become BPCE's second largest domestic retail market. Likewise, novobanco's leading position in corporate and SME lending in Portugal compliments BPCE's retail business. With EUR 45 billion of total assets in Q1 2025, novobanco holds roughly 9% of the market share of lending to individuals and 14% to corporates in Portugal.

We expect the acquisition will favorably affect BPCE's earnings capacity, even if novobanco only adds 3% to BPCE's EUR 1,600 billion balance sheet. The Group reported a 2024 net profit of EUR 3,675 million compared with EUR 744 million for novobanco. BPCE intends to finance the purchase with own funds, and on completion of the transaction BPCE's CET1 ratio would remain above 15%, according to the bank. Following the approvals of the requisite representative bodies and regulators, BPCP expects to close the transaction in the first half of next year.

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