Commissioner Margrethe Vestager, in charge of competition policy, said: "The industrial plan presented by Portugal foresees a structural transformation of CGD and will enable the bank to become profitable in the long-term. Our assessment showed that Portugal's state as the sole owner, is investing under the same conditions as a private owner would have accepted. Therefore, the recapitalisation by the State involves no new state aid."
CGD has been fully owned by the Portuguese State since 1876. Today's decision follows an agreement in principle reached between Commissioner Vestager and the Portuguese authorities in August 2016 on the way forward to enable a recapitalisation of CGD on market terms.
The EU Treaties are neutral on the type of property ownership. The Commission is therefore bound to give equal treatment to publicly and privately owned banks. In December 2016, Portugal notified plans to the Commission to restructure and recapitalise CGD for assessment under EU state aid rules. Portugal, assisted by the new management of CGD, has identified that the bank needs additional capital, mainly due to an insufficient level of provisions against loan losses.
To address these issues, Portugal is strengthening CGD's capital in two stages by in total €3.9 billion:
- In the first stage, completed in January 2017, Portugal transferred its 49% stake in CGD's subsidiary Parcaixa, with an accounting value of around €0.5 billion, to CGD. It also converted debt instruments it held in CGD worth a total of around €0.9 billion.
- In the next stage, Portugal will acquire new ordinary shares of CGD worth €2.5 billion.
At the same time Portugal has submitted a robust industrial plan, running until end-2020, to ensure the bank's long-term profitability. This plan will be implemented by a recently appointed a management team, which has been approved by the supervisor. It identifies and addresses the present weaknesses of CGD and will ensure a structural transformation of the bank. In particular, the bank will strengthen its solvency and risk management, implement deep cost cutting measures, adjust its domestic operational infrastructure, modernise its domestic commercial franchise, restructure its international operations and strengthen its governance model. This structural transformation should enable the bank to return to profitability in 2018, ensuring that Portugal receives a market-based return on its investment, in line with what a private investor would have accepted.
On this basis, the Commission concluded that the recapitalisation by Portugal is carried out at conditions that a private operator would have accepted under market conditions. The measures therefore involve no new state aid in favour of CGD.
Furthermore, as part of its industrial plan, CGD will also take actions to further strengthen its capital position from private sources. In particular, it will raise internal capital and issue €930 million of additional Tier 1 or "core strength" capital to investors not related to the Portuguese State.
Portugal and the Commission will closely monitor the implementation of the industrial plan, based on the agreed targets. Portugal will ensure that adjustments are made if the plan is not followed. Today's decision relies on Portugal's representation that, as the sole shareholder of CGD, it will ensure that the bank reaches the agreed profitability targets.
The Commission also found that the State aid already granted to CGD, and approved under the Commission decision in 2013, remains compatible with the Single Market. Notably, regarding the bank's operational efficiency, the targets of the 2017 industrial plan are either consistent with, or stricter than, the commitments under the 2013 restructuring plan. Regarding behavioural commitments of the 2013 restructuring plan, the changes are limited to the minimum necessary in order to allow the bank to take the actions to further strengthen its capital position, and the successful implementation of the 2017 industrial plan. In particular, the Commission has accepted to the early termination of CGD's commitment not to pay discretionary coupons on subordinated debt, in order to allow CGD to raise hybrid capital from the market.
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Fully State-owned CGD is the largest bank in Portugal, with a leading market share in both deposits and retail loans. The bank has been making losses since 2011.
In 2013, the Commission approved restructuring aid for CGD, subject to a restructuring plan and commitments that apply until end-2017. Those state aid measures involved capital injections into CGD in the form of ordinary shares (€0.75 billion) and contingent convertible bonds (€0.9 billion).
According to Portugal, the new recapitalisation has become necessary due to CGD's inability to recognise and adjust to changing and more challenging market conditions in Portugal, which lasted longer than expected, and the low interest rate environment in Europe more generally. The necessary capital injection is slightly lower than estimated at the agreement in principle was reached in August 2016 (€3.9 billion instead of €4.1 billion). This is because the assessment by the current management of CGD completed in mid-February 2017 shows that there were fewer bad loans to provision for than in the first estimates.
The non-confidential version of this decision will be made available under the case number SA.47178 in the State Aid Register on the competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.