COMMISSION DECISION
of 23 July 2013
on the State aid SA.35062 (13/N-2) implemented by Portugal for Caixa Geral de Depósitos
(notified under document C(2013) 4801)
(Only the English text is authentic)
(Text with EEA relevance)
(2014/767/EU)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Having called on Member States and other interested parties to submit their comments pursuant to those provisions (1),
Whereas:
1. PROCEDURE
(1)
On 28 June 2012, the Portuguese Republic (‘Portugal’) notified recapitalisation measures to Caixa Geral de Depósitos, S.A (‘CGD’ or ‘the bank’).
(2)
On 18 July 2012, the Commission adopted a decision in case SA.35062 (12/NN) (‘the Rescue Decision’) (2) authorising the recapitalisation of CGD implemented on 29 June 2012 as rescue aid.
(3)
By electronic mail of 27 September 2012 Portugal informed the Commission that Caixa Geral Finance Limited (‘CGDF’), an affiliate of CGD, would pay out dividends to the holders of perpetual non-cumulative preference shares the next day.
(4)
On 28 September 2012, CGDF executed the payment of dividends.
(5)
On 18 December 2012, the Commission adopted a decision in case SA.35062 (12/NN) (‘the Opening Decision’) (3) instigating the formal investigation procedure for misuse of rescue aid pursuant to Article 16 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the treaty on the functioning of the European Union (4).
(6)
By publishing that decision the Commission invited interested parties to comment on its preliminary conclusion that the dividend payment constituted a breach of the terms of the Rescue Decision, but has not received any related comments.
(7)
Portugal exceptionally accepts for reasons of urgency that the present decision be adopted in the English language.
2. DESCRIPTION
2.1. The beneficiary
(8)
CGD is a banking group fully owned by Portugal. It holds total net assets (based on accounting perimeter) (5) amounting to EUR 116,9 billion at 31 December 2012 and a total net loan book amounting to EUR 74,7 billion at 31 December 2012. The bank’s activities comprise, inter alia, nationwide and international commercial banking (notably, in Spain, Lusophone Africa, Macao and Brazil), investment banking, asset management, specialised credit business, and insurance activities.
(9)
In 2012, the CGD group had a leading position in most of the business areas it operated in the domestic Portuguese market (in particular, loans and advances to customers, customer deposits, insurance, leasing, investment banking and asset management).
Table 1
CGD’s main financial figures (based on accounting perimeter)
31.12.2012
Total assets (billion EUR)
116,9
Loans to customers (billion EUR)
74,7
Retail deposits (billion EUR) (*)
71,4
Total wholesale funds (billion EUR) (**)
35,2
Employees, total Group
23 028
Number of branches, total Group
1 293
National Market share in deposits
28,1 %
National Market share in loans
21,3 %
2.2. The events triggering the aid measures
(10)
Since the beginning of the sovereign crisis, CGD experienced difficulties in accessing the wholesale markets. The difficulties started in accessing the medium- and long-term capital markets and progressively extended to the short-term money markets.
(11)
As a result, CGD had to reduce its reliance on wholesale funding and activated its contingent liquidity plan in the first quarter of 2010, subsequently trying to (a) find alternative sources of funding, mainly through collateralized funding; (b) increase the pool of eligible collateral that would be acceptable for the ECB; (c) sell non-strategic assets; and (d) present its own credit credentials to investors and counterparties.
(12)
Under the Economic and Financial Assistance Plan agreed upon between Portugal, the Commission, the ECB and the IMF, CGD was asked to submit a Funding and Capital Plan (‘FCP’) for the period 2011-15 which was to be subject to quarterly review. The first version of the FCP was submitted on 26 July 2011 and has been subject to revisions.
(13)
As regards solvency, the Core Tier 1 (‘CT1’) ratio of CGD, calculated in line with Basel II rules, was equal to 9,48 % as at 31 December 2011. The objective of the FCP was to achieve, inter alia, a 10 % CT1 ratio by 31 December 2012 under Basel II rules, in line with the requirements of the Memorandum of Understanding (‘the MoU’) signed between the Portuguese Government, on the one hand, and the IMF, the Commission and the ECB. Following a recommendation of the European Banking Authority (‘EBA’), the FCP was updated regarding the level of capital to be held from 30 June 2012 onwards, in order to fulfil capital needs calculated based on the amount of sovereign and local municipality debt held by the bank (‘sovereign buffer’) and the capital need resulting from a stress test exercise conducted by EBA (‘the EBA requirements’).
(14)
According to the version of the FCP of May 2012, and following the recommendation of EBA, a need to increase its capital by EUR 1,650 billion was identified.
2.3. The aid measures
(15)
The recapitalisation measures carried out by Portugal as CGD’s only shareholder consisted in
(i)
the subscription of newly issued ordinary shares (‘the capital increase’) in the amount of EUR 750 million and
(ii)
the subscription of convertible instruments (‘CoCos’) issued by CGD in an amount of EUR 900 million which are eligible for solvency purposes under the EBA requirements as CT1.
(16)
A detailed description of the aid measures is provided in recitals 12 to 25 of the Rescue Decision.
2.4. The formal investigation procedure on the misuse of aid
(17)
As set out in recital 31 of the Rescue Decision, Portugal committed to ensure that CGD (as a group) applies behavioural restrictions equivalent to those applying to banks that are recapitalised under the New Recapitalisation Scheme for Credit Institutions in Portugal (6), including, inter alia:
-
a dividend ban;
-
a ban on coupon and interest payments on hybrid instruments and subordinated debt which are not held by Portugal and where there is no legal obligation to proceed with such payment.
(18)
On 28 September 2012, CGDF, an affiliate of CGD, paid, without the Commission’s authorisation, dividends on perpetual non-cumulative preference shares in the amount of EUR 405 415. That amount corresponds to 0,025 % of the capital that was injected on 29 June 2012.
(19)
In the Opening Decision the Commission preliminarily considered the dividend payments made by CGDF on 28 September 2012 to fall under the dividend ban which was applicable to CGD pursuant to the Rescue Decision and that the dividend payments constituted a misuse of the rescue aid granted.
3. RESTRUCTURING OF CGD
(20)
CGD submitted a restructuring plan that contains four main elements:
-
Deleveraging the balance sheet of CGD group by selling the insurance arm and remaining non-strategic holdings as well as by the run-down of non-core assets;
-
increasing its operational efficiency;
-
the restructuring of CGD’s operations in Spain;
-
the repayment of EUR 900 million of CoCos during the restructuring period.
Deleveraging
(21)
CGD had already made efforts to deleverage its balance sheet before the capital increase in June 2012. From December 2010 until June 2012 the bank reduced its balance sheet by approximately EUR 8,2 billion (accounting perimeter).
(22)
The restructuring plan sets out additional deleveraging efforts. It envisages the sale of the insurance arm, Caixa Seguros, and other non-strategic holdings as well as the run-down of non-core assets to enable CGD to better focus on its core retail banking operations, and release funds that subsequently will strengthen the core capital of the bank. CGD aims to further deleverage the group’s balance sheet by EUR [10-20] billion of non-core assets, which - compared to the consolidated balance sheet in December 2012 (based on accounting parameters) - translates into a reduction of [10-20] %. The sale of the insurance business is an important element of the deleveraging exercise, contributing approximately EUR […] (***) billion to the reduction. The sale of the remaining non-strategic holdings will contribute EUR [0-5] billion, the repayment of ex-Banco Português de Negócios (‘BPN’) debt EUR [0-5] billion, and the run-off of non-core credit in Spain EUR [0-5] billion. Furthermore, approximately two-thirds of the non-core portfolio (EUR [10-20] billion) will be run-down by the end of 2017, while the remainder of the non-core portfolio will be run-down after 2017.
(23)
Caixa Seguros is the market leader in Portugal with total market shares in December 2012 of 31 % in life insurance and 26 % in non-life insurance respectively, including a multiline insurance entity for the life and non-life business as well as specialty insurance entities in particular for health and car insurances. As at 31 December 2012, Caixa Seguros represented 9,2 % of CGD’s consolidated net assets and it generated a net income attributable to CGD’s shareholders of EUR 89,7 million, based on a volume of direct insurance premiums that in 2012 amounted to EUR 3 195 million.
(24)
CGD will restructure Caixa Seguros in order to improve its marketability and facilitate the sales process. CGD may […]. The sale process will allow all possible combinations which could vary from […]. CGD’s restructuring plan assumes that […].
(25)
CGD will also sell all its remaining non-strategic holdings held in quoted Portuguese corporations by the […], deleveraging its balance sheet approximately by an additional EUR [200-250] million. CGD has already sold the majority of its non-strategic holdings, which generated proceeds of approximately EUR 450 million.
(26)
CGD furthermore plans to gradually run off a portfolio of assets which stems from debt of the failed Banco Português de Negócios (‘BPN’) (7) that has a nominal value of EUR [0-5] billion and a net asset value of approximately EUR [0-5] billion. According to the related repayment scheme, the value of the net assets will be reduced by [40-50] % to EUR [0-5] billion until the end of 2017.
(27)
Finally, CGD will run off a portfolio of non-core credits which were originated by its retail and wholesale banking operations in Spain. That portfolio amounts to approximately EUR [0-5] billion.
Operational efficiency
(28)
The second main element in the restructuring plan is an increase of the bank’s operational efficiency. CGD had also already taken measures in 2011 and 2012 to optimise its cost base and has, if compared to pre-crisis financial data, reduced both the labour costs and the selling, general and administrative costs of its domestic operations.
(29)
CGD will continue that optimization effort by further reducing operational costs during the restructuring period. A reduction of the bank’s headcount and the renegotiation of contracted services are the main levers to achieve additional savings. According to the restructuring plan, CGD will continue to reduce its labour costs over the restructuring period, targeting a reduction of [5-10] % and projecting labour costs of EUR [500-550] million as of December 2013 and of EUR [450-500] million as of December 2017. In terms of headcount, the number of employees in Portugal will be reduced by [5-10] %. Whilst in December 2012 9 401 employees worked for the domestic retail banking activities CGD intends to reduce that number by December 2017 to [8 500 - 9 000].
(30)
The increase of CGD’s operational efficiency will furthermore be achieved by an optimization of the branch network, reducing the domestic branch network by [5-10] % from 840 branches in June 2012 to [750-800] branches by […]. The closure of [70-80] branches in Portugal from June 2012 until […] forms part of a periodic optimization process to revaluate and rationalize CGD’s domestic retail footprint and is expected to result in yearly savings of EUR [0-5] million. 58 branches have already been closed or are currently in the process of being closed, the remaining [10-20] branches will be closed before […].
(31)
Finally, CGD’s operational efficiency will be improved by increasing the income from services and commissions, which in 2012 contributed approximately 25 % to the total net operating income, while the relevant share in the Portuguese banking sector was on average 29 %. CGD will introduce new fee structures in order to better align its sources income with that of its peers.
Restructuring of Spanish operations
(32)
The third main element of the restructuring plan concerns the restructuring of the banking operations in Spain. While in general CGD’s international operations currently perform much better than the domestic operations and deliver important contributions to the bank’s overall performance, CGD’s operations in Spain are loss-making. CGD started its retail operations in Spain in 1991 by acquiring Banco de Extremadura and Chase Manhattan España, and then Banco Simeón in 1995. Those retail banking activities currently operate in Spain as a subsidiary of CGD under the name Banco Caixa Geral (‘BCG’). In 2007, CGD also started wholesale banking operations which were carried out in a branch that CGD had set up in Spain and which focussed on real-estate projects, related project finance and syndicated loans. While CGD’s retail operations in Spain hardly managed to break even over the last decade, the situation was even worse with regard to the wholesale operations. The wholesale operations, which were started just before the financial crisis, have a very poor track record and over a comparatively short period of time added significant losses amounting to approximately EUR 250 million by December 2012. The wholesale will be completely discontinued, and […].
(33)
Nevertheless, CGD regards Spain as a key market in which it aims to stay present, in particular to support the export business of Portuguese small and medium-sized enterprises (‘SMEs’). The retail operations in Spain will therefore be continued, albeit on a much smaller scale. In order to bring the operation back to profitability the number of branches will be reduced by [47-52] %, down from 209 branches in June 2012 to [100-110] branches as of […]. The headcount of the operations in Spain will be reduced by [46-49] %, down from 974 employees in June 2012 to [500-523] employees as of […].
(34)
In terms of geographical coverage, BCG will focus its retail operations on the regions of Galicia, Castilla y León, Asturias and Extremadura, keep only a reduced presence in the main cross-border trade centres (Madrid and Catalunya) and keep a very limited presence, with [0-5] branches in each region, in those areas that have relevant cross-border relations and serve as a relevant source of funding for the Spanish operations, namely País Vasco, Andalucía, Aragón and Valencia.
Repayment of Cocos
(35)
The fourth main element of the restructuring plan, the repayment of the EUR 900 million of CoCos during the restructuring period, aims to reduce CGD’s average funding costs. The deleveraging of the balance sheet and the increase of the operational profitability should enable CGD to redeem the CoCos. In particular, the sale of the insurance arm should free regulatory capital and thereby allow for an early repayment.
(36)
In order to balance the objectives of lowering the average funding costs on the one hand and keeping a sufficient capital buffer on the other hand, the restructuring plan sets out that in the fiscal year 2014 CGD will use [50-60] % of its excess capital (i.e. the capital above the applicable minimum capital requirement under European and Portuguese law (including pillars 1 and 2) plus a capital buffer of [100-150] basis points) to repay CoCos., In the fiscal years 2015 and, if necessary, in the following years CGD will use [90-100] % of its excess capital for the repayment of CoCos.
(37)
Table 2 presents the main financial projections, based on accounting perimeters, contained in the restructuring plan for CGD:
Table 2
CGD’s key financial figures 2011 - 2017
P&L
2011
2012
2013
2014
2015
2016
2017
Evolution rate 2012¬2017 (%)
Core
Total
Core
Total
Core
Total
Core
Total
Core
Total
Core
Total
Core
Total
Core
Total
Profit before tax
-90
- 545
- 303
- 367
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
(…)
[…]
[…]
Cost of Income Ratio
57 %
54 %
52 %
52 %
[70-80] %
[60-70] %
[60-70] %
[60-70] %
[40-50] %
[40-50] %
[40-50] %
[40-50] %
[40-50] %
[40-50] %
- [20-30]
- [20-30]
Employees
17 502
23 205
17 296
23 028
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[1 000 -20 000 ]
[0-5]
- [20-30]
Branch
1 344
1 344
1 293
1 293
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
[1 000 -1 500 ]
- [0-5]
- [0-5]
ROE
-2,5 %
-7,4 %
-5,5 %
-6,3 %
[…] %
[…] %
[…] %
[…] %
[…] %
[…] %
[…] %
[…] %
[…] %
[…] %
[…]
[…]
Balance
2011
2012
2015
2017
Udvikling 2012-2017 (%)
Assets
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Loans to clients (net)
78 248
75 095
3 153
74 713
71 338
3 375
[70 000 -75 000 ]
[65 000 -70 000 ]
[1 500 -2 000 ]
[70 000 -75 000 ]
[70 000 -75 000 ]
[1 000 -1 500 ]
- [0-5] %
- [0-5]
- [60-70]
NPLs
4 800
4 727
72
6 551
6 427
124
[10 000 -15 000 ]
[9 500 -10 000 ]
[400-450]
[10 000 -15 000 ]
[10 000 -15 000 ]
[500-550]
[60-70] %
[60-70]
[300-350]
Total assets
120 642
103 262
17 380
116 857
100 333
16 523
[100 000 -150 000 ]
[95 000 -100 000 ]
[8 500 -9 000 ]
[100 000 -150 000 ]
[100 000 -150 000 ]
[5 000 -10 000 ]
- [5-10] %
[0-5]
- [60-70]
RWA
69 021
66 207
2 813
68 315
65 963
2 352
[65 000 -70 000 ]
[60 000 -65 000 ]
[1 000 -1 500 ]
[65 000 -70 000 ]
[65 000 -70 000 ]
[1 000 -1 500 ]
[0-5] %
[0-5]
- [50-60]
Liabilities
2011
2012
2015
2017
Evolution rate 2012-2017 (%)
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Total
Core
Non-core
Central bank
9 013
9 013
0
10 300
10 300
0
[5 000 -10 000 ]
[5 000 -10 000 ]
[0-5]
[2 000 -2 500 ]
[2 000 -2 500 ]
[0-5]
- [70-80] %
- [70-80]
-
Liabilities to clients
70 587
64 030
6 557
71 404
65 545
5 859
[70 000 -75 000 ]
[65 000 -70 000 ]
[3 500 -4 000 ]
[75 000 -80 000 ]
[70 000 -75 000 ]
[1 500 -2 000 ]
[5-10] %
[10-20]
- [70-80]
Total Liabilities
120 642
114 085
6 557
116 857
110 997
5 859
[100 000 -150 000 ]
[100 000 -150 000 ]
[3 500 -4 000 ]
[100 000 -150 000 ]
[100 000 -150 000 ]
[1 500 -2 000 ]
- [5-10] %
- [0-5]
- [70-80]
LTD
122 %
117 %
n.a.
114 %
109 %
n.a.
[100-150] %
[100-150] %
n.v.t.
[90-100] %
[90-100]%
n.a.
- [10-20] %
- [10-20]
EBA CT1
n.a.
n.a.
n.a.
9,5 %
9,6 %
9,5 %
[5-10] %
[10-20] %
[5-10] %
[10-20] %
[10-20] %
[5-10] %
[10-20] %
[10-20]
[0-5]
4. POSITION OF THE PORTUGUESE AUTHORITIES
4.1. Position of the Portuguese authorities on the restructuring plan
(38)
Portugal considers the capital increase to be State aid, in particular in view of the current market circumstances and of the fact that the capital increase was carried out simultaneously with the subscription of the CoCos.
(39)
Portugal acknowledges that the subscription of CoCos constitutes State aid, in view of the fact that the terms of their subscription were aligned with those provided for in the New Recapitalisation Scheme which constitutes State aid (8).
(40)
Portugal submits that CGD has systemic importance within the Portuguese financial system, that the measures were necessary to bring CGD’s capital in line with the capital needs as established in the assessment of the Portuguese Central Bank, Banco de Portugal (‘BdP’) and the Troika and that the terms and conditions of the aid measures, together with the terms and conditions set out in the commitments for the restructuring of CGD, contain a sufficient range of safeguards against possible abuses and distortions of competition.
4.2. Position of the Portuguese authorities on the procedure on the misuse of aid
(41)
Portugal considers the payments made to the holders of the perpetual non-cumulative preference shares not to be dividends but coupon payments which may be paid if there is a legal obligation to do so.
(42)
Portugal states that according to the underlying terms of the perpetual non-cumulative preference shares, non-payment of dividends would prevent the bank from repurchasing or redeeming parity obligations or junior obligations until after the fourth consecutive following dividend payment date on which a dividend is paid in full. Portugal considers that the repurchase of the CoCos, for which it has received an explicit commitment by CGD, constitutes such a repurchase of parity obligations or junior obligations.
(43)
Portugal confirms that it gave its agreement to the payment of dividends in light of its assumptions that failure to pay them would have made it impossible for CGD to repurchase the CoCos during the following 12 months, and that if no dividends were paid during the five-year public investment period, CGD would not be able at all to repurchase CoCos without breaching its contractual obligations. From Portugal’s point of view, such a delay was incompatible with the overriding obligation to minimize the amount and duration of State aid to CGD. Accordingly, Portugal considers that those circumstances de facto rendered the payment of dividends legally binding.
4.3. Commitments of the Portuguese authorities
(44)
Portugal has undertaken a number of commitments related to the implementation of the restructuring plan (‘Commitments’) which are annexed to this Decision.
(45)
Furthermore, in order to ensure that the various commitments are duly implemented, the Portuguese authorities commit to appoint a monitoring trustee (‘the Monitoring Trustee’) to monitor all commitments undertaken by the Portuguese authorities and CGD towards the Commission.
5. ASSESSMENT
5.1. Existence of State Aid
(46)
According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market
(47)
The qualification of a measure as State aid requires the following conditions to be met cumulatively: a) the measure must be financed through State resources; b) it must grant a selective advantage liable to favour certain undertakings or the production of certain goods; c) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
(48)
The Commission has already found, for the reasons set out in recitals (33) to (42) of the Rescue Decision, that the measures constitute State aid within the meaning of Article 107(1) of the Treaty. The recapitalisation measures, consisting of the subscription of new ordinary shares in the amount of EUR 750 million and the subscription of CoCos in the amount of EUR 900 million, were provided by Portugal and thus involve State resources. The measures conferred a selective advantage to CGD, enabling it to increase its capital at more favourable conditions than could have been found on the market. CGD is an internationally active bank, competing with other banks in Portugal and other countries. The advantage to it is therefore capable of affecting intra-Union trade and distorting competition.
5.2. Compatibility of the aid with the internal market
(49)
As regards the compatibility of the aid provided to CGD, the Commission must determine, first, whether the aid can be assessed under Article 107(3)(b) of the Treaty, i.e. whether the aid remedies a serious disturbance in the economy of Portugal. Subsequently, the Commission, using that legal basis, must assess whether the proposed measures are in line with the internal market.
5.2.1. Legal basis for the compatibility of the aid
(50)
Article 107(3)(b) of the Treaty empowers the Commission to find that aid is compatible with the internal market if it serves ‘to remedy a serious disturbance in the economy of a Member State’.
(51)
In respect of the Portuguese economy the presence of a serious disturbance has been confirmed in the Commission’s various approvals of the measures undertaken by the Portuguese authorities to combat the financial crisis. In particular, the Commission has acknowledged in its last approval of the prolongation of the Portuguese Recapitalisation Scheme (9) that there is an on-going threat of serious disturbance in the Portuguese economy and that State support of banks is suitable to remedy that disturbance. The Commission notes that the Portuguese banking system faced severe difficulties at the time the aid measures were granted, as a result of the fact that some of the Portuguese banks were highly leveraged, had high loan-to-deposit ratios, and had to cope with an increasing ratio of non-performing loans. The Commission furthermore notes that Portugal receives financial assistance from euro area Member States, part of which is earmarked for the support of Portuguese banks (10).
(52)
Given the systemic importance of CGD - which is a leading bank in Portugal - and the significance of its lending activities for the Portuguese economy, the Commission accepts that its failure to satisfy strengthened capital requirements would have entailed serious consequences for the Portuguese economy.
(53)
In view of the current situation of the Portuguese economy and the widespread lack of banks’ access to international and wholesale funding markets, the Commission considers that the requirements for State aid to be approved pursuant to Article 107(3)(b) of the Treaty are fulfilled.
5.2.2. Compatibility of the aid with the Restructuring and Prolongation Communication
(54)
All the measures identified as State aid have been provided in the context of the restructuring of CGD. The Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (‘Restructuring Communication’) (11) sets out the rules applicable to the granting of restructuring aid of financial institutions in the current crisis. According to the Restructuring Communication, in order to be compatible with the internal market under Article 107(3)(b) of the Treaty, the restructuring of a financial institution in the context of the current financial crisis has to (i) lead to the restoration of the viability of the bank, (ii), include sufficient own contribution by the beneficiary (burden-sharing) and ensure that the aid is limited to the minimum necessary and (iii) contain sufficient measures limiting the distortion of competition.
(55)
Notwithstanding the requirements set out in the Restructuring Communication, point 14 of the Communication from the Commission on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘the 2011 Prolongation Communication’) (12) specifies that the Commission will ‘undertake a proportionate assessment of the long term viability of banks, taking full account of elements indicating that banks can be viable in the long term without the need for significant restructuring, in particular where the capital shortage is essentially linked to a confidence crisis on sovereign debt, the public capital injection is limited to the amount necessary to offset losses stemming from marking [European] sovereign bonds to market in banks which are otherwise viable, and the analysis shows that the banks in question did not take excessive risk in acquiring sovereign debt.’
(56)
In that regard the Commission notes that the capital needs of CGD were essentially linked to a crisis of confidence regarding the sovereign debt of Portugal. Although they were not directly caused by the impact of marking sovereign bonds to market, the underlying reason was comparable, as EBA required banks to establish a capital buffer related to the amount of sovereign bonds held on the balance sheet (the so-called ‘sovereign buffer’) and as a consequence increased its minimum capital requirements.
(57)
Out of CGD’s total capital buffer requirement of EUR 1 650 million as established by EBA, which led to the need for that amount of State aid, EUR 1 073 million (65 %) are due to exposure to Portuguese sovereign debt. The Commission’s analysis has furthermore shown that CGD did not take excessive risk in acquiring sovereign debt. The sovereign debt portfolio was acquired by doing carry trade transactions (financed by ECB one-year funding). Whilst such transactions could under certain circumstances be considered as above-average risk-taking, the acquired bonds represented eligible collateral and the relevant rating notations were well above investment grade (AA- for Portugal).
(58)
For those reasons the Commission will undertake a proportionate assessment pursuant to point 14 of the 2011 Prolongation Communication.
Restoration of viability
(59)
As the Commission sets forth in its Restructuring Communication the Member State concerned needs to provide a comprehensive restructuring plan which shows how the long-term viability of the beneficiary will be restored without State aid within a reasonable period of time and within a maximum of five years. Long-term viability is achieved when a bank is able to compete in the marketplace for capital on its own merits in compliance with the relevant regulatory requirements. For a bank to do so, it must be able to cover all its costs and provide an appropriate return on equity, taking into account the risk profile of the bank. The return to viability should mainly derive from internal measures and be based on a credible restructuring plan.
(60)
Portugal has submitted a restructuring plan for CGD, with a five-year time horizon, going up to 2017 and showing a return to viability at the end of the restructuring period.
(61)
Point 10 of the Restructuring Communication requires that the proposed restructuring measures constitute a remedy to the beneficiary’s weaknesses. In that regard, the Commission notes that the restructuring plan addresses the core weakness of CGD, namely the overall weak profitability of its domestic banking operations, which represent 80 % of its activities. The weak results of CGD’s domestic activities can only partly be offset by the positive performance of CGD’s international operations, although on average they have shown in the past and currently still show positive Returns on Capital Employed (ROCE). In 2012, for example, the banking activities in Angola achieved a ROCE of [50-60] %, those in Mozambique a ROCE of [20-30] %, in South Africa [20-30] %, and in Macau [20-30] %. In comparison, the banking activities of CGD in Portugal achieved a ROCE of - [10-20] % in 2012. As the international activities contribute positively to the overall economic situation of the CGD group, but only represent a small part of the activities, the restructuring plan focusses on improving the profitability of the domestic operations.
(62)
The Commission positively notes that CGD had taken measures to reduce its labour and administrative costs before it received State aid. The current macroeconomic situation and the prospects of the domestic banking market, however, called for a more resolute approach, such as the optimization effort that is set out in the restructuring plan. The targeted reduction of the bank’s headcount, reducing the number of employees in Portugal in the banking area from 9 401 to [8 500-9 000] over the restructuring period, thereby projecting a reduction of labour costs by [5-10] %, is an adequate means to achieve the required savings, in particular when taking into account that the budget for administrative costs will also be significantly cut down.
(63)
The Commission’s analysis of CGD’s branch network initially showed that room for improvement as regards the handling of branches that were clearly underperforming. However, the periodic revaluation process of branches which CGD has now established is an adequate approach to monitor the performance of the retail network so as to be able to adjust the domestic footprint if required. In the restructuring plan CGD has set out that it will reduce the domestic branch network by [5-10] %, closing [70-80] out of the 840 branches. From the Commission’s point of view, the targeted downsizing appropriately adjusts CGD’s domestic presence to the market requirements, while on the whole maintaining an adequate service level to clients.
(64)
The Commission furthermore notes that the improvement of CGD’s operational efficiency will also be achieved by increasing the income from services and commissions, based on the introduction of new fee structures. That fee and commission income increase seems justified, considering both that the share of commissions in CGD’s income statement is rather low compared to the average in the Portuguese banking sector on the one hand and that the bank has full control over the applicable fee structures on the other hand.
(65)
As regards the deleveraging of the balance sheet, the Commission notes that CGD’s restructuring plan is well balanced and carefully avoids producing negative effects on the recovery of the Portuguese economy, even though in total the related measures add up to an amount of EUR [10-20] billion, equivalent to a balance sheet reduction of [10-20] %. If CGD as Portugal’s largest bank had simply cut down the size of the credit budget it could have contributed to a credit crunch and hurt the real economy. That outcome was avoided by the fact that the main sources of CGD’s deleveraging efforts are not linked to the amount of credit which may be provided to the Portuguese economy. CGD’s lending capacity is unaffected by the sale of the insurance business, the sale of remaining non-strategic holdings, the repayment of ex-BPN debt, and the run-off of non-core credit in Spain. The deleveraging efforts are hence well targeted, as they enable CGD to focus on its core retail banking operations and release funds that can strengthen the core capital of the bank whilst avoiding the potential negative effects of deleveraging for the Portuguese economy.
(66)
In the same vein the Commission takes note of the commitment by CGD vis-à-vis the Portuguese Government to allocate EUR 30 million per year to a fund that will in turn invest in equity of SMEs and mid-cap corporates in order to secure financing to the real economy in Portugal. Such investments will not involve the acquisition of equity stakes in competing businesses, and the Commission also considers that they do not constitute market-distorting activities within the meaning of point 23 of the Restructuring Communication. There is nothing in that commitment which can give rise to an additional advantage to CGD, and therefore the Commission does not need to consider further the status of that commitment in the present decision.
(67)
As regards the sale of CGD’s insurance activities, it is necessary to restructure Caixa Seguros in order to improve its marketability, as set out in CGD’s restructuring plan. CGD has proposed a reasonable approach to achieve a sale of Caixa Seguros within the restructuring period.
(68)
The turnaround of CGD’s banking operations in Spain constitutes a significant element in CGD’s plan to achieve a positive overall profitability within a short timeframe. In particular in view of the fact that the operations in Spain have been unprofitable for some time already and were contributing negatively before the financial crisis started, a decisive approach is needed to tackle that problem.
(69)
In the restructuring plan, CGD has set out its preferred option to terminate the wholesale activities in Spain and to restructure and continue the retail activities on a smaller scale as well as alternatives, namely a full shut-down of the operation, divesting them by a sale or an asset swap, putting them into a progressive run-off, or looking for a joint venture partner. However, all of those alternatives had their specific downsides and were expected to result in capital losses of significant magnitude. CGD therefore came to the conclusion that restructuring the Spanish operations is the best option from an economic point of view.
(70)
The Commission reckons that the restructuring of the Spanish operations in the current macroeconomic context will be a difficult undertaking but at the same time acknowledges that the alternative approaches could be more costly. The Commission notes positively that the wholesale activities have been stopped and that BCG will in any case run-down a sizeable portfolio of non-core assets of its Spanish operations, significantly reduce its footprint in Spain by nearly [50-60] % and is exploring possibilities to save costs by using services available in the group.
(71)
From the Commission’s point of view it is, however, necessary to reinforce the objective of achieving a turnaround of the operations in Spain as soon as possible. For that reason the Commission deems it essential that Portugal has given a commitment that BCG will either meet by the […] the key performance indicators defined in section 4.2.7.3.1.5 of the commitments set out in the Annex with regard to the relevant thresholds for labour and administrative costs, cost-to-income ratio, funding, deposits, new credit, net margin, and non-performing loans, or - if it fails to achieve them - to stop new business in Spain and to run down all Spanish activities. In view of that safeguard and the lack of alternatives in the short run, the Commission accepts the plan to achieve a turnaround of the retail banking activities in Spain as an element of CGD’s restructuring plan.
(72)
The Commission furthermore considers CGD’s restructuring plan to be credible even if the current difficult economic situation of Portugal were to last longer assumed in the base case. CGD projects credit at risk to further increase over the restructuring period from an already high level of 12 % to [10-20] % at the end of 2017. The bank furthermore projects to increase provisioning of credit at risk to [50-60] %. Such a coverage ratio can be deemed to be in line with that of other Portuguese banks which have not received State capital, for example those of Banco Espirito Santo or Banco Santander Totta. CGD’s coverage ratio has to be assessed in light of the fact that the bank traditionally has a strong foothold as mortgage provider in Portugal and hence has a large share of mortgages in its loan portfolio with an average loan-to-value ratio of around [70-80] %. Taking those factors into account, a coverage of credit at risk of [50-60] % appears to be adequate to cover for CGD’s future loan losses over the restructuring period.
(73)
The Commission finally notes that all the measures set out in the restructuring plan are geared to restore CGD’s viability and to result in a satisfactory level of profitability, as indicated by the Return on Equity (‘ROE’) of [5-10] % for CGD’s banking activities in Portugal that is targeted for 31 December 2017, as well as the ROE of [5-10] % for the consolidated results of all activities of the CGD group as of 31 December 2017.
Aid limited to the minimum, own contribution and burden-sharing
(74)
The Restructuring Communication indicates that an appropriate contribution by the beneficiary is necessary in order to limit the aid to a minimum and to address distortions of competition and moral hazard. To that end, it provides that (i) both the restructuring costs and the amount of aid should be limited and (ii) a significant own contribution is necessary.
(75)
CGD’s restructuring plan does not contain any elements that suggest that the aid exceeds the means required to restore long-term viability. As described in recital (13), the capital shortfall which needed to be covered was determined on the basis of the MoU as agreed between the Portuguese Government, on the one hand, and the IMF, the ECB and the Commission, on the other hand.
(76)
According to point 34 of the Restructuring Communication, adequate remuneration of any State intervention is one of the most appropriate limitations of distortions of competition. The Commission notes in that context that the capital provided in form of CoCos is adequately remunerated, in line with the guidelines of the Commission and the ECB (13). The remuneration of the CoCos starts at an initial 8,5 % for the first year and will with step-ups increase over time, resulting in an average annual remuneration rate of 9,2 % over the investment period. The step-up mechanism will encourage CGD to exit from the State intervention.
(77)
The Commission notes that according to the restructuring plan and the related commitments CGD will use its excess capital for the full repayment of the CoCos (see Section 5 of the Commitments).
(78)
CGD will in 2014 use [50-60] % of its excess capital and [90-100] % of excess capital in 2015 and in the following years to repay the EUR 900 million of CoCos. The repayment mechanism limits the buffer of capital that CGD can hold on its balance sheet and thereby ensures that the aid will over the restructuring period remain limited to the minimum necessary.
(79)
It is furthermore important to note that the sale of the insurance arm will free regulatory capital and hence make it more likely that CGD will have excess capital that can be used for the repayment of the CoCos, thus also contributing to the restructuring costs by its own means.
(80)
However, the Commission notes that CGD did not comply with the dividend ban but paid out dividends in the amount of EUR 405 415, in contravention of the commitment given by Portugal in the context of the Rescue Decision.
(81)
The aim of the dividend and coupon bans is to prevent the outflow of funds, thereby ensuring that the aid can be repaid and hence that State aid is limited to the minimum necessary. To that end, shareholders of the bank as well as holders of hybrid capital and subordinated debt should as far as possible be excluded from the potential benefit of the State aid.
(82)
As CGD was in a position to pay out dividends, it was demonstrated that the aid amount was not limited to the minimum necessary. The information that CGD provided in the course of the misuse investigation procedure has not changed the Commission’s assessment in the Opening Decision that the payments qualified as dividend payments which fell under the dividend ban of the Rescue Decision or shown a legal obligation to make the payment which would have allowed for a payment of dividends under the Rescue Decision.
(83)
The Commission concludes that the aid measures in the amount of EUR 1 650 million were limited to the minimum necessary, with the exception of an amount of EUR 405 415 that was used for dividend payments. In that respect the Commission takes in particular note of the commitment by CGD to pay back to Portugal an amount equaling the dividend payment and therefore the amount by which the aid granted exceeded the minimum necessary. Given that commitment, the aid is deemed to have been limited to the minimum necessary.
(84)
In addition, the Commission notes that Portugal has committed to a ban on dividend, coupon and interest payments (see Section 6.7 of the Commitments).
(85)
Point 24 of the Restructuring Communication furthermore stipulates that an adequate remuneration of State capital is also a means of achieving burden-sharing. As established in recital (76), the Commission considers that the capital provided in form of CoCos is adequately remunerated.
(86)
Finally, the Commission notes that CGD has already carried out and will continue to implement cost-cutting measures by in particular reducing its headcount and branch network in Portugal, and thereby contributes to the restructuring costs through internal measures.
(87)
For those reasons, the Commission concludes that the restructuring plan ensures that the aid is limited to the minimum necessary and provides for an appropriate own contribution and burden-sharing.
Limiting distortions of competition
(88)
Finally, section 4 of the Restructuring Communication requires that the restructuring plan contains measures limiting distortions of competition. Such measures should be tailor-made to address the distortions on the markets where the beneficiary bank operates post-restructuring. The nature and form of such measures depend on two criteria: first, the amount of the aid and the conditions and circumstances under which it was granted and, second, the characteristics of the markets on which the beneficiary will operate. Furthermore, the Commission must take into account the extent of the benficiary’s own contribution and burden-sharing over the restructuring period.
(89)
The Commission recalls that CGD has received State aid in the form of capital injections and CoCos in the amount of EUR 1 650 million. The aid amount is equivalent to 2,3 % of CGD’s Risk Weighted Assets (RWA) (14) which is comparatively low. As the CoCos are adequately remunerated, only moderate measures are necessary to limit potential distortions of competition.
(90)
The proportionate downsizing of CGD in terms of balance sheet size, geographical footprint and staff will contribute to limiting competition distortions. Whilst the divestment of Caixa Seguros and the downsizing and restructuring of the Spanish operation will contribute to the bank’s restoration of viability, the remaining balance sheet reduction is considered appropriate compared to the distortions of competition stemming from the aid
(91)
In addition to those structural measures, Portugal also committed to several behavioural constraints. The Commission takes note of those behavioural commitments set out in Section 6 of the Commitments, such as a ban on advertising State support and a ban on aggressive commercial practices, preventing CGD from using the aid for anti-competitive market conduct. It in particular welcomes an acquisition ban, which ensures that the State aid will not be used to take over competitors, but that it will instead serve its intended purpose, namely to restore CGD’s viability.
(92)
In sum, the Commission considers that there are sufficient safeguards to limit potential distortions of competition, in particular in light of the application of point 14 of the 2011 Prolongation Communication as a consequence of the events leading to the necessity for State aid, namely the EBA sovereign buffer.
5.3. Monitoring
(93)
Pursuant to section 5 of the Restructuring Communication, regular reports are required to allow the Commission to verify that the restructuring plan is being implemented properly.
(94)
Moreover, the correct implementation of the Restructuring Plan and the full and correct implementation of all commitments contained in the Commitments will be continuously monitored by an independent, sufficiently qualified Monitoring Trustee.
CONCLUSION
In view of the commitments made by Portugal it is concluded that the restructuring aid is limited to the minimum necessary, that competition distortions are sufficiently addressed and that the submitted restructuring plan is apt to restore CGD’s long-term viability. The restructuring aid should be found compatible with the internal market pursuant to Article 107(3)(b) of the Treaty,
HAS ADOPTED THIS DECISION:
Article 1
The State aid consisting of the subscription by Portugal of newly issued ordinary shares in the amount of EUR 750 million from CGD and the subscription by Portugal of convertible instruments issued by CGD in an amount of EUR 900 million is compatible with the internal market, in the light of the commitments set out in the Annex.
Article 2
Portugal shall ensure that the restructuring plan submitted on 15 October 2012 and complemented by the submission of 19 July 2013 is implemented in full, including the commitments set out in the Annex and in accordance with the schedule set out in that Annex.
Article 3
Portugal shall inform the Commission within two months of notification of this Decision of the measures taken to comply with it.
Article 4
This Decision is addressed to the the Portuguese Republic.
Done at Brussels, 23 July 2013.