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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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

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.

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.