Caixa General

Resilience gained through the painful post-global financial crisis restructuring has helped Portugal’s banks emerge from the pandemic in fit condition. Now, as Russia’s invasion of Ukraine takes its toll on the global economy, the sector is well prepared for the challenges ahead. Peter Wise reports.

“The pandemic made Portuguese banks realise that it was possible to embrace transformation and achieve multiple changes in a short period,” says Paulo Macedo, CEO of state-owned Caixa Geral de Depósitos (CGD), Portugal’s largest bank by Tier 1 capital. “The sector proved its resilience in 2021 by improving profitability and operational efficiency without any significant deterioration in credit risk.”

This strong performance has strengthened Portugal’s banks as they begin to deal with the economic fallout of a war in Europe, particularly rising inflation fuelled by supply chain disruption and soaring energy prices — factors that are likely to compress household incomes and exert pressure on banks’ profit margins and operating costs.

“The world remains an uncertain place and the invasion of Ukraine raises an entirely new set of challenges for Europe and the world,” says Miguel Maya, CEO of Millennium bcp, Portugal’s largest listed bank by total assets. “We are keeping our focus on sustainable growth, deepening customer relationships, increasing lending and taking full advantage of the benefits of the digital transition.”

Rebound in performance

After combined loses of €250m in 2020, the performance of Portugal’s top five lenders rebounded in 2021. CGD, Millennium, Banco Santander Portugal, Banco BPI and Novo Banco, which together account for almost 80% of the sector’s total assets, posted combined net earnings of more than €1.5bn last year, supported by strong growth in fee income and favourable refinancing costs.

Last year, Banco BPI recorded a consolidated net profit of €307m, up from €105m in 2020. “It was one of our best-ever performances, underpinned by solid growth and reflected in all our commercial and financial indicators,” says the bank’s CEO, João Pedro Oliveira e Costa.

In the same year, BPI, part of Spain’s CaixaBank group, overtook Novo Banco to become Portugal’s fourth-largest bank, with total assets of €40.8bn. The latter posted its first annual profit since being created as the so-called good bank rescued from the collapse of Banco Espírito Santo in 2014.

Over the past two years of the Covid-19 pandemic, CGD lifted customer deposits by more than €13bn, making them the bank’s principal source of funding. It strengthened credit impairments by some €475m over the same period, mostly on a preventive basis, reducing its non-performing loan ratio, net of total impairments, to zero by December 2021. Notwithstanding this effort, CGD posted net earnings of close to €500m in 2020, lifting them by 18.6% to €583m in 2021.

The results reflect the recovery of the Portuguese economy in 2021, where gross domestic product (GDP) expanded 4.9% after a contraction of 8.4% in 2020 — the country’s worst slump in more than 80 years. The war in Ukraine has led to a downward revision in the outlook, but Portugal is still expected to outstrip growth in the larger European economies. In the first three months of 2022, GDP was up 2.6% on the previous quarter, contrasting with a Europe-wide slowdown as average eurozone growth increased by only 0.2%.

“Notwithstanding the adverse external context and some lingering structural weaknesses, the Portuguese economy is much more robust than in the past,” says Mr Maya. “We recovered swiftly from the pandemic, while unemployment fell close to historic lows.”

By the end of 2021, the jobless rate was at pre-pandemic levels. “Data for the first two months of 2022 show no deterioration in asset quality, even though prices were already gaining traction,” says Rui Constantino, chief economist of Santander Portugal. “On the other hand, interest rates are increasing in anticipation of potential European Central Bank (ECB) moves in the second half of 2022.”

Impact of Russia–Ukraine conflict

Portugal’s direct exposure to Russia and Ukraine is small in terms of trade, and it is also minimal for the banking sector. The two countries accounted for 0.4% of Portugal’s exports and 2% of imports between 2015 and 2019, with Portugal relying on Russia for 12% of its energy imports and on Ukraine for almost 17% of its imported cereals over the same period.

Indirect impacts of the conflict, however, are more difficult to gauge. “It’s possible that they will translate into an increase in credit risk and non-performing loans,” says Mr Oliveira e Costa.

Mr Macedo says the possibility of higher loan default levels “needs to be understood in the context of the negative interest rate environment of the recent past, which means that potentially higher rates would still be very low”.   

Portugal remains committed to fiscal discipline despite the potential slowdown in Europe.

The 2022 state budget was not approved until May, after its rejection by the far-left allies of prime minister António Costa’s minority Socialist party (PS) government led to its defeat in parliament last October, triggering a snap election two years ahead of schedule. The PS emerged from the January vote with a surprise absolute majority in parliament and a clear path to enact reforms.

Fernando Medina, the new finance minister, has targeted a budget deficit of 1.9% of GDP this year, down from 2.8% in 2021. The Bank of Portugal’s most recent forecasts see GDP growth unchanged from 2021 at 4.9%, converging in subsequent years towards the estimated pace of long-term growth of about 2%. The public debt-to-GDP ratio dropped from a record high of just over 135.2% in 2020 to 127.4% last year, and is projected to fall to about 120.7% in 2022.

“In the medium and long term, the two main risks to the Portuguese economy are low productivity and reduced population growth, which hinder potential growth,” says Mr Macedo.

The €17.2bn that Portugal is due to receive from the EU’s Recovery and Resilience Facility (RRF) between 2021 and 2026 is equivalent to about 8% of Portugal’s GDP in 2020 and is expected to play a key role in increasing growth potential and lifting productivity.

Only €2.7bn of the RRF funding will be in the form of loans, limiting the impact on public debt. The funds are mainly being used to bolster public investment, focusing on environmental projects, digitalisation and research.

To be fully effective, however, these investments need to be accompanied by reforms to improve low-labour productivity, a diminishing working-age population, and high levels of public and private indebtedness. “It is vital that the fiscal consolidation programme remains on track and that the recovery plan is executed in a way that ensures EU funds are used to accelerate growth,” says Mr Oliveira e Costa.

After a growing number of central and eastern European economies have overtaken Portugal in terms of GDP per capita in recent years, concern is growing over the pace of growth.

“Portugal needs a great leap forward,” says Mr Constantino. “A combination of EU funds worth about €60bn until 2030 is a unique opportunity to further transform the economy and bring about an additional increase in potential growth.”

Portugal’s economic recovery will support an increase in banking sector revenue, according to projections by Moody’s. “We expect a moderate increase in problem loans, but sizeable provisions built up in 2020 and 2021 will allow banks to absorb losses,” the rating agency said in April. “Capital ratios will hold steady, although they will remain weak compared with European peers,” it added. “A rise in interest rates will also benefit the sector, which has a high exposure to floating-rate loans.”    

Portuguese banks drew substantially on the ECB’s targeted longer-term refinancing operations during the pandemic as a means of reducing funding costs and risk. These temporary gains, however, are expected to decline this year as the advantageous interest rates expire and banks begin repaying the funds. 

Lenders continued to build up their minimum requirement for own funds and eligible liabilities buffers in 2021. They issued around €4bn of eligible debt in 2021, of which €1.2bn was placed by BPI and Santander Portugal with their respective Spanish parents. Fitch Ratings estimates the sector will have to issue a further €6bn–€7bn of eligible debt by 2024 to comply with minimum requirements for own funds and eligible liabilities, potentially challenging weaker issuers.

Digital and green transition

Portuguese lenders are strongly focused on their digital and green transitions.

“Customers today want a more digital and remote relationship with their bank,” says Pedro Castro e Almeida, CEO of Santander Portugal. “Technology enables us to be much more efficient, but also poses challenges because it changes the way we work.”

He cites a new workflow platform for mortgages, which reduces the time it takes to acquire loan to a maximum of 25 days, as a recent example of his bank’s digitalisation efforts. “We have more than 80 automation solutions running and more than 25,000 daily runs, which has a great impact on our operations,” he says. At end of 2021, the bank had a million digital customers, representing 59% of regular customers, with digital channels accounting for 56% of total sales.

Technology enables us to be much more efficient, but also poses challenges because it changes the way we work

Pedro Castro e Almeida

“The Covid-19 pandemic has shown that the digital transition is paying off for banks,” says Mário Centeno, governor of the Bank of Portugal. “They have maintained their client base, ensured service continuity and were instrumental in ensuring the effectiveness of policy measures aimed at supporting households and firms. They have also shown operational resilience in face of an increase in cyber attacks.”

CGD was first to launch an open banking app in Portugal. The app, called DaBox, provides customers with an overview of all their accounts at any bank in the country, enabling them to track spending, draw up budgets and make savings plans. The bank was also a pioneer in creating a digital assistant app. Using artificial intelligence and based on natural language, it is specially tailored for customers who are not digital natives. The app was used for 2.8 million conversations and 27,000 transactions in 2021.

“We see advanced analytics and machine learning as a great opportunity to serve our customers better and provide them with personalised advice,” says Mr Macedo. “We have been building a team of data scientists and analysts, and recently decided to create a business with the single goal of enhancing the value that we can extract from data.” In 2021, CGD had more than two million digital and 1.3 million mobile customers, up 12% and 21%, respectively, on the previous year.

Portuguese lenders are aligned with the European banking sector in terms of the green transition, says Mr Centeno. “The key tasks include improving the quantity and quality of the data available, as well as the analytical framework, and adopting a prudential, regulatory and supervisory framework for this new source of financial risks.”

Environmental, social and governance challenges, including those arising from climate change, are one of Millennium’s strategic priorities for 2021–24. “We have consistently strengthened our structures and adopted best practices for incorporating sustainability criteria into our activities,” says Mr Maya. “In addition to converging towards the carbon neutrality of our operations, we will continue to manage the physical and transitional risks caused by climate change, improving the risk profile and quality of our balance sheet, and promoting sustainable financing policies.”

Over the medium term, some bankers expect the sector to be reshaped by consolidation, with Novo Banco, controlled by US equity fund Lone Star, seen as the most likely acquisition target. “There are still too many banks in Portugal,” says Mr Castro e Almeida. “This is evident from the average profitability of the sector, which is one of the lowest in Europe and well below the cost of capital. Either there will be mergers or some banks will reduce their size and lose market share.”

New fintechs and ‘big techs’ would bring welcome innovation, “but conditions must be fair and equal for all players,” he says.

“Consolidation can address excess capacity and deliver important cost savings through economies of scale and revenue synergies,” says Mr Centeno. “We should, however, avoid excessive concentration and the creation of institutions that are too big to fail or too complex to supervise or resolve.”


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter