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Western EuropeJune 1 2004

Back in balance

Millennium BCP is emerging from a spate of troubles that hit its share value hard. Focusing closely on core business has helped the turnaround.
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Misfortunes never come alone. Banco Comercial Português, Portugal’s biggest listed bank, now called Millennium BCP, has discovered the truth in this proverb in the past three years as a series of setbacks undermined its share value and weakened its capital base. But, after disinvesting from international insurance operations, refocusing on its core banking business, strengthening its capital and rebranding its Portuguese networks under the single name Millennium BCP, the group is regaining investor confidence and advancing with its growth strategy in Poland and Greece.

Net profits rose by 60% to E438m in 2003, substantially higher than analysts had forecast, with operating revenue growing 4% despite the recession in Portugal. Net interest income was stable at E1.37bn, while earnings from fees and commissions rose 9% to E544m.

“As the economic climate deteriorated internationally, we focused on managing the capital we had available to the best advantage,” says Christopher de Beck, vice president. “We decided we had to stick closely to our core business and that meant focusing on banking in Portugal, Poland and Greece.”

Past troubles

BCP’s troubles began after it decided to integrate its domestic insurance operations with Eureko in return for a stake of about 25% in the pan-European insurance group, sharing management control with the majority shareholder, the Achmea Association of the Netherlands.

Eureko was being prepared for a stock market flotation in 2002, when there was a post-September 11 downturn in the world insurance market. In an abrupt reversal of strategy, BCP decided to pull out of Eureko, reacquiring full control of its domestic insurance business, Seguros e Pensões.

“We had decided to integrate with a pan-European group because we saw insurance as a non-core business,” says Mr de Beck. “Unfortunately, no-one has a crystal ball and we were very unlucky with the timing. The deterioration in market conditions meant Eureko was unable to advance as planned and the initial public offering that was being prepared has still not gone ahead today.”

At the same time as BCP was engaged in the difficult process of withdrawing from Eureko, it was affected by the downturn in international capital markets and the deceleration of economic growth in Portugal. A further, unexpected difficulty arose in 2001 when a planned reduction in the bank’s executive board from 13 to nine members was interpreted outside the bank as a clash between board members over the group’s expansion strategy.

“Looking back, we were astonished that a normal board reorganisation had such consequences in terms of public opinion,” says Mr de Beck. “We continue to think that it was very rational and logical move. There is a global tendency towards smaller boards and many other banks have done the same without any fuss. Now that people realise that we have a clear strategy and that all the board members stand behind it, it has become a non-issue.”

At the time, however, BCP’s share value was hit hard by the combination of troubles. From a high of E5.10 a share in September 2000, the value fell to a low of E1.24 in April 2003. The price has since risen to about E2.

Rising again

BCP is emerging from what has undoubtedly been the most challenging phase in its history. Founded in 1985 by Jorge Jardim Gonçalves, chairman and chief architect of the group’s success, it set new standards for efficiency and innovation in a sector that was then dominated by slow-moving, state-owned banks. After strong organic growth, it went on to gain critical mass through a series of ambitious takeovers, establishing itself as Portugal’s biggest listed bank.

The group gained an international reputation for its prowess in segmentation, cross-selling and back-office efficiency based on sophisticated information technology systems. Insead, the prestigious European management school, ranked BCP as the world’s top bank in terms of “competitive fitness” for the period 1998-2002.

In particular, the group developed the concept of bancassurance to a degree that its critics never thought possible. Insurance selling by banks was almost non-existent in Portugal when BCP started up. The country now sells a higher percentage of premiums through banks than anywhere else in Europe.

“People said you couldn’t sell insurance from a bank,” says Mr Gonçalves. “We have shown that it does work if the insurance products are fully identified with the banking group and the whole margin, not just a commission, stays within the bank.” BCP sees this link with its banking network as a key asset in its search for a partner to buy a stake in Seguros e Pensões, Portugal’s biggest insurance group.

“We don’t need to have a position in the insurance production business because it is not related to bancassurance,” says Mr de Beck. “We’re looking for a joint venture and we’re prepared to give up a majority stake. The value of the business is in the distribution network, which belongs to BCP, so a potential buyer would almost certainly want to keep BCP involved. We think the most balanced way to get the best out of the transaction would be for a partner to acquire a majority of the production unit.”

Expansion abroad

In the late 1990s, as the scope for domestic growth narrowed, BCP began to look outside Portugal for new opportunities. It chose Poland and Greece for expansion, investing E9bn in two years in creating Millennium Bank in Poland and NovaBank in Greece.

Critics have questioned why BCP should target markets on the other side of Europe where it has no cultural affinities and where, in Poland, the big German groups are competing close to their home turf. The answer, says BCP, is that it knows how to deliver personal financial services in developing economies that are undergoing transformations that are almost identical to the changes that Portugal has experienced in the past 20 years.

Unlike many bigger European banks, BCP has grown up meeting the changing needs of customers who are adapting to economic liberalisation, financial deregulation, privatisation, falling interest rates, increased affluence and the effects of joining the EU and the eurozone. Overseas operations now account for about 14% of total assets, but are not yet contributing to earnings.

New branding

BCP’s Polish operation, Millennium, provided the group with the name for the rebranding of its four domestic networks – an E11m operation that was completed in January. “Using one of our existing Portuguese brands would have inevitably offended some customers. We needed something new,” says Mr de Beck. “We were already using Millennium as a brand name in Poland. We tested it in Portugal and it has worked extremely well.”

BCP’s rebranding as Millennium BCP is the culmination of a long process of large-scale mergers and acquisitions. “The most difficult thing in banking is client acquisition. After a merger it is vitally important not to lose clients,” says Mr de Beck. “You might be able to make a bigger profit in the short term by centralising, rebranding and cutting costs. But if you lose customers, you lose in the long term. We consider our rebranding a total success because we haven’t lost a single client.”

Gradual integration

As BCP acquired banks, such as Atlantico and Sotto Mayor, it made a point of maintaining their individual brands as well as its own leading networks, NovaRede and Banco Comercial Português. “We would have lost many customers if we had simply imposed our brand name,” says Mr de Beck. “We moved gradually, completing the operational merger of the different banks but keeping their separate names. We then began showing people they could use any branch from any network within the group and find the same level of service and the same products.”

On a practical level, the late opening of some branches proved highly successful in attracting customers from other BCP networks to discover for themselves that the whole group was at their disposal. The next stage was to add “BCP” to all the separate brand names and finally to convert all the individual brands to the single name Millennium BCP at the beginning of this year.

One consequence is that several different branches of Millennium BCP now exist literally side-by-side in some locations – one shareholder joked that the main square in his town had been renamed “Millennium Plaza.” BCP plans a gradual rationalisation of its network of 1050 branches, which will involve the opening of new branches as well as closures.

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