The normally discreet world of Portuguese banking has found itself unaccustomedly in the glare of the media spotlight in recent months as a boardroom battle for control of Millennium BCP, the country’s largest listed bank, escalated into an acrimonious power struggle that spilled out from businesses sections onto the front pages of the country’s newspapers.
The unfolding drama, broadcast live to television viewers from a series of agitated shareholders’ meetings, reached a climax in September with the resignation of Paulo Teixeira Pinto, BCP’s chief executive. But the saga is far from over. Shareholders who want a bigger say in the bank’s strategy are still pressing for a new model of corporate governance and analysts continue to focus on the possibility of further mergers and acquisitions.
Generational conflict
BCP’s boardroom soap opera reflects a mood of growing protagonism among smaller shareholders, many of whom feel the independent management team has failed to give them the hearing they deserve. This led to what was perceived as a generational clash between an old and new guard of executives, embarrassing BCP at a time when it was struggling to rebuild its image after the collapse of a hostile €5.32bn bid for Banco BPI, a smaller Portuguese rival.
Mounting the failed takeover bid cost BCP €65.5m, contributing to a 22% fall in the group’s net profits in the first half of 2007. BPI, Portugal’s fifth largest financial group, posted a €9.9m charge in the first half for costs incurred in defending itself against the BCP bid. Amid speculation that the group’s management instability could make it vulnerable to takeover, BCP shares reached their highest level in more than five years in June, one of the top performances by a European financial stock this year.
At the same time, the unprecedented media coverage given to the tussle at the top of BCP has deflected attention away from the positive evolution of Portuguese banking as a whole. “The strong efforts Portuguese banks have made to increase their efficiency over recent years are now clearly evident in their performance,” says Luís Bento dos Santos, a board member at Santander Totta. “Each group is pursuing a different growth strategy. But in terms of return on equity, solvency ratios, non-performing loans and credit ratings, the overall performance is outstanding.”
Banking sector growth
State-owned Caixa Geral de Depósitos, Portugal’s biggest financial group with a 29% share of customer deposits and accounting for 27.4% of total mortgage lending, lifted net consolidated income by 26% in the first half of 2007 to €489.7m. BCP, with a market share of more than 23%, increased first-half net consolidated earnings by 3.1% to €374.4m on a comparable basis. Operating profit before provisions was up 15.1% to €579.4m. Income from operations outside Portugal, mainly in Poland and Greece, grew 40% to represent 16% of the total.
Banco Espírito Santo, the third largest group with an average market share of about 20%, saw net earnings soar 64% in the first half to €329m, excluding non-recurring items. The group is aiming for average net profit growth of 20% a year between 2006 and 2010.
Santander Totta, the fourth largest group with an average market share of about 12%, posted a 28.1% increase in net earnings to €271.1m. Chief executive Nuno Amado says this represents 11 straight quarters of income growth above 20%. Net earnings at BPI, with an average market share close to 10%, rose 30% in the first half to €193.1m, with its 82 branches in Angola, one of the world’s fastest-growing economies, making a strong contribution to its overall performance.
BCP’s internal power struggle became public in May when a small group of ‘activist shareholders’ representing 20% to 30% of the bank’s capital moved to resist a bid by Jorge Jardim Gonçalves, the group’s chairman and founder, to strengthen the powers of the supervisory board, which he chairs, making it responsible for appointing the executive board and allowing the chairman of the board to attend executive board meetings.
The chairman also wanted to strengthen the bank’s ‘poison pill’ defences against takeover by requiring a majority of three-quarters of voting shareholders to alter a bylaw that limits the voting power of any individual shareholder to 10%.
Differences over these issues heightened into a clash portrayed by the media as a conflict between shareholders who supported Mr Teixeira Pinto, appointed in 2005 as Mr Jardim Gonçalves’s chosen successor, as a representative of a younger generation of executives opposed to attempts by the chairman and an older cohort of managers to hang on to power. Supporters of Mr Jardim Gonçalves saw it as an attempt by a few shareholders to assert their influence over the management of the bank.
Three extraordinary shareholder meetings were called in less than three months, but failed to resolve the conflict. One meeting was suspended after the electronic voting system collapsed and another was abandoned after all the proposals for discussion were withdrawn. Willingly or otherwise, Mr Teixeira Pinto became linked with the ‘activist shareholders’ expressing their support for him. When it became clear they lacked majority support for their proposals, he was left with little alternative but to resign. He has been replaced by Felipe de Jesus Pinhal, formerly the bank’s senior vice-president.
Mr Teixeira Pinto had to bear the brunt of responsibility for losing a contest to buy Banca Comerciala Romana, Romania’s biggest bank, in 2005 and for the failed bid for BPI. He is also understood to have clashed with the chairman over a proposed shareholding agreement with Sonangol, the Angolan oil company. Although Mr Teixeira Pinto had the full support of the supervisory board for the BPI bid, London-based analysts say his aggressive approach may have lost him support. He proposed to close a large number of BPI branches, involving heavy job losses, with the aim of cutting BPI’s overall costs by 40%.
Some bankers and analysts now believe a friendlier BCP/BPI merger could go ahead, with Fernando Ulrich, BPI’s chief executive, and other top BPI staff being offered senior positions in the new group. “Five big banking groups may still be too many for a market the size of Portugal,” says a London-based analyst.
As BCP seeks to recover management stability, Mr Pinhal is expected to be the main candidate for the CEO position when a new board is elected to a new mandate next May. He is committed to an existing strategic plan for organic growth, known as Millennium 2010, that includes the opening of 700 new branches, mainly overseas, and double-digit annual revenue growth over the next three years.
Until its recent upsets, BCP was arguably the most successful group in Portuguese banking, which, liberalised, privatised and open to foreign competition since the 1980s, is itself one of the country’s most successful business sectors, with productivity and profitability levels that rank among the best in Europe.
Central bank approval
Vitor Constâncio, governor of the central bank, endorsed the health of Portuguese banks in recent comments on the international credit squeeze. Both the direct and indirect exposure of Portuguese banks to the subprime market, he said, was virtually nil. They were not facing serious liquidity problems, their risk control mechanisms were more than adequate and there was clearly no need for external intervention.
Mr Constâncio added that Portugal was not confronted with the risk of a sharp fall in house prices. As Gonçalo Pascoal, BCP’s chief economist, points out, Portugal differs sharply from neighbouring Spain in this regard, as mid-range house prices have changed little over the past five years and high-end properties have gained in value at a sustainable rate. Being spared the threat of a bursting property bubble is particularly comforting for banks in Portugal, where mortgage loans and construction finance have accounted for some 50% of total lending in recent years.
Property stabilisation
Annual growth in mortgage lending, which reached a peak of more than 35% a year in 1999, has steadily slowed, falling below 10% for the first time in more than two decades in the 12 months to May 2007. Rui Constantino, an economist with Santander Totta, says the deceleration reflects a stabilisation of housing demand and the impact of higher interest rates on affordability. Household indebtedness currently represents 124% of disposable income, historically high for Portugal, but below the level of countries such as the UK, the Netherlands, Spain and Denmark.
Portuguese bankers are not unduly concerned about the increase in indebtedness, as Portuguese borrowers are strongly committed to keeping up mortgage payments. They also point out that family interest payments account for only 6% of disposable income. “Overall levels of non-performing loans [NPLs] are well contained with ratios close to historic lows,” says Mr Constantino. In the first half of 2007, NPLs as a percentage of total lending were below 2.5% for all of Portugal’s five main banking groups, with Caixa Geral de Depósitos registering the highest level at 2.4% and Santander Totta the lowest at 0.6%.
But the tougher international funding climate is inevitably squeezing financial margins, which have already been pushed down by aggressive competition. Because Portuguese banks lend considerably more than they can fund from their own deposits, their margins are particularly vulnerable to fluctuations in the cost of funding on international markets. A London-based analyst said the extra basis points banks were paying to fund their loan portfolios would have to be passed onto customers.
Most local bankers see the increased cost of interbank lending as a welcome opportunity to tighten their credit policies. On top of the already tough competition for new mortgage customers, new legislation came into force earlier this year that has put further pressure on margins. The regulations governing the rounding-up of decimal points in the calculation of interest charges were changed in favour of the consumer, negatively affecting bank’s net interest earnings. More importantly, the government lowered the maximum charge for transferring mortgage loans from one bank to another, cutting the average transfer fee from about 3% to 1% of the outstanding loan.
This has intensified competition, with several banks offering home buyers zero spreads over Euribor for an initial period and zero transfer fees to customers who move their loans from other groups. In the new climate of costlier funding, however, banks say they will have to be more selective in terms of both individual and corporate borrowers, tightening credit controls and lending procedures.
Government forecasts
Some economists believe the impact of the global credit squeeze on important trading partners such as Germany, Spain and France could be negative for economic growth in Portugal. But they project the loss of only a decimal point or two from GDP growth.
| Fernando Teixeira dos Santos, Portugal’s finance minister, says there will be no direct impact on Portugal. The government’s forecasts for economic growth remain unchanged at 1.8% for this year moving to 2.4% for 2008. The biggest worry caused by the credit crunch and international market volatility is the negative effect it could have on business and consumer confidence amid the first signs that domestic investment and spending is beginning to take over from exports as the main driver of Portugal’s economic growth. |
