No definitive answer is ever likely to be given to the question of where Portuguese banks should expand as they outgrow their domestic market.
Caixa Geral de Depósitos and Banco Espírito Santo (BES) saw possibilities in Portugal’s cultural affinities with Brazil. But both ended up merging their stand-alone ventures into big Brazilian banks in return for shareholdings.
“Brazil is a difficult market with strong local players,” says a senior Portuguese banker. “Because we speak the same language, we think it must be easy to understand but it’s very different. You have to be very big to acquire economies of scale.”
Strategic niche
Millennium BCP has opted for expansion into Poland (fighting successfully head-to-head with giants like Deutsche Bank) and Greece. Its sees them as relatively immature markets with the right dimension for BCP’s segmentation strategies, cross-selling expertise and back-office efficiency to be successful in the same way that they were in Portugal at a similar stage of economic development.
BES also began operations in Poland but later decided to pull out. “We’re focusing on what makes sense for us,” says BES chairman Ricardo Espírito Santo Salgado. “We see eastern Europe as a market more suited to the big European banks that are geographically closer. We don’t have the right skills.”
BES, like other Portuguese banks, is concentrating on servicing the banking needs of an estimated four million Portuguese living abroad. “Many emigrants are high net worth individuals and we’re tapping into that potential,” says Mr Salgado.
Jean-Pierre Garson, head of the International Migration Division of the Paris-based Organization for Economic Co-operation and Development (OECD), has singled out Portuguese banks as a model for how emigrants’ remittances can be used to build national wealth. The banks have created special transfer arrangements and worked tirelessly at construction sites and migrant hotels to inform workers about their services. By the late 1990s, savings from emigrants had grown to about 20% of total deposits in Portugal, about $14bn, according to a study by the Centre for Global Development.
The right dimensions
Some of the most successful overseas operations in Portuguese banking have profited from using their reduced dimension to the best advantage. “Given our own size, we aim to remain light in structure and focus on what we can do well: providing a bridge for international investors to markets in Portugal, Spain and Brazil,” says António Guerreiro, chairman and chief executive of Banco Finantia, an independent investment bank.
Finantia, which achieved record profits in 2003, has been highly successful as a specialised operator bringing international investors to the Eurobond and trade finance markets in Brazil, focusing on providing research and liquidity in a high yield market. The bank has begun similar operations in Turkey, which Mr Guerreiro sees as an important low-cost production centre set to become “the Mexico of Europe”. A few months ago Finantia initiated a similar approach to the Russian market.
“Finance is a capricious business and there is always room to come up with new ideas and services, particularly if you are small and flexible, and have a good client base,” says Mr Guerreiro.
In Spain, a light structure has helped Banco BPI outperform Portuguese competitors with much bigger operations. “Our Spanish operations consist of a single branch in Madrid,” says Fernando Ulrich, BPI’s new chief executive. “But last year that branch made a bigger profit than the Spanish operations of all the other Portuguese banks put together.”
Competition with Spain
Spain is a constant challenge for Portuguese banks. The progressive integration of the two economies cannot be ignored. “Being able to offer customers services in both Portugal and Spain is a real competitive advantage for any bank,” says António Horta Osório, chairman of Totta, a leading Portuguese bank acquired by Santander Central Hispano, Spain’s largest bank.
But the huge difference in scale between the Spanish and Portuguese markets – and the leading banks in each country – is an almost insurmountable challenge for Portuguese banks. The power of Spain’s mutual savings banks (cajas), which dominate regional markets and account for about half of the Spanish banking sector, act as another barrier to entry.
Portuguese bankers take heart from the fact that much more powerful banks from other countries have also had little success in breaking into Spain. “Spain is a collection of regional markets rather than a single national market,” says a Lisbon banker. “If you look at the whole of Iberia from this perspective, Portuguese banks at least have a dominant position in Portugal, one of the most important Iberian markets.”
