Five years after Portugal exited a gruelling bailout programme in June 2014, the strenuous efforts of the country’s banks to recover from the losses inflicted by the global financial and European debt crises are beginning to pay dividends in every sense.
Millennium bcp, the country’s largest listed lender, Banco BPI and state-owned Caixa Geral de Depósitos (CGD), the country’s biggest bank, are all paying dividends on their 2018 profits, the first time this has happened since before the three-year economic adjustment programme overseen by the EU and International Monetary Fund.
For Millennium chief executive Miguel Maya, paying a 10% dividend on net earnings of €301m is an “important signal to the market that the bank has returned to normal”. Over the long term, Millennium wants to move towards a dividend payout of 40%.
Recovery positions
The return to dividend payments marks a general sense of recovery across the sector. “Millennium and the Portuguese banking sector in general have come through the long crisis period stronger than ever,” says Mr Maya. “Banks today are extremely competitive and well prepared to support the economy, a very different situation than in the past.”
BPI chief executive Pablo Forero echoes these sentiments. “Portugal has a very competitive retail banking market, which has emerged better prepared from the financial crisis,” he says. BPI, the smallest of the country’s 'big five' banks, has proposed paying Spain’s CaixaBank, its sole shareholder, a 31% dividend on net individual earnings of close to €458m.
CGD is paying the state a dividend of €200m on net 2018 earnings of €496m, in what chief executive Paulo Macedo has described as a “necessary step towards normalising” the bank’s operations and a first move towards remunerating taxpayers for the billions of euros the government has pumped into CGD as part of a recapitalisation plan launched in 2016 (see interview page 60).
Profits rebound
Shareholders are benefiting from a steady return to profitability in Portugal. Return on equity reached a banking sector average of 7.1% in 2018, up from -19.4% five years ago, but still well below the 17.7% recorded in 2007, according to figures compiled by the Portuguese Banking Association (APB). Average return on assets is moving back toward the pre-crisis level of 1.1% in 2007, reaching 0.7% in 2018.
Earnings are improving as the level of impairments and provisions for problem assets drop. Net profits for the banking sector as a whole totalled €1.26bn in 2018, compared with a net loss of €228m the previous year. While 2018’s earnings were less than half the €3.3bn recorded in 2007, they represent a robust improvement on the record losses of €5.5bn that Portuguese lenders posted in 2014.
BPI, for example, achieved its best domestic results for a decade in 2018, recording a net profit of €218m from its banking activities in Portugal, excluding one-offs, up 28.5% on the previous year. “We closed the year with a record number of customers and market share gains in most segments,” says Mr Forero. “All of this was achieved with robust capital ratios and a non-performing exposure ratio of 3.5%, the best in Portugal.”
Among the big five banks, which together account for more than 80% of the Portuguese market, Banco Santander Totta is the only lender never to have interrupted dividend payments. “Since the crisis began, we are the only bank in Portugal never to have received state aid of any kind or to have needed a capital increase,” says chief executive Pedro Castro e Almeida. “We have been able to deliver positive results every single year and to keep paying dividends.” In 2018, the bank lifted net income to €500m, up 14.6% on the previous year.
Homegrown strength
Millennium prides itself on being the only lender among the four leading private sector banks where the big decisions are still made in Portugal. Santander Totta and BPI are today subsidiaries of big Spanish groups, Santander and CaixaBank, respectively. Novo Banco, the so-called 'good bank' rescued from the ruins of Banco Espírito Santo in 2014, is 75% owned by US equity fund Lone Star.
“Being a Portugal-based bank is a clear competitive advantage that is reflected in the sustained growth of our customer base,” says Mr Maya. “With the state aid we received repaid, we are now well placed to take full advantage of our leading position as the only listed Portuguese bank.” In 2017, Millennium finished paying off the €3bn in state aid it had received in the form of contingent convertible bonds (cocos) and in 2018 lifted net consolidate earnings to €301.1m, up from €186.4m the previous year.
In the first quarter of 2019, Millennium’s net earnings jumped to €153.8m, almost 80% up on the same period of 2018, with earnings in Portugal more than doubling to €94.3m.
“We have successfully executed an operational turnaround, based on the three core competences that characterise the bank,” says Mr Maya. He lists these as “a customer-oriented business model, market-leading efficiency with the lowest cost-to-core income ratio in Portugal, and a competitive international portfolio.”
While remaining what Mr Maya describes as “stable and diverse”, Millennium’s shareholder structure changed significantly in the wake of the crisis. Fosun, China’s largest private conglomerate, is today the largest single shareholder with just over 27%, followed by Sonangol, the Angolan state oil company, with about 19% and investment management firm BlackRock with 3%.
Iberian synergy
BPI’s Mr Forero highlights the advantages of belonging to the CaixaBank group, which moved from being a long-standing minority shareholder of the bank to full ownership in early 2017. “Over the past two years, CaixaBank’s control of BPI has brought stability and robustness to its capital,” he says. “This has enabled the bank to lower its financing costs significantly and strengthen its investment capabilities, especially in digital transformation.”
Similarly, Mr Castro e Almeida of Santander Totta says: “Belonging to the Santander group is a big advantage, as it allows us to use the scale of the group to serve our clients locally.” The bank’s other competitive features, he says, include “our relative strength in the local market and the quality of our balance sheet”, adding that “we have some of the most solid capital ratios and credit ratings in the sector”.
The bank’s common equity Tier 1 (CET1) ratio at the end of the first quarter of 2019 was 14.7%. “All this is important as it gives more confidence to our customers in a sector where confidence is everything,” adds Mr Castro e Almeida.
Government support
The cocos that helped Millennium recover were part of €19bn in government aid – the equivalent of 9.5% of GDP – that the state has poured into Portuguese banks in the form of grants and loans. Portugal currently ranks fifth in the EU in terms of government aid to the financial sector as a percentage of GDP, below Ireland (16%), Greece (15.1%), Slovenia (12.5%) and Cyprus (10.2%), and above Spain (4.2%).
The aid included €5.8bn in cocos, now largely paid back with interest, and the €4.3bn rescue of Banco Espírito Santo that created Novo Banco. Weeks after taking office in November 2015, the incumbent Socialist government also agreed a €2.3bn rescue for Banco International do Funchal (Banif) and less than a year later paid €3.9bn into CGD as part of a €5bn recapitalisation.
Bailing out small Banif, Portugal’s seventh largest lender, was “probably the most expensive banking resolution in Europe”, according to finance minister Mário Centeno. He has accused the previous centre-right government of delaying vital decisions on banks, including Banif, leaving the Socialists to take urgent and costly action.
When they came to office, Mr Centeno said recently, about three-quarters of banking assets were in lenders “in resolution, about to be resolved, lacking capital or [otherwise] in disarray”. Acting to remove this “absolute bottleneck” was vital, he said, because “you cannot have economic growth in a country that does not have a stable financial sector”.
Acquiring the healthy assets of Banif in the context of the state rescue, as well as absorbing Banco Popular Portugal, the local arm of the struggling Spanish bank acquired by the Santander Group in 2017, has moved Santander Totta slightly ahead of Millennium in terms of asset size.
“Integrating Banco Popular involved three main challenges,” says Mr Castro e Almeida. “We had to guarantee its customers a smooth transition and a warm welcome, make sure that the teams coming from Popular were motivated and well integrated into our culture, and ensure that the systems and technology behind the move were working to perfection.” The operation was completed within 10 months. “With Popular we became the biggest private sector bank in Portugal, both in terms of assets and credit. That was a key aspect of the acquisition for us,” adds Mr Castro e Almeida.
Tackling bad loans
Portugal's banks have focused on strengthening capital ratios, cutting costs and offloading problem assets. The country's improving economy has helped accelerate this process, which is expected to continue at a healthy pace in 2019. “The banking system has made remarkable progress in improving the quality of its credit portfolio, notwithstanding the fact that when the effects of the crisis on the Portuguese banking sector emerged, the tools available to address them had been substantially limited at a European level,” says Carlos Costa, governor of the Bank of Portugal, the country's central bank (see interview on page 59).
In less than three years, Portuguese banks have roughly halved their non-performing loans (NPLs) in gross terms, from a peak of €50.4bn in June 2016 to €25.8bn at the end of 2018. In net terms, NPLs stood at about €12.4bn in December 2018. The central bank says the sector NPL ratio fell to 9.4% at the end of 2018, a drop of 8 percentage points over three years. The coverage ratio of NPLs has risen from 38.5% to 51.9% since 2014. Nevertheless, Moody’s says the ratio is “still very poor compared with the EU average”.
“The level of NPLs continues to be high and compares unfavourably with the European average,” says Mr Costa. “It is therefore important that the current NPL reduction trend is maintained and that losses on assets with little chance of recovery continue to be recognised.”
Lenders are using a combination of recoveries, write-offs and loan portfolio sales to clean up their balance sheets. In the last three months of 2018, CGD, Santander Totta, Novo Banco and Montepio, a savings bank, closed or announced disposals estimated to have reduced the stock of NPLs by more than €3.7bn. Sales of foreclosed real estate assets, which continue to affect the asset quality of some of the largest banks, particularly Novo Banco, are also expected in 2019.
Non-performing asset reduction plans submitted by banks are continuously monitored and challenged by the supervisory authorities. CGD aims to reduce its NPL ratio to below 7% by 2020, down from 9.6% in the third quarter of 2018. Millennium has set a target of reducing its non-performing exposures to about €3bn in 2021, down from €6.3m in September 2018. BPI plans to cut its NPL ratio from 4.3% to below 3% over the same period.
Although Portuguese NPL ratios remain high, BPI chief economist Paula Carvalho does not consider them an important restriction on bank performance. Rather than difficulties in obtaining bank finance, she sees concerns over profitability and demand as the main factors inhibiting firms from investing. “The provision of new credit to households and companies is advancing at a sound pace,” she says. “I think we will continue to witness a sustainable reduction in non-productive credit in the system over the next couple of years.”
Lingering concerns
A steady improvement in capital strength faltered slightly in 2018, with the average CET1 ratio for the Portuguese banking sector slipping back from 13.9% in 2017 to 13.2%. The ratio, boosted by eligible own-fund instruments, has increased from 7.4% in 2010 and stands comfortably above the European Central Bank’s minimum requirement. The total solvency ratio rose from 9.8% in 2011 to 15.1% at the end of 2018.
“The financial sector has gone through a rather complicated period, but fortunately it is already in a new phase, with most banks strengthening their capital positions, and being able to reorganise their structures and activity,” says Mr Castro e Almeida of Santander Totta.
Reminders of the recent turbulent past are never far away. Novo Banco posted a net loss of €1.41bn for 2018 and restated its 2017 net loss as €2.29bn. The bank, salvaged from the ruins of Banco Espírito Santo, has asked the government to make a further support loan of €1.14bn to the bank resolution fund, which owns 25% of the lender.
In May 2019, an appeals court upheld a Bank of Portugal decision to fine Ricardo Salgado, former head of the Espírito Santo family group, €3.7m for “ruinous management” when he was chief executive at Banco Espírito Santo.
Mr Salgado, who denies any wrongdoing, also faces criminal charges as part of a wide-ranging corruption case known as Operation Marques, in which Socialist former prime minister José Sócrates and several others have also been charged. Meanwhile, a second parliamentary inquiry is under way into loans made by CGD between 2000 and 2015 following the leaking of an independent audit that exposed allegedly questionable lending practices that purportedly led to heavy losses.
In an effort to achieve more sustainable growth, banks have scaled back their branch networks and workforces, bringing down cost-to-income ratios. The number of bank employees in Portugal has fallen by almost 12,000 since the financial crisis to about 46,700, according to APB figures. The total branch network has shrunk by almost 2000 to just over 4000.
Efficiency programmes have seen the cost-to-income ratio of Portugal's banks fall from a sector average of about 65% to 60% over the past five years. A further 5 percentage point cut would be needed to reach pre-crisis levels. The average cost-to-income ratio for the top five lenders was close to 58% in 2018, varying between 46% for Millennium and 68.9% for Novo Banco.
Driving innovation
As most banks move back into profit, the competitive focus is on digital platforms and new technologies. Millennium, for example, is working with Auriga, an Italian banking software company, on a ‘branch of the future’ strategy. The aim is to create a new level of customer service, using a combination of advanced software and hardware to deliver better 24-hour physical bank branches.
Mr Maya says there is an opportunity for Millennium “to confirm our leadership in innovation, using all our commercial channels to manage the challenges of digital transformation and to ensure we provide top-quality universal service to our growing customer base, both individuals and companies”. The bank aims to lift the percentage of customers using digital channels above 60% by 2021, up from 56% today.
At the end of April 2019, Millennium launched a “faster, simpler and more intuitive” version of its mobile banking app based on ideas and experiences provided by customers. The app includes “bureaucracy-free online personal and car loans” and a privacy mode that can be used in public without revealing account information. The bank hopes to see more than 45% of its 6 million active customers using mobile banking within three years, up from a current level of 35%.
BPI aims to leverage its strong position in home banking. Almost half of its individual customers and more than 84% of corporate clients currently use the bank’s digital channels. This creates important opportunities for driving sustainable growth, according to Mr Forero. “BPI’s strong capital position, financing capability, prudent risk policy and commercial strength empower us to drive growth areas such as corporate, small business and consumer loans as well as investment and savings,” he says.
BPI’s strategic plan for 2019 to 2021 targets 5% annual growth in lending, above the forecast market average, and a 3% annual expansion in customer resources, with important contributions from mutual funds and insurance. “We also expect to reach an annual growth rate of 7% in core revenues by 2021, while keeping recurrent costs flat,” says Mr Forero.
Santander Totta has launched the Spanish group’s ‘Work Café’ concept in Portugal, that is, spaces for clients and non-customers that bring together a bank branch, a co-working area and a coffee house. “We have also launched a platform for mortgages that we believe will have an important impact in the market and allow for a significant reduction in the number of days needed to formalise contracts,” says Mr Castro e Almeida.
“We are investing significantly in innovation and digitalisation,” he adds. “The aim is to offer our clients the best and most convenient products and services, while at the same time ensuring that, from the internal processing perspective, we have the best and most agile structure to do so in place.” Openbank, the Santander Group’s digital offering, currently being tested in Germany, is scheduled to be launched in Portugal and the Netherlands later in 2019.
For Mr Castro e Almeida, technological change “starts with customers, not fintechs”, companies whose success he sees as a straightforward result of giving bank customers the services they want. “Banks that fail to adapt and are unable to cope with this transformation will have a very tough time in the near future,” he warns.
