This year marks the coming of age of Portuguese banks. Twenty-one years ago, the licensing of the first foreign banks signalled a tentative opening up of a sector that had undergone wholesale nationalisation in 1975 following the leftwing “revolution of flowers”. The first private domestic banks set up shortly afterwards and in 1986 the long process of reprivatisation began.
In the succeeding two decades, Portuguese banks have been transformed almost beyond recognition. Families whose banks were seized by the state, like the Espírito Santos and Mellos, bought them back and turned them round. In 1985, a handful of northern businessmen provided financial backing for a new bank, now Millennium BCP, which today is not only Portugal’s biggest financial group, but also the country’s largest company.
New landscape
Mergers, acquisitions and inward investment from Spain have also radically altered the landscape. After a wave of consolidation in 2000, Portugal’s financial services sector became one of the most concentrated in the EU, with the five largest banks accounting for 80% of total assets. In the same year, Spain’s Santander Central Hispano mobilised EU support to overcome resistance from the Lisbon government and acquire a large slice of the Portuguese market, where it now enjoys a share of almost 12%.
Portuguese banks now count themselves among the most competitive in Europe, outperforming most of their EU peers in terms of average return on assets, efficiency ratios, asset quality and productivity. “Banking is by far the most competitive sector of the Portuguese economy and the area where Portugal is closest to the top European benchmarks,” says Paulo Teixeira Pinto, who in March succeeded founder Jorge Jardim Gonçalves as chief executive of Millennium BCP.
Spark of change
The success of Portuguese banking is largely attributed to the liberalisation that began in 1984, exposing banks to international competition and later leading to market liberalisation and privatisation. The state withdrew from all but one bank, Caixa Geral de Depósitos, which today operates independently and competes on equal terms with the private sector.
Bank capital was also opened up to minority foreign shareholdings, widely seen as a beneficial influence. “Most Portuguese banks now have important foreign institutional shareholders. This ensures not only good governance but also a very open-minded attitude towards the challenges ahead,” says António Guerreiro, chairman and chief executive of Banco Finantia, an independent investment bank.
Partnerships with foreign banks, which are often cemented by cross-shareholdings, are strategically important. But Portuguese banks are resolute in resisting any attempts at control. “It is a central part of Millennium BCP’s strategy to remain independent of any shareholder and to keep our decision-making centre in Portugal,” says Mr Teixeira Pinto. “We will not participate in any consolidation process in which we could be swallowed up or dominated.”
Santander’s entry into Portugal was facilitated by the decision of the late business magnate António Champalimaud to sell his financial group, against the wishes of the government, for – as he put it – “a barrel of money”. But most Portuguese banks share Millennium BCP’s determination to maintain their independence.
In the view of Joaquim Gões, a board member of Banco Espírito Santo (BES), the country’s third-largest financial group, it is possible for Portuguese banks to avoid being taken over by much larger European groups. They must maintain their competitive edge over foreign rivals, strengthen customer segmentation and service quality at home and focus on well-chosen niche markets abroad.
In trying to keep that edge, the banks are beginning to pursue separate paths. In the past decade, the sector has thrived on the exponential growth of mortgage lending. But as the house-buying boom begins to subside, banks have started to seek new sources of growth in strategies that are leading them in different directions.
From a high of more than 20%, annual growth in house-purchase loans has been falling in the past three years, reaching about 11% in 2004. “The era of double-digit growth in mortgage lending is coming to an end. The challenge is to find alternative areas for expansion,” says João Freixa, vice-president of Caixa Geral de Depósitos, the biggest mortgage lender in Portugal.
“The past 10 years have been marked by tremendous growth in mortgage portfolios,” he says. “The decade before that was a period when banks focused on customer service, high net-worth individuals and starting up factoring, leasing and other services in the wake of privatisation. In the next 10 years I think we’ll see Portuguese banks pursuing several different models of development.”
Target segments
The new areas being targeted are mainly segments in which activity levels are significantly below the European average. “Credit cards, consumer credit and middle-market corporate lending are all strong areas for future growth,” says Miguel Bragança, chief financial officer of Santander Totta, the fourth largest banking group. “Our aim in these segments is to build market share in new business rather than compete with rival banks for existing customers.”
In four years, this strategy has helped Santander Totta to gain market shares of about 15%, 18% and 10% in the new production of mortgage lending, investment funds and insurance respectively. In credit cards, the group’s overall market share has risen from 6% to 10%.
Millennium BCP is moving in a different direction, in which consumer lending and credit cards have a lower priority. The group signalled this strategy in January when it announced the sale of Credibanco, a consumer finance operation, for €65m to Sofinco, the specialist consumer credit subsidiary of France’s Crédit Agricole.
“Our main focus for growth is the affluent market,” says Mr Teixeira Pinto. “We have ambitious targets for private banking and asset management, areas where we’re well below the market share we believe we can attain. Lending to small and medium-sized companies is another segment where we aim to achieve strong growth.”
Beyond tapping into new markets, banks see additional room for growth in cost-cutting. Overall efficiency levels are above the European average following big rationalisation efforts after the merger wave in 2000. Investment in technology has also been strong. As a result, operational costs as a percentage of banking income have fallen from 63% in 1999 to just over 55% in 2004.
Room for improvement
Millennium BCP, with a 2004 cost-income ratio, including amortisations, of 58.6%, and Banco BPI, with 59.7%, have the most room for improvement. In addition to further staff reductions through early retirement agreements, Millennium is investing in re-engineering the way in which information technology serves banking operations.
“In conceptual terms, our aim is to do away with the traditional division between front and back offices,” says Mr Teixeira Pinto. “Everyone in the bank will have commercial targets, even those who have no direct contact with customers. Operational staff will serve internal customers and will have precise targets to achieve in terms of efficiency levels and profitability.”
Banco BPI, the smallest of the top five banks, is seeking to contain costs and lift productivity through an early retirement programme, investing in operational and technological optimisation, managing its branch network more pro-actively and bringing in younger, better qualified employees. Like other banks, it is also outsourcing non-core activities and encouraging the migration of low value-added transactions to internet, telephone and ATM channels.
BES has been changing its growth model since the beginning of the global economic downturn in 2000, says chairman Ricardo Espírito Santo Salgado. “We foresaw a drop in lending growth, which at that time was between 15% and 20% a year but has since fallen to about half that level. Our strategy was to shift our focus to services, investing heavily in quality, training and segmentation to provide more sophisticated customer services.”
Luís Bento dos Santos, a Santander Totta board member, says a recent study by the group illustrates how effective a renewed focus on customer satisfaction can be in lifting business volumes. The survey, based on 2261 test transactions at 567 of the group’s branches, showed a 47% difference in business volume for branches that complied with more than 90% of the bank’s “personalised service” goals compared with branches that met less than 80% of those targets.
Growth abroad
Banks are also seeking new sources of growth outside Portugal. BES, for example, has been particularly successful in increasing fee income from investment banking and advisory services in overseas markets. Partly by sharing the expertise of the group’s London-based team, BES has won important project finance consultation contracts in the UK, Spain, Brazil, Bulgaria and elsewhere. “When a market like ours is contracting, diversity is vitally important,” says Mr Salgado.
The bank that is expanding the most overseas is Millennium BCP. It has invested heavily in setting up two large-scale retail banks abroad: Millennium Bank in Poland and NovaBank in Greece. “We no longer see ourselves as a Portuguese bank with overseas operations,” says Mr Teixeira Pinto. “We have become a multi-domestic bank. That means we are committed to providing the same services with the same responsibilities and the same ambition in Portugal, Poland and Greece.”
“One consequence of this strategy is that our domestic market has grown from 10 million to 60 million. It also means that the question we ask ourselves about Poland and Greece is ‘what resources do we need to meet our goals’ rather than ‘how can we grow given the resources we have’. Our objective is double-digit market shares that will place us among the top five banks in both countries.”
Millennium BCP has a market share of 4% in Poland and 1.5% in Greece. In the medium term, the group aims to increase the two banks’ contribution to total earnings to 33%, up from about 5% now. The operation in Greece, a start-up from scratch, is a replica of the Nova Rede retail network that proved hugely successful in Portugal. It has achieved breakeven in less than four years, a year faster than Nova Rede.
The group’s operations in Poland are on a larger scale, but Millennium Bank, which has a cost-to-income ratio of 90%, is the result of a process of acquisition, merger and restructuring that will take longer to bear fruit.
Integrative approach
Meanwhile, Millennium BCP is creating a common operation centre for the three banks and sharing best practices from country to country through an Innovation Forum. For example, door-to-door mortgage sales forces are a successful concept in Poland that the bank plans to import into Portugal.
Staff are being interchanged in the same way and many Lisbon committee meetings are now conducted only in English. Consultancy Egon Zehnder has been hired to study the group’s human resource capacities to ensure that “the right person is in the right job in the right place”.
