Carlos da Silva Costa, Portugal’s central bank governor, talks to Peter Wise about the country’s priorities, which include further reduction of bad loans and improving profitability, while tackling forthcoming challenges such as an ageing population.

Carlos da Silva Costa

Q: How has Portugal’s banking sector changed since the financial crisis?

A: Our most immediate concerns were access to liquidity and the strengthening of capital ratios. At the same time, banking supervision became much more intrusive and forward-looking and the regulatory environment was significantly strengthened. The country’s full participation in the banking union, and particularly in the single supervisory and resolution mechanisms, can be seen as a natural corollary of the much more demanding strategy that we have consistently been following since mid-2010.

Major progress has been achieved over the past eight years. Portuguese banks are now increasingly robust, as evidenced by stronger liquidity and capital positions, reinforced shareholder structures in major banks and improvements in asset quality. The banking system has recognised more than €33bn in credit impairments and the biggest banks have raised over €20bn in equity.

The system’s core equity Tier 1 ratio increased to 13.9% at the end of 2017 (compared with 7.4% in 2010) [and] the loan-to-deposit ratio decreased to 93% at the end of 2017 (compared with 151% at the end of 2010). In regard to asset quality, while economic growth has certainly been beneficial, an ongoing comprehensive strategy to reduce non-performing loans [NPLs] is also bearing fruit. Considering the whole banking system, NPLs have decreased by more than €13bn since the peak recorded in June 2016. Deposits have also been quite resilient, showing that depositor confidence has been preserved.

Q: What further steps are needed to reduce risk?

A: Improving profitability is a priority. Given that interest rates are still low, further progress on cost reduction is needed. This is even more pressing in view of stricter regulatory requirements and the trend towards digitalisation. Legacy problems must also be tackled. Despite recent progress, the stock of NPLs remains a fundamental challenge. It is worth noting that, excluding Novo Banco, the banking system’s return on equity stood at 4.1% at the end of 2017. Banks need to continue delivering on the targets in their NPL reduction plans.

The sustainability of business models, risk management controls and internal governance processes are also key to guaranteeing the soundness of the banking system. These elements are closely monitored and challenged by the single supervisory mechanism and the Bank of Portugal.

Q: What reforms are essential to ensure Portugal’s sustained growth?

A: There is no silver bullet to unlock growth potential. The convergence of gross domestic product per capita towards the EU’s highest performers requires a combination of higher labour and capital productivity, as well as adequate institutions – including sustainable macroeconomic policies and a friendly business and investment environment. A comprehensive and consistent set of policy measures and institutional developments will be needed to deliver the right incentives to economic agents. Measures and reforms tend to be complementary and self-reinforcing. Sequencing and proper ‘before and after’ evaluation will be key.

Given that interest rates are still low, further progress on cost reduction is needed 

This is urgent, as the Portuguese economy faces a set of long-term challenges that require special attention. One of these is ageing and the expected decline in the working-age population. It is important to maintain investment in education and to ensure that the education system keeps up with technological transformations and company needs. Increasing capital-per-worker is another important challenge. While reducing corporate indebtedness – which is still high – is a necessary condition for higher investment, we also need to review our institutions, policies and practices to create a more investment-friendly environment.

The sustainability of growth in the Portuguese economy greatly depends on the dynamics of the tradeable sector. This means we must create the conditions to promote capital accumulation in the tradeable sector and increase efficiency in the non-tradeable sector. I am thinking about the usual determinants of investment such as the functioning of the judicial system, the tax laws and administration, labour market institutions and the enforcement of competition rules.

Q: Is fintech a threat or an opportunity for Portuguese banks?

A: Fintech is a threat but also an opportunity for incumbents. Fintech companies should not be seen only as competitors, but also as possible complementary institutions, or partners. Indeed, they may be instrumental in helping incumbents overcome the constraints associated with low activity growth and low profitability, and also in helping banks recover the trust and reputation undermined by the financial crisis.

Our main concern, which is totally aligned with that of the European authorities, is to ensure a level playing field for both incumbents and new players, to promote consumer protection and safeguard financial stability, while not hindering innovation, by applying the principle of ‘same services/activities, same risks, same rules and same supervision’.


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