Port banks

Portugal is primed to take on the challenges of recovering from its recession, having learned lessons from past crises.

Less than a decade ago, Portugal’s banks were seen as victims of the sovereign debt crisis. In their response to the slump caused by the coronavirus pandemic, however, they believe themselves to be very much part of the solution.  

“This time, unlike during the previous crisis, we’re on the side of financing the economy and supporting renewal,” says Paulo Macedo, chief executive of Caixa Geral de Depósitos (CGD), Portugal’s largest bank. “More capitalised, abundant in liquidity and actively willing to extend credit at sustainable risk levels, our priority is to increase lending to families and companies.”

Newfound confidence

Having previously survived the turmoil of being downgraded to ‘junk’ status, restructured and, in some cases, bailed out, Portuguese banks have emerged better equipped to deal with the impact of Covid-19

“The banking sector as a whole is much better prepared and capitalised than it was when it faced the previous crisis,” says Miguel Maya, chief executive of Millennium bcp, Portugal’s largest listed bank. “This is why we were able to swiftly provide effective and broad financial support, and why we are confident of a sustainable recovery in the near term.”

If customers are visiting [bank branches] less and less, we cannot continue operating in the same way

Pedro Castro e Almeida

Mário Centeno, governor of the Bank of Portugal, the central bank, says: “The progress made by the banking system over the past decade, particularly in the past few years, has been significant,” making the sector “better prepared to deal with the negative consequences of the pandemic”. 

The solvency of the sector, measured by its total capital ratio, has increased 7.5 percentage points since the end of 2008, reaching 16.9% and 18.1% by the end of 2019 and 2020 respectively. Profitability had also been gradually recovering — until the pandemic struck. Last year it fell close to zero in aggregate terms, in line with the eurozone average. 

Bank financing structures have also seen a significant increase in customer deposits to the detriment of market instruments, making the system less vulnerable to international investors changing their perception of risk. The ratio of non-performing loans (NPLs) to total credit fell from 17.9% in June 2016 to 4.9% at the end of 2020. Operating costs as a percentage of assets have been falling since 2015, reflecting the restructuring programmes carried out in the aftermath of the debt crisis.


In 2020, state-owned CGD successfully concluded a €4.9bn recapitalisation plan, an innovative deal negotiated with the European Commission that enabled the state and private investors to invest “on market terms”, so as not to contravene EU rules on state aid. The result has been accomplished, says Mr Macedo. “Our whole organisation focused collectively for four years on meeting the 109 objectives of the plan and, except for a few that the pandemic made impossible, we’ve achieved them all.”

castro e almeida

Pedro Castro e Almeida, Banco Santander Portugal

In addition to state capital, CGD’s 2017–2020 Strategic Plan included a €500m Additional Tier 1 placement in 2017 with a risk premium that mainly attracted hedge funds, and a €500m issue of Tier 2 securities in 2018 that successfully targeted more institutional investors. 

The strategy involved reducing the number of employees by almost 2300 to around 6580 and cutting CGD’s branch network, the largest in Portugal, from 677 outlets to 543. The bank also sold Banco Caixa Geral in Spain, Mercantile Bank in South Africa and a large number of overseas branches. Sales of banks in Brazil and the Cape Verde islands are pending. “These are cases where good sense and the strong capitalisation we have achieved have led us to wait,” says Mr Macedo. 

As a result of the plan, CGD ended 2020 with a fully loaded common equity tier 1 ratio — a measure of balance-sheet strength — of 18.1%, well above the planned target of 14%. “This is a guarantee that we are well-prepared to deal with the economic crisis caused by the pandemic,” says Mr Macedo. “Our NPL ratio fell from 15.8% in 2017 to 3.9% last year and our NPL ratio net of impairments is 0.1% — one of the best in Europe. Our return on earnings was negative in 2016, reached 8.1% in 2019 and remained above the EU average at 5.6% in 2020.”

Implementing the plan also more-than-halved CGD’s cost-to-income ratio, a measure of operational efficiency, from 101.5% in 2016 to 49.8% last year.  

After the internal restructuring, recapitalisation and cost-cutting that followed the debt crisis, some bankers see consolidation as the best way to tackle low profitability and prosper in a climate of prolonged low interest rates. Mr Centeno believes mergers and acquisitions are the “natural next step” and views domestic, rather than cross-border, consolidation as “probably more likely to generate more benefits”. 

Too many banks?

While seeing some consolidation as inevitable, however, most bank executives remain focused on organic growth. “There will certainly be consolidation in the Portuguese and European banking sector over this decade, but it is not an issue on our strategic agenda,” says Mr Maya of Millennium. “Our priority is to grow organically, taking advantage of the success we are having at the mobile [phone banking] level, continuing to strengthen our relationship with businesses, increasing operational efficiency through automation, and by incorporating artificial intelligence into our business models and processes.” 

“I think it’s indisputable that Portugal has too many banks, and this cannot go on eternally,” says Pedro Castro e Almeida, chief executive of Banco Santander Portugal, one of the two top-five lenders in Portugal owned by Spanish groups. “I don’t know if the adjustment needed will be made through acquisitions, mergers or the simple disappearance of some banks. I do know that Santander already has an important share [of the Portuguese market] and that we will be focused on organic growth.”

Banco BPI, Portugal’s fifth-largest bank and part of Spain’s CaixaBank group, is also “focused on organically growing [its] domestic business”, says chief executive João Pedro Oliveira e Costa. “In the short term, I do not envision a major consolidation in the Portuguese market. We have confidence in our robust capital levels, liquidity position and leading asset quality ratios, and are ready to leverage the benefits of being part of the largest Iberian financial group,” he says.

Novo Banco, the bank salvaged from the ruins of Banco Espírito Santo (BES) in 2014, is seen as a potential acquisition target by, or merger with, other domestic banks — its merger with Millennium has been a topic of speculation before Lone Star, the US equity fund, acquired 75% of Novo Banco in 2017. Lone Star has told Portuguese media that is has no plans to sell its position over the short term. 

The bank’s losses increased by 25% last year to €1.3bn, after provisions for credit and asset risks, as well as the impact of the pandemic. Its core operating profit, however, increased by 4.5% to €369m and its net interest income rose 8.3% to €555m. Over the past six years, Novo Banco has been cleaning up its balance sheet by offloading toxic assets inherited from BES. In March, the bank’s chief executive António Ramalho, declared the process complete and forecast “a period of positive results” from the first quarter. 

After selling off bad loan portfolios, Novo Banco’s NPL ratio fell to about 9% of total loans in December, compared with more than 33% in 2017. The agreement with Lone Star included a €3.9bn restructuring and recapitalisation plan financed by Portugal’s Bank Resolution Fund, which is owned by all the banks, but largely financed by state loans. To date, Novo Banco has used about €3.6bn of these recapitalisation funds. The cost to taxpayers of supporting the bank, however, has become an increasingly controversial political issue, with opposition parties uniting against the minority socialist government last year to block an injection of capital into the lender. 

Overall resilience

Novo Banco’s losses have heavily contributed to an aggregate net loss of €293m for Portugal’s six largest banks last year, compared with an aggregate net profit of €894m in 2019. The recession caused by the pandemic has also hit core revenues, while credit provisions and impairments more than doubled in comparison with 2019. However, of the six, only Novo Banco and Montepio have posted net losses. While gross domestic product contracted 7.6% last year, almost double the decline at the height of the debt crisis in 2012, the gross stock of NPLs fell 22% as a result of sales, write-offs and cures. 

Many companies have thrived [during the pandemic], many have survived and some will fail

Miguel Maya

“The capacity developed by Millennium in recent years to reduce non-performing exposures (NPEs) meant that we were able, despite the adverse circumstances, to continue reducing our stock of NPEs last year in line with our targets, while keeping our balance sheet and capital levels strong,” says Mr Maya.

BPI cut its NPE ratio from 2.5% to 1.7% in 2020 — “the best NPE ratio in the Portuguese financial sector”, according to Mr Oliveira e Costa. “I trust in BPI’s track record of prudent risk management and feel confident that fiscal, regulatory and monetary measures will help drive economic recovery and limit the impact of NPLs,” he says.

Bankers have welcomed measures to mitigate the effects of the pandemic, including loan moratoria, state-guaranteed credit and furlough schemes. BPI, for example, has provided more than €4.5bn in loans and issued more than 100,000 payment moratoria to its customers. “Without these measures, the country might have entered into a destructive spiral that would have been difficult to reverse, aggravating and prolonging the consequences of the economic crisis,” says Mr Maya.

miguel maya

Miguel Maya, Millennium bcp

These support measures have also helped protect the asset quality of banks and contributed to a significant increase in loan volumes in the corporate and small and medium-sized enterprise sectors. Deposits have also risen as uncertainty about the future led consumers and companies to save more. The eventual withdrawal of the measures, however, is expected to have a negative impact on asset quality. Most moratoria are due to expire in September and few extensions are expected.

“The post-moratoria period will be challenging, and its impact will have a strong bearing on how the economy recovers,” says Mr Oliveira e Costa. “An increase in NPEs is likely, but we’re ready to cope with it.”

CGD is monitoring loans, says Mr Macedo. “We will assess customers as their moratoria end, trying to foresee any need for loan restructuring and helping people recover from the impact of the pandemic.” 

One of the biggest impacts of coronavirus on the way banks operate has been to speed up digitalisation. “The pandemic has probably accelerated customer adoption of digital banking by five years, representing both a challenge and an opportunity for the banking sector,” says Mr Castro e Almeida. Santander, like other banks, closed branches in 2020 and plans more closures this year. “Portugal has one of the highest ratios of bank branches to inhabitants in Europe,” he says. “If customers are visiting them less and less, we cannot continue operating in the same way.” 

Ensuring customers are included in the move to digital banking has become a key priority, says Mr Macedo of CGD, which is investing €500m in a four-year digital transition programme. Use of CGD’s home-banking platform, which has 1.8 million customers, increased by 21% in 2020 and the number of transactions rose 71%.

The challenges facing Portugal’s banks, he says, include stagnating revenues, falling margins that are being further eroded by low interest rates, little likelihood of being able to increase commissions, and a short-term increase in NPLs. Part of the way forward, he believes, is to “continue investing in digitalisation on the way towards cashless banking”.

“Many companies have thrived [during the pandemic], many have survived and some will fail,” says Mr Maya. “What happens to our customers, to their businesses and family finances, affects our operations. But the financial sector in Portugal has clearly been part of the solution, serving as a conduit for state-backed support as well as private sector initiatives. These are challenging times and the risks are real, but we are ready to take them on.”


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