Portuguese banks return favour on financial aid

Portugal’s banks are hoping their hard-won resilience – achieved in the decade since the European sovereign debt crisis – will help them navigate a way through the coronavirus pandemic.

“We are clearly facing a defining moment, a challenge unlike any we’ve seen before,” says Miguel Maya, chief executive of Millennium bcp, Portugal’s largest listed bank. “Fortunately, our restructuring efforts mean we are much better prepared for this crisis than we were for the financial crisis.” 

Pedro Castro e Almeida, chief executive of Banco Santander Portugal, echoes these sentiments. “Our consistent strategy, based on asset quality and cost efficiency, will help us mitigate the risks and adverse impacts [of the pandemic], but we will not be immune,” he says. 

Similarly upbeat is Pablo Forero, outgoing chief executive of Banco BPI, who says: “We face these uncertain times well prepared. We not only have the benefit of a solid capital position, but also the best non-performing [loans] (NPL) ratio in Portugal.” BPI’s NPL ratio stood at 2.3% in March 2020. Mr Forero, who announced his retirement in May, will be succeeded by João Pedro Oliveira e Costa, a long-serving senior executive at the bank.

Covid-19 fears

Covid-19 arrived in Portugal in early March, later than in most EU countries. Compared with neighbouring Spain and several other European countries, coronavirus infection and mortality rates in Portugal have been relatively low. However, António Vieira Monteiro, the then chairman of Santander Portugal and its chief executive from 2012 to 2018, was, sadly, among the first people to die from the disease in Portugal. He was 73 and had recently returned from a holiday in northern Italy. 

There is acute concern over the impact of the pandemic on a small, open economy where memories of the hardship and recession triggered by the previous financial crisis are still fresh. 

“This crisis looks as if it will be long and severe,” says Mr Maya. “To serve our customers, we have to defend the quality of the bank’s balance sheet, because we will only be able to support the economy if we remain healthy, with a robust balance sheet, with [the necessary] capital, liquidity, and profitability.”

Millennium, Santander Portugal and BPI form the core of Portugal’s private sector banking industry (the latter two are subsidiaries of Spain’s Santander and CaixaBank groups, respectively). State-owned Caixa Geral de Depósitos (CGD), the largest bank, and Novo Banco, the ‘good bank’ salvaged from the collapse of Banco Espírito Santo in 2014, make up the top five lenders, which together account for more than 80% of the system. Lone Star, the US equity fund, owns 75% of Novo Banco.

Historical bailout

The sector has taken big strides forward over the past decade, but it still bears the scars from 2011-14, when Portugal was bailed out by the EU and the International Monetary Fund on condition of a tough economic adjustment programme. NPLs spiked as BES, once the biggest listed banking group in Portugal, collapsed and other lenders buckled.

In subsequent years, the state paid €3.9bn into CGD as part of a €5bn recapitalisation and rescued Banco International do Funchal (Banif), the seventh largest lender, at a cost of €2.3bn. Santander Portugal went on to acquire Banif in 2017.

The billions of euros taxpayers have pumped into Portugal’s banks since the financial crisis – an estimated €25bn between 2007 and 2019 – have coloured public attitudes to the sector as Covid-19 poses a new threat to jobs and businesses. 

“Banks must not forget what the country has given them,” António Costa, Portugal’s Socialist prime minister, has said. “It is now time for them to help those in need.” Rui Rio, the centre-right opposition leader, put it more strongly, saying it would be “shameful” if banks posted profits in 2020 or 2021.

The billions of euros the state has loaned to Novo Banco under the sales terms agreed with Lone Star remain a particular point of political contention. Parties to the left of the minority Socialist government question its pledge that supporting the loss-making lender “will not cost taxpayers a euro”. 

Returning the favour

Banks have heeded the message. “We know the importance of being helped,” says Mr Maya. “Millennium received, and has paid back, state support during the financial crisis and we won’t forget that. We are here to stand by our customers and to support them to the best of our abilities.” 

Mr Castro e Almeida of Santander Portugal told a parliamentary committee questioning bank chiefs in April that “banks will not profit from this crisis; on the contrary, they will be among those most strongly affected”. He said lenders were likely to register hefty impairments as result of the pandemic.

Since the 2011-14 bailout, Portuguese banks have worked hard to strengthen capital ratios, with the average common equity Tier 1 solvency ratio for the sector almost doubling from 7.8% in 2011 to 14.1% in 2019.

Paula Carvalho, chief economist at BPI, says deleveraging has also been “intense” in recent years, with the sector’s credit-to-deposit ratio standing at 88% in September 2019. She acknowledges, however, that “challenges remain”.

NPLs too high

These mainly concern NPLs. Big efforts to reduce NPLs have built more resilience into the sector in the wake of the global financial crisis. Total NPLs fell from a peak of €50bn in June 2016 to €17.2bn in December 2019. The average NPL ratio for the sector dropped from almost 18% to just more than 6% over the same period. 

Millennium, for example, reduced its NPLs by more than €1.6bn last year.  “We have done a thorough job of improving the quality of our balance sheet and outpacing expectations,” says Mr Maya. “The strong and continuous reduction of [NPLs], along with other efficiency improvements, has helped make us one of the most efficient banks in the EU.”

For the Portuguese banking system as a whole, however, the level of NPLs remains roughly double the European average. Outstanding loans stood at €234bn in 2019. Cutting them further, says Ms Carvalho, will be key to achieving sustainable profitability levels. Covid-19 is likely to make it harder to reach that goal, however, partly because the pandemic is expected to lead to low interest rates remaining place for longer than previously envisaged.  

At the same time, measures to mitigate the economic impact of the disease will place additional pressure on bank balance sheets.

“We need to be prepared to act if the pandemic lasts longer and the economic impacts go deeper, because ultimately it will affect our customers’ ability to pay back their loans,” says Mr Castro e Almeida. 

Debt moratorium

Banks have been on the frontline of the Lisbon government’s economic response to Covid-19, as it seeks to ease the financial burden on struggling families and companies. In April, economy minister Pedro Siza Vieira announced a six-month debt moratorium that suspended interest and capital repayments on residential mortgage loans and corporate lending to firms in difficulties. The policy could be applied to loans worth a total of €20bn.

By May, the government estimated the measure had led to the postponement of €12bn in loan repayments and decided to extend the moratorium indefinitely, a move that banks had been pressing for.

The aim is to avert the risk of a big jump in bad loans in September, when repayments were originally due to resume. This would limit the risk to banks, said finance minister Mário Centeno, by ensuring any spike in problem debt would occur only “when the evolution of the Portuguese economy is more certain”. 

Banks have also taken independent initiatives to support their customers, extending the moratorium beyond the terms set out by the government. “We immediately decided to maintain credit lines to our customers at a time when a drop in activity could be affecting their revenues and liquidity,” said Mr Castro e Almeida at Santander Portugal. “Being close to customers and understanding their changing needs at a challenging time like this is key to supporting them over the longer term.”

In April, BPI customers, for example, made 57,500 moratoria requests on €4.8bn of loans. The bank also conceded €1.1bn in special Covid-19 credit lines.

The Bank of Portugal has given lenders an extra year before a planned increase in capital buffers comes into force, postponing the measure to the beginning of 2022. In supporting the supply of credit in this way and giving banks greater leeway to navigate the downturn, the central bank said it was using “all available policy instruments to prevent the banking system from acting as an amplifying channel for the shock triggered by the coronavirus outbreak”.

Negative outlook

Concerns over the impact of the pandemic led Fitch Ratings to revise its outlook on the main Portuguese banks downwards in April, from positive or stable to negative. While the country’s banks were more resilient than at the start of the previous crisis, the agency said, a prolonged emergency caused by Covid-19 could “threaten the sector’s viability”, constituting  “a clear risk” to its operating environment, asset quality, earnings and capitalisation. 

Moody’s also changed its outlook for Portugal’s banking system from stable to negative in April, saying it expected “asset quality and profitability to deteriorate over the next 12 to 18 months as the economy contracted in response to government restrictions aimed at controlling the spread of the virus”.

Covid-19 hit as banks in Portugal were beginning to regain their stride, having emerged stronger, leaner and more competitive from the global financial and European sovereign debt crises. In February, Millennium posted 2019 results that Mr Maya described as “the best in 12 years”. These included a 12.4% increase in pre-tax profits and a 9% gain in net interest income. 

“On a consolidated basis, we achieved pre-tax profits of €627.3m, with a significant contribution from our operations in Portugal, where we grew 79% in pre-tax profits,” he says. “We also counted on an important and profitable group of international operations, including Poland and Mozambique. Over the year we added more than 700,000 customers.”  

CGD reported consolidated net income of €776m in 2019, up €280m on the previous year. Recurring consolidated net income rose 27% to €632m, equivalent to a return on earnings of 8.1%. In the first quarter of this year, however, the state-owned lender’s net income fell by almost €40m to €86.2m compared with the first three months of 2019. This partly reflected a €60m charge for impairments and credit guarantee provisions in readiness for the economic impact of the pandemic.

Santander Portugal described its 2019 results as the best the Spanish group had ever generated in Portugal, with net earnings rising 5.5% on the previous year to €527.3m. “We made organic gains in market share and improved our profitability, supporting growth with an appropriate appetite for risk,” said Mr Castro e Almeida. “This resulted in a high rate of return on equity [ROE] and low NPL ratios.”

In the first quarter of 2020, however, the bank reported a 13.4% drop in consolidated net income in comparison with the same period in 2019, to €118.9m, and a 2.2 percentage point drop in ROE to 11.2%. Santander Portugal strengthened provisions by €30m because of the expected impact of Covid-19 and, says Mr Castro e Almeida, will continue to do so though the year. 

Hope prevails

In 2019, BPI recorded a net profit of €231m for its banking business in Portugal, excluding one-off items, which is an increase of 6%, or €13m, on the previous year. Net interest income was up by 3.2% year-on-year to €436.3m, despite the context of low interest rates. 

In the first quarter of 2020, however, BPI’s consolidated net profit fell by 87% compared with the first three months of 2019, dropping to €6.3m as the impact of the pandemic became apparent. The bank said the drop in financial markets and a €32m credit impairment charge related to Covid-19 had a combined negative impact of €47m on pre-tax profits. 

Mr Forero says he is confident that BPI’s “strong financial position, reflected in the high quality of our assets and strong capitalisation, will enable the bank to weather the current crisis and contribute to the economic recovery”.

As veterans of a crisis that reshaped and strengthened Portugal’s financial sector earlier this century, bankers are confident they can now steer a course through the Covid-19 pandemic. “The government was very fast to react to the economic threat and the measures announced to support families and companies on all fronts were the right ones,” says Mr Maya. “It is still a work in progress, of course, but we are on the right path.”