Steady improvements in asset quality and capitalisation since 2016 have materially strengthened Portugal’s banks.
The top players today are less sensitive to the confidence of foreign investors and unexpected blows to asset quality than was often the case in the past. And despite the current challenging global geopolitical and macroeconomic environment, analysts see no material evidence of balance sheet deterioration.
“The Portuguese banking sector remains highly competitive, given the number of financial institutions in the market and the moderate size of the country’s economy,” says Julien Grandjean, director for financial institutions at Fitch Ratings. “Pricing discipline has improved. The sector remains dominated by local players and competition from foreign entities is limited to Spanish banks, most notably CaixaBank [and] Santander, which both have well-established franchises in Portugal.”
However, Mr Grandjean says the Spanish banks are so well entrenched in the Portuguese market that there is less incentive for them to put pressure on margins to gain market share than some of the smaller players.
A more favourable position
Portuguese banks’ efficiency levels are at a much higher standard than the EU average. “The cost-to-income ratio at the end of December 2022 stood at 46%, compared with a 61% average for EU banks,” says María Viñuela, vice-president and senior analyst for Europe, the Middle East and Africa (EMEA) banking at Moody’s Investors Service. “This has shown further improvement since last year, thanks to improved operating income. We believe this is likely to continue throughout 2023, as higher rates will compensate for a rise in costs.”
Most Portuguese bankers voice cautious optimism over the outlook for continued profitability into 2024. Pedro Castro e Almeida, CEO at Santander Portugal, says households and businesses continue to adjust to higher costs and prices, with pressure on business margins and purchasing power combined with the effects of rising interest rates. Santander is Portugal’s largest privately owned bank in terms of domestic lending, with a market share of around 18% in total loans and 13.9% in deposits.
“The economy is in a position of full employment and this stability will be decisive for consumer confidence,” says Mr Castro e Almeida. “Economic growth is expected to decelerate more sharply this year, although it should remain on positive ground and it is expected that recovery will begin in the second half of the year.”
Pricing is competitive on the asset side for Portuguese banks as the system is quite concentrated
He says Portugal is starting from a slightly more favourable position than its European peers, with a greater level of sustained recovery and lower unemployment. “But it will not fail to suffer the effects of high inflation and rising interest rates,” says Mr Castro e Almeida.
Banco Português de Investimento (BPI), another major player in the Portuguese market, is owned by Spain’s largest domestic player, CaixaBank, which in 2018 acquired BPI’s entire share capital. CEO João Pedro Oliveira e Costa sees the next two years as a period of some uncertainty, due to geopolitical and social tensions, inflation and rising interest rates. “In this fast-moving context, we will have to adapt and monitor closely all these factors and their consequences on our activity, while modernising and … keeping business as usual,” he says.
“Our guidelines are clear: consolidate our growth trend, supported by investment, innovation and sustainability, obviously putting the interest rate and inflation scenario [at the] top of our minds and acting to manage its consequences.”
Mr Oliveira e Costa says BPI has the liquidity and capital to continue to support the economy, invest in environmental, social and governance measures, and build on its leadership in responsible banking in an economic environment that requires special support for the most vulnerable.
The banks share a concern over the impact of increased inflation, though as Elena Iparraguirre, director of EMEA financial institutions ratings at S&P Global Ratings, points out, Portuguese banks have focused strongly on reducing their operating infrastructure over the past few years, and are well-placed to face inflationary pressure on costs. “Pricing is competitive on the asset side for Portuguese banks as the system is quite concentrated,” she explains.
Attracting new business
Ms Iparraguirre says the five big banks offer more or less the same products. “The market is not very big and they are all competing for the same customers. Competition on the deposit side is lower as the banks are quite liquid. They need to keep their funding costs under control to grow their margins now that interest rates are rising. That said, you also have smaller players which can be tempted to put pressure on margins to gain market share.”
Paulo Macedo, CEO at state-owned Caixa Geral de Depósitos (CGD), Portugal’s largest bank, says uncertainty around economic performance, and the headwinds of elevated inflation and restrictive monetary policy when the effects of the Covid-19 pandemic started to abate, have all contributed to subdued growth in business volumes. “All domestic market players are competing for growth with stronger intensity, putting margins and profitability under pressure,” he says. “Retaining existing clients and attracting new business is a permanent challenge.”
Miguel Maya, CEO of Millennium bcp, says some cooling of economic growth is expected, driven by the effort to contain inflation, but this does not reflect any structural problem in the Portuguese economy, which is expected to grow around 1.8% in 2023, according to the Bank of Portugal. “After a period of struggle against inflation and some turbulence in the financial markets, I believe 2024 will be a year of greater predictability and normalisation, so long as we do not have to face any new and unexpected major disruptions,” says Mr Maya.
given the sudden rise in rates, we may see increased pressure on individual customers with loans
He says inflationary pressure led central banks to swiftly invert monetary policy after a long and abnormal period of negative interest rates. “Of course, given the sudden rise in rates, we may see increased pressure on individual customers with loans,” he says. “But I do not expect this to be a significant issue, given the resilience shown by the labour market in Portugal.”
Novobanco’s CEO Mark Bourke says that in a historical context, the market is witnessing a normalisation of rates, and therefore the banking business is viable and contributes to the functioning of the economy. Novobanco was created from the carve-out of assets and liabilities from Banco Espirito Santo, after its 2014 collapse. The bank is owned by the US private equity fund Lone Star, which acquired a 75% stake in 2017. “A potential deterioration of asset quality, as a result of higher rates, is expected to be contained if rates stabilise at, or close to, recent levels,” says Mr Bourke.
Too many banks
The Espirito Santo collapse was a major shock to Portugal’s banking system. One of the questions hanging over the sector is whether more takeovers and mergers are in store.
“Consolidation is the big unknown,” says Ms Iparraguirre at S&P. “Mergers, takeovers and different paces of organic growth in the past few years have reduced the system’s disparity in size. The big question mark is the future of Novobanco. There is uncertainty over their private equity owner Lone Star’s possible exit strategy in the medium term and whether this will take the form of an initial public offering or another bank owner.”
Novobanco has downplayed speculation about a possible withdrawal from the Portuguese market. A bank source says, “Contrary to what has been mentioned recently in the news, Lone Star has not initiated any contacts to sell its stake in Novobanco nor does it intend to start a sale process this year.”
there are still too many banks in Portugal and this is evident in the average profitability of the sector
Portuguese banks began a process of consolidation in 2000, when several mergers and acquisitions took place involving four out of the seven largest banking groups. The magnitude of these operations led to profound changes in the structure of the country’s financial services system. Banco Pinto & Sotto Mayor was absorbed by BCP (now Millennium bcp), BTSM Investments was acquired by CGD, and Crédito Predial Português was acquired by Banco Totta e Açores. In 2000, the then Banco Totta was acquired by Spain’s Santander Group. Despite these deals, the Portuguese banking system is still not as highly concentrated as in other European countries.
“In terms of consolidation, and analysing the size of the Portuguese market, we think there are still too many banks in Portugal and this is evident in the average profitability of the sector, which is one of the lowest in Europe and well below the cost of capital of banks,” says Santander’s Mr Castro e Almeida. “As a result, there will be either mergers or some banks will reduce their size and lose market share.”
One area of focus is digitisation. Fitch’s Mr Grandjean says Portuguese banks have been moving towards European market standards, but they are less advanced than Europe’s digital banking leaders. “The level of customer willingness to engage in digital business is lower than in northern Europe, although it is increasing,” he says.
Virtual reality
Santander’s Mr Castro e Almeida says it has been necessary to invest in talent and technology, innovate, reformulate and, most of all, to change mentalities. “By the end of 2022, we had reached more than 1.1 million digital customers — an increase of 115,000 compared with the same period the previous year — representing 62% of the total number of loyal customers. Sales through digital channels represented almost 50% of the total. This dynamic reflects the commercial and digital transformation that has been carried out, aiming to improve our customers’ experience and satisfaction.”
For BPI’s Mr Oliveira e Costa, digital transformation represents one of the bank’s strategic pillars. “We have two centres of excellence for innovation and new business and for artificial intelligence,” he says. “These are focused on areas like Web 3.0, decentralised finance, open banking and robotics.” Last year, BPI launched BPI VR, the first virtual reality bank branch in Portugal and one of the first in the world.
The BPI VR concept store is BPI’s first step into the metaverse and demonstrates the bank’s focus on innovative omnichannel customer experiences. The bank recently launched Portugal’s first ‘All in One’— a new concept of financial commercial space, with which the bank intends to transform the experience of banking customers in the physical channel. “Located in Lisbon, the BPI All in One branch combines a personalised service with more than 100 managers, with the agility and convenience offered by the most innovative technologies, like the metaverse, robot-concierge and digital check-in,” explains Mr Oliveira e Costa.
Future signs: BPI is pioneering the idea of the robot concierge
Millennium bcp’s Mr Maya says the bank is committed to a symbiotic relationship between people and technology, combining a commercial network made up of high-quality professionals and advanced technological solutions that provide distinctive user experiences. “This is one of our central and differentiating elements — a reliable bank with a strong technological component,” he says. “We prioritise investment and innovation in mobile platforms and this has made a decisive contribution, with 63% of customers using our mobile applications last year for their daily transactions.”
In personal loans, he says production levels through the digital channel were 78% higher in 2022, with the app responsible for 88% of digital transactions. “This digital transition also contributed to a notable improvement in the bank’s efficiency. The cost-to-income ratio at the consolidated level dipped below 40% in 2022, ahead of the target set out in our strategic plan.”
Novobanco’s Mr Bourke says the bank has implemented an omnichannel approach, thus providing customers with a consistent and integrated experience across all channels. ‘‘The most visible facets of this reinvention are … the branch network, where we have developed an innovative concept in the market that combines technology, proximity to the customer and openness to the community, and … digital, which has been a determining factor for the accelerated transformation of Novobanco, both back- and front-office.”
In 2022, more than 67% of operations in the individual client segment were carried out in self-service mode. This increased to 83% and 95% in the small businesses and medium-sized companies’ segments, respectively.
CGD’s Mr Macedo says the bank’s approach to digital transformation addresses three major goals: improved customer experience, personalised service, and an increase in omnichannel sales in the retail and corporate segments. “As a result of a consistent investment in digital solutions over the years, CGD has achieved a total of 2.2 million digital customers, representing 65% of the total customer base,” he says.
Whatever the future holds ... we will need an omnichannel offering
“Equally relevant has been the performance of digital sales, which in 2022 represented 80% of the total, with a 7% year-on-year growth. These achievements have been a result of an innovative and comprehensive strategy, highlighted by the adoption of artificial intelligence in digital customer service, with more than three million conversations in 2022 by more than 1.1 million customers.”
“Whatever the future holds in terms of the fast-moving technological evolution and changes in customer needs, we will need an omnichannel offering, close to the customer, with a personalised service whenever necessary, and with innovative and quality products that add value for our customers,” says BPI’s Mr Oliveira e Costa. “There will be economic and geo-strategic challenges and uncertainties but after all, banking is about managing risks. We see many business opportunities ahead.”
He cites the rise in interest rates as a positive factor in profitability, but it also has an opposite side effect, mainly on the non-performing loan (NPL) side. “Nevertheless, we are comfortable with our track record in terms of credit quality and BPI holds the best NPL ratio in Portugal. As we have always done, we are monitoring the current situation with the utmost prudence.”
Novobanco’s Mr Bourke sees a medium-term need for the Portuguese economy to adapt to several structural transformations. “These include the energy transition, involving the assessment and reporting of financial climate risks and a shift of financing towards carbon neutrality, the digitisation and automation of economic activity and transformations in the labour market, forcing organisations to be agile and adaptive,” he says.
Santander’s Mr Castro e Almeida sounds a note of caution on the outlook for Portugal’s economic growth this year, which he believes will decelerate more sharply, albeit remaining on positive ground. “It is expected that a recovery will begin in the second half of the year,” he says.
On balance, the outlook for Portugal’s banks could be described as cautiously positive. “The NPL book is much lower today than in the past,” says S&P’s Ms Iparraguirre. “From 2014 to 2016 the system’s NPL ratio exceeded 20%. It has now been reduced to 5%, though some legacy assets remain to be cleared up. We could see some problem loans emerging this year and next. The corporate sector is, in general, more indebted than in other countries, but any upsurge in NPLs is likely to be manageable.”
