THE DECLINE OF the Portuguese economy last year was as spectacular as the strong growth that it registered in the late 1990s. Recession hit with a vengeance – GDP and real per capita incomes each fell by one percentage point, the sharpest drop in the eurozone, as well as the worst performance of all OECD countries.
In this dire environment it might have been expected that the country's banks would follow the rest of the economy downhill. That's not the case – in fact four of the five banks that account for some 80% of the financial system in terms of lending, deposits and total assets, managed to grow their net income in last year's tough environment. In the case of Banco Português de Investimento (BPI), growth was an impressive 61% on the previous year.
"The leading Portuguese banks have proved very resilient despite the difficult operating environment and therefore there has been little impact of this on our ratings," says analyst Philip Smith at Fitch Ratings. "While the Portuguese economy has had a somewhat uncertain start to 2004, expectations are that positive GDP growth of around 1% to 1.5% should be achieved this year, which should enable the banks to maintain their sound profitability levels."
Enrique Díaz-Barceló, banking analyst at Exane BNP Paribas, says certain parts of the Portuguese banking market can be highly profitable. "This is the case for mortgages and SME lending," he says. "However, the deposit market is extremely competitive and funding is very expensive and scarce in Portugal, and this has made life difficult for the banks."
If a major crisis was avoided during the recession, this was to some extent a result of prudent regulatory policies. "The Bank of Portugal imposes strict regulations on the banks and this is a positive factor," says Díaz-Barceló.
"In fact last year it issued a few notices. With IAS coming in, it is unlikely that the banks will be allowed to lower their non-performing loan provisioning ratios. NPLs are still running at a relatively high rate but there doesn't seem to be any structural problems in the market. The fact that Spain is doing so well will be another positive factor for Portugal."
The banks can count on expansion in their core retail operations such as residential mortgage lending, and further recovery in the equity markets is expected to provide yet more growth in brokerage, asset management and corporate finance. "While there may still be some deterioration in asset quality, we do not expect that this will be significant, and all the leading banks have ample loan-loss reserves," says Smith.
Fit to face another downturn?
Last year was indeed the acid test for the "new face" of Portuguese banking, that is the four retail banks that have emerged from dramatic and sometimes acrimonious consolidation over the past five years.
The fifth player, Caixa Geral do Depósitos (CGD), is the giant state-owned savings bank that is not expected to be released from public control in the near term.
The question now is whether the leading banks have sufficient scale and depth to withstand another economic downswing as far-reaching as the one that was suffered last year. Is this when large foreign players will begin to weigh up Portugal's small and potentially vulnerable banking industry?
Of the top four banks, Banco Espírito Santo (BES) is a family controlled institution in which French bank Crédit Agricole also has a strong protective shareholding, while Banco Totta is already owned by big Spanish banking group Grupo Santander. That
leaves BPI and Banco Comercial Português (BCP), the country's largest bank.
However, efficient and profitable as they are, Portuguese banks are tiny compared with most of their European rivals. Last year, the four retail banks' combined net income stood at e1.3 billion, less than half of the e2.61 billion that was earned by Spanish rival Grupo Santander alone.
"The Portuguese banking market is already fairly heavily concentrated in the hands of a few players," says Díaz-Barceló. "Contrary to the situation in other European countries, the only big savings bank is Caixa Geral and there is no regional spread, like in Spain where 50% of the market is controlled by several dozen savings banks. Apart from that there are only a few big commercial banks that, together with Caixa Geral, account for over 80% of the market. That said, if a bidder were to come in with a good price and could put a convincing case to shareholders, he could get control of a bank, provided that political and regulatory authorities do not oppose the deal."
In the case of BCP, there was recent speculation about possible interest in an acquisition from Dutch-Belgian financial services group Fortis, rumours that were denied by BCP's management. Although Díaz-Barceló believes BCP has no interest in being taken over, he acknowledges that the bank would not be in a position to avoid this happening if there were a good offer on the table.
"A different story might be the type of arrangement that Banco Espírito Santo has with Crédit Agricole," he says.
"The French bank is a large shareholder of BES and went to the privatization of BES in the early 1990s. Crédit Agricole has helped them with their insurance business and they sit on the board. Together with the Espírito Santo family, they hold a more than 50% ownership in the bank. This strikes me as a good arrangement for both banks. Crédit Agricole makes a lot of money from its insurance and other businesses with BES, while the Portuguese bank last year sold a stake in its consumer lending company to its French partner. If there were a bank trying to do this with BCP, it could work. But trying to gain full control of the bank would be a much more difficult proposition."
BCP was a greenfield operation started in 1985 by exiled banker Jorge Jardim Gonçalves, who in the space of five years built up what is today Portugal's leading financial services group with a e6.68 billion market capitalization.