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March 2002

The party is over


Portuguese banks were the golden boys of European finance for years, reaping the rewards of a consumer lending boom. But Portugal has landed with a bump, with GDP growth no longer outstripping the rest of Europe. The banks are suffering, both in wholesale finance and in retail, where intense competition makes it difficult to turn a profit. Even market leader Banco Comercial Português is feeling the pinch. With opportunities for domestic mergers limited, it has expanded abroad, with mixed results.




       
Jorge Jardim
Gonçalves
It doesn't take long for a rumour to spread in a city as small as Lisbon. At the moment, most of the rumours in the banking sector are about Banco Comercial Português.
Established as recently as 1985, the bank is a success story that has won the envy and respect of its rivals and international commentators. Established under chairman and CEO Jorge Jardim Gonçalves, BCP has established a domination in both retail and wholesale finance. And analysts still highlight it as a good bet for investors in Portuguese banking. The problem is, though, that those analysts are generally advising investors to keep out of the sector altogether.
The warning signs for all Portuguese banks have been around for some time. GDP growth has been slowing since midway through last year and growth in consumer loans has been steadily falling for longer. Nor is Portugal immune to the effects of plummeting brokerage commissions, which banks around the world are struggling to deal with.
Despite the slowdown in business growth Portuguese banks have remained confident and ambitious. They see European unity as an opportunity for expansion and not just in the Iberian peninsula. What's more, they have built up competition for retail market share. And they have generally had performance figures to back up their strategy.
BCP has been the best example of this. Its ambitions led it to service its natural client bases in Portuguese-speaking Mozambique and Macau, as well as expatriate Portuguese communities in the US and France. But it really set the pace for the competition when it bought a stake in NovaBank in Greece, as well as acquiring (and later increasing) a stake in BIG Bank Gdansk in Poland. That stake now stands at around 20%, and it is scheduled to rise to 44%. It may even rise to 50%. It claims that by 2005 35% of its revenues will come from outside Portugal.
       

View graph.
The biggest risk that BCP took was to buy a stake in European insurance alliance Eureko. The bank wanted to outsource the development of insurance products through Eureko, while marketing the products itself and scooping 80% of the sales commission. It described Eureko as the "third pillar" in its international strategy.
Eureko has, however, been a big disappointment. João Ramalho Talone, the director responsible for Eureko, has left BCP's executive board and not been replaced. Three further executive board members resigned soon afterwards. Senior management claims that Talone was not pushed but left for personal reasons. But as the board shrank from 13 members to nine, it appeared that CEO Jardim Gonçalves wanted to run a tighter ship, taking decision-making ability away from representatives of his foreign acquisitions.
The reasons for this are clear. BCP's forecasts for Eureko's performance have been drastically cut back. In fact, its previous pro forma results were cut back before it released the 2001 results. In 1999, its net income on a pro forma basis was e245.6 million ($213 million). In 2000 it posted e521 million. But in 2001, once you remove the e64 million in restructuring costs, a bill that BCP had not expected, income was just e204 million. To be fair, this reflects the performance of other insurers - this has been a tough year for the sector. As Jardim Gonçalves says: "When we started with the Eureko acquisition, we had a much better environment."
It was not just that revenues were lower than expected. Eureko also had to write off e20 million from a failed internet venture. And its corporate governance structure changed completely. It started life as a loose alliance of European insurers. But when two of the network's members merged, it became what board member Antonio Rodrigues describes as a "new sort of company". Jardim Gonçalves became chairman of Eureko. Performance continues to disappoint. And the IPO has been indefinitely postponed.
"The first, second and third priority is to have excellent performance," says Jardim Gonçalves. "Then, when the markets advise, Achmea will sell a 20% stake." He declines to set a time frame for this, saying only that it depends on performance. Dutch insurance group Achmea currently has a 60% stake in Eureko.
All of this investment abroad, with the initial outlay, restructuring costs and costs for development, is expensive, and risky. And that is starting to show in BCP's results. For any other bank, a 13% increase in revenues for 2001 would have been considered an achievement. At e571.7 million, BCP's 2001 revenues are much higher than the combined revenue of its three privately owned rivals. But expectations of the market leader are high. Its share price has fallen by 15% since the beginning of January.
Nevertheless expansion plans continue regardless. Buoyed by domestic cost-cutting in the form of branch closures and staff cuts, and helped by retrenchment in international ventures, BCP insists that it has sound foundations for growth. Brokerage fees may have fallen by nearly 60% over the past year but higher retail commissions and cost-cutting have helped. It has undergone a difficult period, or, as Jardim Gonçalves puts it, "two special years". And it has made a profit in spite of expansion costs. Rodrigues says: "We bought [domestic retail network] Atlântico in '95. But the share price only took off in '97 once the market believed we could do what we promised. People said that BCP didn't know how to do acquisitions. Well, now we have done three." BIG Bank Gdansk and Novabank are still thought to be excellent prospects for BCP. If and when Poland joins the EU and the single financial market gets properly under way, competition from other EU banking rivals will intensify in both Poland and Greece but BCP will be well placed.
It is not just the underperformance of Eureko that has led to board restructuring. Eureko chairman Talone was also thought to be a possible successor to Jardim Gonçalves. Pedro Libano Monteiro was also in line to take the CEO position but he also resigned. Predictably, BCP plays down the departures. Talone was welcome to stay at the bank, it says, but he wanted to pursue other interests. Two further board members resigned, also, apparently, for personal reasons. BCP announced the reshuffle in January.
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If you don’t fully understand an instrument, don’t buy it. If you would not buy for yourself a specific product, don’t try to sell it. If you don’t know very well your customers, don’t lend them any money. If you do all these things, you will be a better banker, my son

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