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Foreign banks in Portugal are having to take serious decisions about their future. With market growth slowing and competition increasing, a change of strategy is the least that is needed and some players have decided to quit altogether. Others have adopted a halfway-house position, such as cutting staff and moving operations to Madrid. Of the departing banks, the most notable recent example was Chemical Banking Corporation, which prior to its merger with Chase sold a controlling stake in Banco Chemical (Portugal) to the industrial and financial concern run by Antonio Champalimaud in February. Before that, in 1992, Lloyds sold a substantial retail chain to Banco Bilbao Vizcaya. Those that have compromised include Chase, which reduced its Lisbon branch to a representative office and transferred lending to Madrid. Banque National de Paris has cut down its branch network after reporting hefty provisions and a restructuring. But some foreign banks are made of sterner stuff and refuse to give up even after an abject failure. Crédit Lyonnais, for example, has been in Portugal for close to 100 years and shows no signs of leaving. In 1994 this stalwart of the retail and small corporate sector lost all its capital and had to go cap in hand to Paris to request a complete recapitalization. In 1995 it announced a provision of over Esc10 billion ($63.3 million) for a Esc230 billion balance sheet. Crédit Lyonnais has reduced its staff from 600 to 330, cut costs massively, and completely changed its business profile. Crédit Lyonnais was brought down by massive bad loans, the result of its exposure to the small and medium-sized corporate sector. Managing director Bernard Chantrelle says the bank has learnt its lesson and is now pursuing big corporates, multinationals and the top 150 Portuguese companies. Building a new position in this sector will not be helped by the bank’s reputation for mismanagement and bad judgement, nor by the fact that virtually every other foreign bank wants to break into it as well. The battle for lending to the large Portuguese corporates has now reached fever pitch, because the demand for credit is shrinking and all the banks are scrabbling for a share. Growth in demand for credit fell from 12% in 1994 to 10% in 1995, and the decline accelerated in early 1996. Analysts put the decline down to changes in treasury financing policy and falling investment by manufacturing companies. The effect on the banks has been dramatic, says Barclays director for corporate finance, Marcos Lagoa. “The market is extremely competitive, quality corporate assets are very rare and margins are paper-thin. A three-month short-term loan to Electricidade de Portugal could have a margin over interbank rate of one-sixteenth. We demand a return on capital of a minimum of three-eighths, so the present situation is ridiculous.” While foreign banks are bidding down rates to win over some of the key local clients, they are also having to compete with an increasingly aggressive local banking sector. Says Joao do Carmo Salvado, the executive director of Deutsche Bank de Investimento: “The easy times have come to an end because the local banks have become more efficient.” ABN-Amro’s general director, Jan Panman, says: “Portuguese banks are becoming more aggressive. Up till now, foreign banks have benefited from Portugal’s growth, but now the local banks are saying, ‘Why can’t we have our share of it?’ It is very difficult to compete with Portuguese banks in bidding for business from a local company. But when local companies go overseas, we have an advantage.” The competitive environment in Portugal has been transformed by the recent merger of some of the country’s largest banks. New local corporationshave been created, led by the high-flying, predominantly retail, Banco Comercial Portugues, which merged in 1995 with Banco Portugues do Atlantico. Other conglomerates have been built, following mergers led by Banco Totta e Acores, Banco Espirito Santo and Banco Mello. The government wants to support this part of the private sector and the once-generous favours dished out to foreign banks are drying up. “The privatized banks have much more lobbying capacity than we do,” says Deutsche’s Salvado. “Foreign banks cannot compete for influence with the local banks in winning big-ticket privatizations. They have good contacts, good political influence.” Local banks tacitly accept Salvado’s point, merely saying that every market favours its own. A saturated market This makes protecting corporate customer bases and mining the private sector for all it is worth all the more necessary. “You can forget the spectacular growth we have enjoyed in the past,” says Panman. “It is much tougher now to bring in new clients. Now it is a case of continuing to serve well the existing clients you have. The market is saturated.” Multinational banks can still score by adding value with their international networks. For example, ABN-Amro helped set up bank accounts and credit for the second-largest Portuguese retailer, Jeronimo Martins, when it established an operation in Poland. Foreign banks also expect to benefit from acquisitions being considered by Portuguese companies in Spain and Brazil. They may also assist Portuguese banks by conducting due diligence on international companies making investments in Portugal or seeking loans from Portuguese banks. The ferocious competition is just as evident in retail banking, where foreign operators may have to deal with cultural as well as official prejudices. The growing number of players bidding for savings has contributed to a squeeze in interest margins. They have fallen from a peak of 6% six years ago, when many retail banks set up operations, to 3% today. This tough situation may eventually persuade some banks to pull out of retail credit altogether, but for the moment some are engaged in what may turn out to be suicidal competition. According to Lagoa, instead of closing branches and making bankers redundant, banks are trying to find work for their staff by allowing them to make loans at unrealistic rates. “It is difficult to sack people, and instead of making efficiencies banks have tried to grow by opening branches – and they have paid highly to tempt in deposits.” The implications for bank profits are ominous, he says, since two-thirds of deposits are not invested in highly profitable credits but in low-yielding government bonds. “The difference between a standard-term treasury bill rate and term deposit is, in many cases, zero. So if banks are taking three-month deposits and the bank buys a three-month treasury bill, banks are making nothing.” A report by analysts at ING Barings highlights the foreign banks’ problem in building a secure place in Portugal. “Their relatively low share of total deposits indicates the difficulties they have faced in capturing market share and also reflects the fact that the majority of the business is in the wholesale rather than retail segment of the market.” Union Bank of Switzerland (UBS) has taken a more optimistic view at a time when competitors are busy retreating, having set up an office in late 1994. The bank has broadly four targets: commercial banking for the top 150 Portuguese corporates; corporate finance oriented towards privatizations; derivative products and risk management; and asset management. UBS is bullish about the Portuguese economy, expecting annual GNP growth of 2.5% in 1996 and 3% in 1997. Portugal still lags behind the EU average for GDP per capita, but UBS expects it to start to catch up over the medium term. Two areas particularly interest UBS: privatization and asset management for Portuguese pension funds. UBS has a good record of winning Portuguese privatization mandates. It was joint global coordinator (with Merrill Lynch, Banco Essi and SBC Warburg) for the sale of 27% of Portugal Telecom in June 1995; it led the international tranche for the first part of the privatization of the Portucel paper and pulp company; and it will be lead manager for the international tranche of Cimpor (the leading cement company) in the summer of 1996. It expects to take similar roles in the privatization of electricity company Electricidade de Portugal (expected early 1997) and the air traffic control system, ANA. UBS’s interest in Portuguese pension funds is more speculative. Portuguese pension funds are predominantly invested locally because of the traditional view that escudo liabilities should be invested in escudo instruments. Although permitted to invest up to 20% overseas, Portuguese pension funds have only around 2% invested internationally. However, UBS managing director in Portugal, Rui Costa Santos, expects Portuguese fund managers to adopt international standards and seek diversification through a wider international asset spread. “They should be required to invest a minimum of 20% of their assets abroad,” he says. UBS also sees an embryonic demand for derivatives. Rui Costa Santos says the bank has recently completed two deals where risk management instruments were required. “It is an area where we anticipate growth,” he says. In August 1995 the bank swapped a $50 million fixed-rate French franc loan into fixed-rate escudos for electricity company Electricidade de Portugal. UBS expects derivatives activity to be boosted when the Oporto futures exchange opens on June 20. American banks take a far less bullish view of Portugal than Europeans and many are downgrading their positions in the country. Neither Merrill Lynch nor Bankers Trust have local offices, although both have teams in Madrid which regularly visit Lisbon. Project finance has been a useful area for Americans, and during the heady days of the early 1990s one of the star performers was Chase Manhattan. Chase made its splash when it led the project-finance consortium to supply $1 billion of funds for the second bridge over the Tagus. That project appears not to have given Chase the status in the country that it might have hoped for, so its retrenchment to a representative office was predictable. However, it still hopes to find a niche supplying cross-border derivatives-based structures to local corporates. Chase’s vice-president corporate finance, Susan Soskin, expects derivatives and broader risk management instruments to play a growing role in the Portuguese marketplace. “Our interest is to add value with structured finance applications: that is something the local banks cannot provide.” Project-finance expertise The largest European investment banks are already muscling in with instruments that make use of their foreign exchange and technical expertise. Deutsche’s Salvado has shown the Portuguese how tax-driven leases can help finance their infrastructure projects. His bank arranged a Dm200 million ($65 million) tax-based lease to the Lisbon subway to finance the acquisition of rolling stock. While local banks pitched in with domestic finance based on medium-term loans, Deutsche offered a tax-efficient German cross-border full payout lease and the deal was swapped from floating-rate escudos to fixed-rate Deutschmarks. The lease has an 18-year term and Deutsche’s Salvado says the final cost of the deal was below Libor. The lease broke new ground in transport finance in Portugal and Salvado says he is now pitching at other rolling-stock purchasers, such as the company building the second (railway) bridge across the River Tagus – to be called the Vasco Da Gama bridge – and the builders of the metro in Oporto. Deutsche also has a record in Portuguese project finance established when it advised National Power, the winning bidder for the Pego coal-fired power station project, in the first non-recourse finance, build-operate-transfer scheme in Portugal. The bank is now working with NatWest, ABN-Amro and CISF in providing swap facilities for the financing of a new combined-cycle gas and coal power plant. The UK’s political and cultural ties with the country have enabled it to gain a presence in Portuguese retail that only the French can rival. Barclays is now the primary British representative in this sector – after Lloyds withdrew by selling its network to Banco Bilbao Vizcaya. Barclays set up operations in the country 10 years ago as a commercial bank for the corporate sector. But it repositioned itself in 1990 as predominantly a retail bank. Barclays Portugal – with Esc300 billion in assets, the largest foreign bank in the country – has built up a 70-strong branch network, predominantly in the Lisbon and Oporto area, and targets individuals of medium to high net worth, in particular Portuguese yuppies, who made their money during the boom years of the late 1980s and early 1990s. Marketing manager Luis Rocha dos Reis says the bank is aiming to sell lending and advice to people aged between 30 and 45 with annual earnings of between Esc700,000 and Esc1 million. The bank supplies such high earners with mortgages, which it regards as a profitable use of funds, and credit, a growing business with some obvious hazards. Rocha do Reis highlights credit control and warns that credit scoring and checking is relatively unsophisticated in Portugal as there is no system for banks and credit houses to share consumer data and monitor individual loans. The bank also complains about Portuguese consumer resistance to paying for banking services, such as the use of advanced automated teller machines, overdrafts and investment advice. “There’s very little tradition of paying for banking services,” says Barclays’ Lagoa. “Basically, margins have been so high that banks have provided their services for free. Now that banks have seen a dramatic shrinking of margins, they want to start charging and there has been enormous resistance. When you start charging for anything, there is a small revolution.” The resistance to bank charges is particularly ingrained in the older generation, who may in any case be unfamiliar with more sophisticated products. “It can be extremely difficult to sell the simplest unit trust to very rich private banking customers,” says Lagoa. “If you say there is a subscription charge, they will say they are not interested, and move on.” However, Portugal’s yuppies are much more receptive to new banking products and are also prepared to pay for them, hence the attraction of the segment. The situation with corporate banking services is not much different. BPI’s managing director, Manuel Ferreira da Silva, says that foreign banks’ insistence on being paid fees for advice has been a useful corrective to traditional attitudes. “Portuguese companies are used to paying high interest rates, but they are not used to paying fees. Foreign banks have educated them in the requirements of modern banking.” Given the problems foreign banks have had making a name for themselves in Portugal under their own banner, it is perhaps not surprising that a number have sought to buy into the market indirectly by taking investments in existing banks. Perhaps the most impressive foreign investor is UBS, which holds a 9% stake in Banco ESSI, the investment-banking arm of Banco Espirito Santo, and a 2% stake in Banco Portugues de Investimento (BPI). Another significant player, by proxy, in the Portuguese market is Spain’s Banco Centro Hispanoamericano, which owns 20% of Banco Comercial Portugues. Most Spanish banks have had a fairly unhappy experience in the Portuguese market. For example, Spaniards are still reeling from the public relations beating Banesto received when it was forced to sell up its stake in Banco Totta & Acores. This followed a Portuguese government decision that Banesto had not acquired the Totta stake properly. According to BPI’s managing director, Manuel Ferreira da Silva, this has deterred some Spanish banks from investing in Portugal. Banco Santander do Negocios has a respectable record in Portugal as an investment bank, but when it sought to cut a dash in the retail sector it came across some cultural resistance. BPI sold its banking chain – called Banco Comercio a Industria – to Banco Santander; however, the Spaniards are finding it difficult to run the bank successfully, according to Ferreira da Silva: “There is a problem of mentality, both with clients and in the internal management.” Foreign banking in Portugal goes back to the last century, when French and British banks dealing with trade finance set up offices in the country. They developed small branch networks, but for a long time had a near-monopoly of private-sector banking. No other foreign banks made significant attempts to compete for the business, and the only competitors to the key Europeans – Lloyds (formerly Bank of London and South America), Crédit Lyonnais and Banco do Brasil – were cumbersome state banks led by Caixa General de Depositos. However, they failed to capitalize on these opportunities and when the system was liberalized in the mid-1980s, the European networks were among the weakest. The Europeans were also confronted with growing competition from other foreign banks which, tempted by high interest margins and a changing macro-economic environment, started to play the Portuguese game. The privatization of the economy was the carrot that brought in US players such as Chase, Citibank and Merrill Lynch. Portugal yielded all that had been expected of it in terms of privatization mandates, project finance deals and treasury issues. By the mid-1990s, much of the Portuguese economic transformation had been accomplished, both in terms of building physical infrastructure and privatization. Hence the waning interest of foreign banks as they started to find the country a much harder place to do business. The ferocity of the competition and a rather less bullish outlook for the Portuguese economy than once anticipated must regularly prompt shareholders to pose the question: “Should we stay or should we go?” BPI’S Ferreira da Silva expects some banks to take the second route. “The market is too small for so many global players. There is not enough profit to be made here and, in due course, I expect many of them to lose their commitment to the country.” That may be wishful thinking on the part of the local banker who has no choice but to persevere. But it may also be accurate. BCP’s positive disturbanceLaunched 10 years ago, Banco Comercial Portugues has shaken up the sector and become Portugal’s second-largest bank. But there’s still more to come. It plans further aggressive expansion based on acquisitions, joint ventures and brand developmentBanco Comercial Portugues (BCP) has large ambitions. It not only wants to set the standards for banking in Portugal, but also to be recognized as a European bank on a par with its Spanish counterparts. “We want investors to see us as a proxy for the local market and also as an alternative to an investment in other southern European banks,” says Acacio Jaime Piloto, head of the capital markets division at BCP’s investment banking arm, Banco CISF. To achieve this, BCP has had to grow fast. It recently paid Esc150 billion for control of the larger but less dynamic Banco Portugues do Atlantico (BPA). The deal has not been universally acclaimed and there is some concern that BCP has bitten off more than it can chew.The acquisition was resisted by BPA’s shareholders and for some time the government’s attitude was in doubt. This was a crucial factor as the state still owned 24.5% of the bank, although its complete privatization was planned. When the state eventually gave the takeover the go-ahead, BCP’s managers were seen as all-conquering heroes. Now BCP is having to fork out for the acquisition. It has presented US fund managers with a request for $250 million, for which the bank will issue convertible preference shares this month. The shares will have a fixed dividend of around 7% and the bank has an option to call at the end of year seven. “The capital raised has the beauty of being a tier one instrument from scratch,” says Piloto. “Instead of issuing subordinated debt in the euro or yankee markets at a spread over Libor, we are selling equity at a premium and diversifying our investor base.” The convertible preference shares follow the launch of a rights issue of 27 million new shares in May and are expected to raise roughly the same amount ($250 million). That brings BCP shares in issue to 137 million. With a $1.7 billion market capitalization at the middle of May, BCP is the largest stock listed on the Lisbon Stock Exchange. To top up the coffers to pay for BPA, BCP issued $500 million of floating-rate dividend-preferred stock on the Euromarkets last year. The issue was in big demand and its size was increased twice. Says Piloto: “When we were trying to find synergies between the two banks, we thought it much wiser to issue preferred stock than an equity package. Now we are ready to show some cost-efficiencies that were not possible in September.” The search for synergy BCP has said it is keeping the BPA brand and extensive BPA branch network, even though there are overlaps. “We want to merge the operations of the two banks and reduce costs,” says BCP’s chairman, Jorge Jardim Goncalves. “We also want to keep the BPA name. BPA is a benchmark in the financial system and if you don’t keep the name, you reduce the bank’s authority and franchise.” Goncalves says the merger is already delivering results, although he says these will be measurable only when the two banks have a “common information platform”. Goncalves is clear that “from the viewpoint of fees, income and commission, BPA is already delivering”. BPA’s sales of insurance policies have grown tenfold and there has been a rise in BPA’s unit trust sales. BCP has also labelled a credit card with the BPA name and launched a demand deposit account through the bank. Says Goncalves: “BPA is and was an excellent bank. Its problem was the long process of privatization. This was very bad for BPA’s management and our takeover has given the bank stability.” Observers question whether the takeover and blending of BCP’s aggressive culture with BPA’s more traditional style has gone quite so smoothly. In any event, BPA has given BCP a testbed for the high management standards that made its start-up in 1986 so successful. The launch was characterized by clear standards and entrepreneurial zeal. The standards of management, accounting and service followed were based on international rather than Portuguese models and local customers were impressed. “BCP has helped the country demonstrate a new entrepreneurialism. We think we are the model for the best Portuguese business practice,” says managing director Antonio Rodriguez. In 10 years, BCP has won a dominant position, with 750 branches and a substantial wholesale and investment banking reputation. “We wanted to disturb the market in a positive way. The system did not welcome us,” says Antonio Castro Henriques, a main board member. Today, the bank is second in size to state-owned Caixa Geral de Depositos and dominates asset management and insurance. BCP was the first Portuguese private banking initiative – 200 individuals clubbed together to put up Esc3.5 billion of seed capital. BCP later expanded its capital when it listed on the Lisbon Stock Exchange in 1987. In 1992, it made an ADR issue in New York. The timing of the bank’s start-up was propitious. Portugal’s place in the world and the banks’ scope for making money locally were both changing. Portugal was about to join the EU and the government was relaxing its grip on interest rates. The banking sector was largely state-controlled and inefficient. The imposition of professional management was a prerequisite for success. Founding chairman Jorge Jardim Goncalves, who still runs the bank, was plucked from the top job at Banco Portugues do Atlantico to lead the new institution. He was given a free hand to appoint the best bankers in the country without obligations to a family or large shareholders – which exist in many Portuguese banks. He introduced the banking technique which became BCP’s hallmark – the segmentation of banking services by customer profile. BCP branded six groups of services: individual retail banking, commercial retail banking, private banking, the mass-market branch network, small business banking and telephone banking. Care was taken to differentiate the branded banking services, says Antonio Castro Henriques, but managers in each branch were pushed to cross-sell products. “Our employees assimilate the culture of cross-selling right from the moment they join,” he says. BCP distinguishes its services targeted at individuals and those meant for firms by sending private and commercial customers to different floors of the building, and having different teams of staff to serve them. It differentiates its private banking operations even more sharply: these are based in unmarked villas in Lisbon, furnished more like a hotel than a bank. BCP has joint ventures with foreign banks where the banks swap minority positions. BCP says it does not want to own a foreign bank, merely access to foreign markets. Partners get access to its own network and markets. BCP’s 3% stake in Spanish bank Banco Central Hispanoamericano (BCH) is the best example, giving BCP access to the Spanish market. BCH owns 20% of BCP and has access to Portugal. Curiously, BCH is limited by BCP’s statute to vote only 10% of its shares. In another deal with BCH, the two banks jointly own private bank Banif Banqueros Personales. Other joint ventures include a link with the Spanish Banco Popular Espanol in Paris. BCP also has a stake in Banco International de Mocambique and in Mexican bank BITAL. Goncalves’ hunger for expansion has been temporarily satisfied by BPA, but local bankers expect it to re-emerge. “Goncalves is a man of growth, not of consolidation and contraction,” says one. “He has done well for shareholders and for himself. But what now? He has clearly outgrown Portugal – where he goes from here is anybody’s guess.” |
