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Portuguese banks: Problems loom as loan growth slows

After a hectic period of consolidation, Portuguese banks have fed heartily off rapid economic growth, building substantial loan books, particularly in the retail sector. The boom is continuing but credit quality worries are beginning to emerge and a slowdown in growth could seriously hurt banks’ profits.

Portugal's banks have grown rapidly in recent years through consolidation and asset growth, but the warning lights have already begun flashing, signalling a much-feared slowdown in the lending business that accounts for some 60% of their profits.

The customer loan book skyrocketed by an annual 22% across the sector in the 1995-2000 period and growth is still in the high double-digit range. Now a slowdown in the growth of Portugal's economy to 2.5% in the first quarter from 3.3% on average over the past three years has raised doubts about the sustainability of this lending boom.

The danger is that loan volume growth is rolling along at 10 times the underlying GDP growth rate and up to five times the rate for most EU member countries. 

So in the context of a slowing eurozone economy, the outcome is obvious: lending has to come down, casting a shadow over Portuguese banks' primary profit source. After consumer lending, Portugal's largest banks derive the remaining 40% of their profits from investment banking, proprietary trading, asset management and life business, none of which alone is capable of generating more than 10% of total revenues.

"In recent years the main driver of lending growth for the Portuguese banks has been residential mortgages," says banking analyst Carlos Pertejo at JP Morgan.

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