The Portuguese banking and financial system: not out of the woods yet
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The Portuguese banking and financial system: not out of the woods yet

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Maria João Ricou and Manuel Requicha Ferreira, Cuatrecasas Gonçalves Pereira

The majority of Portuguese banks are now firmly back in the black. In 2018, for the second consecutive year, the banking system achieved positive profitability. There was a significant increase in return on assets (ROA), which stood at 0.66% (against 0.31% in 2017), and return on equity (ROE), which was circa 7% (against 3% in 2017)1. This was mainly driven by a reduction in the provision and impairment component, which still remains above the euro area figures, and better operating results, although income on financial operations continues to decrease.

However, the positive results of 2017 and 2018 are still not sufficient to cover the total accumulated losses during the post-financial crisis period.

In parallel, there was a sharp reduction in non-performing loans (NPL). By the end of 2018, the NPL ratio was 9.4% in gross terms and 4.5% in net terms, the lowest values since the European Banking Authority (EBA) introduced the definition of NPLs into the supervisory reporting templates. NPLs decreased about 30% due mainly to large asset sales. Banks with larger NPL and non-performing asset (NPA) exposures made very significant sales of NPLs and real estate owned portfolios (REO), turning 2018 into one of the most active years for NPL and REO transactions in Portugal.

Are we now fully back on track, with a banking system populated by profitable banks, low NPL ratios and robust capital ratios?

To highlight two of the most prominent of these transactions, Novo Banco sold the largest NPL portfolio in Portugal (Project Nata) and one of the largest REO portfolios (Project Viriato), while Santander made a significant sale of REOs (Project Tagus).

To date, 2019 has continued to be very active in terms of NPL and REO transactions. Novo Banco has already made a large sale of an REO portfolio (Project Sertorius) and is expected to close one of the largest sales of NPLs (Project Nata 2). The sharp reduction in NPLs and REOs is primarily a result of the increase of real estate prices and transactions. Indeed, the real estate market has been booming for the last three years; although the end of 2018 and the first semester of 2019 showed a slowdown, with a lower growth in prices and the number of transactions. Therefore, the window for large REO and secured NPL transactions at attractive prices may start to close in a near future.

In turn, capital ratios have stabilised, with the total capital ratio remaining at 15.1%. This is mainly a result of a reduction in total own funds compensated by the decrease in risk-weighted assets. The major banks have made successful issuances of Additional Tier 1 (AT1) and Additional Tier 2 (AT2) debt: Caixa Geral de Depósitos (CGD) concluded its recapitalisation plan with a €500 million AT2 issuance; Novo Banco made a €400 million AT2 issuance; and BCP made a €400 million AT1 issuance.

The question now arises: are we now fully back on track with a banking system populated by profitable banks, low NPL ratios and robust capital ratios?

Uncertain times ahead

The financial statements from the first quarter of 2019 seem to indicate a decrease in profitability in both ROE and return on assets (ROA). In addition, the slowdown in economic activity continues, and there are signs of recession in some of the major economies of the euro area. Central banks and governments are preparing incentives and measures to stimulate economy.

Furthermore, as a result of the weakening economy, the low interest rate environment will persist, and this will create more challenges for banks in terms of their financial operations and margins. These challenges, along with a potential abrupt reassessment of risk premia (the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset) are some of the main risks and potential troubles for banks on the short-term horizon. In fact, last year there was a reassessment of risk premia that showed how volatile it can be if there is a deeper correction.

At a regulatory level, and following the implementation of the Markets in Financial Instruments Directive (MiFID II) in 2018, one important issue for 2019 will continue to be the rules surrounding the minimum requirement for own funds and eligible liabilities (MREL rules). The MREL rules will require banks to issue highly subordinated debt instruments whose placement may prove to be more difficult if there is a change in risk premia and risk perception in financial markets.

Competition from fintech companies and financial companies without a banking licence will only continue to increase

In 2018, Portugal transposed EU Directive 2017/2399 of December 12 2017, which amended Directive 2014/59/EU (the Bank Recovery and Resolution Directive – BRRD). This change to the BRRD required EU Member States to amend their domestic insolvency laws in order to create a new class of senior nonpreferred (SNP) debt. In insolvency, this senior unsecured debt should rank above own funds instruments and subordinated liabilities (that do not qualify as own funds instruments) but lower than other senior liabilities.

In the context of this transposition, Portugal also decided to introduce a significant change in legislation by creating a credit privilege in favour of the generality of bank deposits, which determines that these deposits (including deposits by large corporates) rank above common credit, including senior bonds. This measure, although protective of depositors and a boon to confidence in the system, could create further difficulties for banks issuing their senior debt, namely on pricing.

Also at a regulatory level, the adoption of IFRS 9 is expected to require a faster recognition of impairment losses and the addendum to the ECB guidance on provisioning of NPLs will incentivise a swifter recognition of impairment losses in loans that have become non-performing. This will boost NPL transactions but at the same time, it will create additional pressure on banks' results.

On the payment services front, in November 2018 Portugal transposed the second Payment Services Directive (PSD II). PSD II is driving important changes for banks, in particular concerning access of third-party providers. The consolidation movements in this sector continue, although the sale of Portuguese payments provider SIBS, the major player in the market, was again put on hold by its shareholders, who are the most important banks in the system.

Additionally, competition from fintech companies and financial companies without a banking licence will only continue to increase. Fintechs, which benefit from light regulation, are entering deeper into the payments and settlement system and banks will be forced to increase their expenditure with investments into IT, if they want to compete with fintechs and meet the avid desire of consumers for mobile and instant payments.

The granting of credit is also an area for concern, with a sharp increase in competition from other players. As an example, investment funds hold about 28% of non-financial debt issuances made by euro area companies, which compares to 18% pre-crisis. This is of course the trajectory of the capital markets union in the euro area and it is here to stay, which means that banks will be compelled to revisit their business models to face the increasing competition.

Finally, the insurance sector continues to be one of the most active sectors in terms of consolidation movements. After preparing its potential exit from Portugal with the sale of its Portuguese business, Generali then decided stay in the Portuguese market. In 2019, it acquired one of the largest market players, Seguradoras Unidas, the entity that resulted from the merger between non-life insurance company Tranquilidade and life insurance company Açoreana, which was sold by Apollo. The market continues to be very active and further sales or consolidation movements are expected in 2019-2020.

Banks are prepared but will it be enough?

Overall, the good news is that banks are back to profit, more robust than ever and better prepared to face future challenges. However, darker clouds on the economy will end up impacting banks and the scale of that impact leaves a big question mark.

What will be a concern, is that the challenges a recession would bring with it may be exacerbated by the key trends in the banking sector, which include low interest rates, growing competition from fintechs, lower levels of credit and increasing regulatory demands for the provision of credit.


1. Source: Bank of Portugal Financial Stability Report, 2018.

About the author



Maria João Ricou

Managing partner, Cuatrecasas Gonçalves Pereira

Lisbon, Portugal

T: +351 21 355 38 00



Maria João Ricou is the managing partner of Cuatrecasas in Portugal, partner of the firm since 1990 and head of the banking, finance and capital markets practice.

Maria holds a law degree from the Catholic University of Lisbon Law School (1984). She has been a member of the Portuguese Bar Association since 1984 and is a member of the International Bar Association (IBA). She was the lead partner on the European Banking & Finance Deal of the Year, the Lawyer Awards 2016.

With extensive experience and in-depth knowledge of the banking, finance and capital markets sectors, Maria has been focused her practice mainly on banking operations, regulatory matters, debt restructurings, structured finance (particularly securitisation structures), corporate finance and all kinds of equity and debt capital markets transactions.

About the author



Manuel Requicha Ferreira

Partner, Cuatrecasas Gonçalves Pereira

Lisbon, Portugal

T: +351 21 355 38 00



Manuel Requicha Ferreira has been a partner in the banking, finance and capital markets practice of Cuatrecasas since 2016 and an associate lawyer since 2006.

He holds a law degree from the University of Coimbra Law School (2004), a post-graduate in securities law from the University of Lisbon Law School (2007) and a master's in banking and capital markets law from the University of Lisbon Law School (2011).

In 2007, Manuel was the winner of the Portuguese Securities Market Commission Award (CMVM). He was a partner on the European Banking & Finance Deal of the Year, the Lawyer Awards 2016.

The main projects on which he has advised in recent years include, in particular, banking law and regulations, resolution matters, structured finance and corporate finance and financing operations, through simple or structured debt issues from public or private entities and public offers of distribution or takeovers.

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