Portugal’s banking sector: Blue skies ahead?
By Maria João Ricou, managing partner, and Manuel Requicha Ferreira, partner, Cuatrecasas Gonçalves Pereira
The Portuguese banking and financial system continues to evolve. Consolidation sees no turning back, with the new players increasing their market shares; recent examples include ABanca's acquisition of Deutsche Bank Portugal's retail business, Portuguese Postal Bank (CTT)'s acquisition of 321 Crédito (the market's second largest auto loan entity) and Pepper's acquisition of Banco Primus from Credit Foncier.
In parallel, deleveraging processes have increased significantly and banks have been taking advantage of the strong momentum of the Portuguese economy, in particularly in the real estate sector, with the sale of vast portfolios of non-performing loans (NPLs) and non-performing assets (NPAs). The latter includes failed development projects, land assets, hotels and other types of REO (real estate-owned) assets. This trend is the conclusion of banks' deleveraging activities (with the sell-out of NPLs) and their refocussing on the core banking retail business. Banks are also making a concerted effort to adapt to the inevitable changes to the banking and financial sectors being heralded by new regulation and technology.
The great clean up and recapitalisation
In November last year, the bank resolution fund successfully concluded the sale of Novo Banco (the bridge bank that resulted from the application of a resolution measure to Banco Espirito Santo – BES) to Lone Star. The deal included a capital contingency mechanism that will serve to reinforce Novo Banco's capital ratios in case they fall under certain thresholds as a result of losses or impairments arising from a pool of existing NPAs, potential NPAs and/or stakes in subsidiaries included in the so-called 'side bank'. This solution sends a good signal and an incentive to banks to clean up their balance sheets and regain their strength by refocusing on banking activity instead of NPL and NPA restructuring.
As a result, we are currently having one of the most active years in terms of the sale of NPL and REO portfolios. By way of example, we recently saw the NPL and REO sale by Portugal's second biggest bank Caixa Geral de Depósitos (CGD) (Project Pacific); the sale of secured and non-secured NPL portfolios by Bankinter (Project Veleiro); Fidelidade's sale of real estate assets (Project Golden); the sale by CGD of small and medium enterprise NPLs (Project Atlantic); and the sale of REOs by Santander and Popular, which has been incorporated into Santander (Project Tagus). This market dynamic is good for the banks, for investors and for the banking sector generally as through this process the banking system is cleaning up bad assets and strengthening its balance sheet.
Another good sign for Portuguese banks has been their ability to place Additional Tier 1 (AT1) and Additional Tier 2 (AT2) securities on the market. After having done an AT1 issuance in 2017, CGD made a €500 million AT2 issuance to conclude the recapitalisation plan agreed with the Directorate-General for Competition (DGCon). Also, in 2018 Novo Banco completed a €400 million AT2 issuance, which was partially made by way of an exchange of existing zero-coupon bonds issued by the former BES and then returned to the capital markets with a new issuance under its new owners Lone Star. The largest Portuguese private bank – Banco Comercial Português (BCP) – was also able to place a €300 million AT2 issuance. The reinforcement of capital ratios from these issuances has precipitated stabilisation in the sector following the years of uncertainty and resolution measures that had to be applied by the Central Bank to failing banks.
Even though some of these issuances are already relevant for MREL requirements, the next challenge at a capital and liquidity level for Portuguese banks will be the MREL requirements, which will force them to go back to the markets and test their ability to raise funds at sustainable costs.
A tidal wave of regulation
In the meantime, and at a regulatory level, the implementation of Mifid II has required market players to make important changes to compliance teams, product distribution and internal structures. Several regulations and pieces of legislation are still being issued, thus banks will have to further adapt. In recent bond and notes offerings (by banks, corporate entities and football clubs), banks have already made changes to their definitions of target markets and the distribution channels they use.
Additionally, at a regulatory level, the entry into force of the second Payment Services Directive (PSD II), which is yet to be fully transposed into Portuguese law, triggered various M&A transactions in the banking sector in 2018 and at the end of 2017. Several banks sold their payment instruments and merchant businesses to international players. Banco BPI sold its merchant business to Comercia (a Spanish entity owned by CaixaBank and Global Payments) and its payment instrument business to CaixaBank Payments. Santander purchased part of Wizink's payment cards business, whilst BCP sold its 'meal payment cards' business to Sodexo. EuroBic is searching for a partner for its payment system Netpay, which competes with Multibanco. More relevantly, the sale of payment services company SIBS, which manages the Multibanco, MB Way and MB Net brands, is anticipated for the second semester of 2018 after delays resulting from disagreements amongst its mainly Portuguese bank shareholders.
Finally, the entry of fintechs into the payment instruments business will increase the competition for banks. More deals are expected in the coming months, particularly in terms of partnerships between banks and fintechs, as the sector attempts to keep up with the digital revolution shaking it. Furthermore, as a result of PSD II and of the regulatory technical standards (RTS), financial institutions will need to make their services available to other platforms. This will allow for the consented exchange of information with Account Information Service Providers (AISP) and Payment Initiation Service Providers (PISP).
Tourism and real estate boost loan market
In terms of banking activity, and in great part resulting from the high level of activity in the tourism and real estate markets, housing mortgage loans increased very significantly in the first semester of 2018. Real estate sector financings for hotels, tourist apartments, shopping centres and other real estate developments were a major target of lending. International banks were the primary lenders in these real estate transactions, although credit funds have also been playing an increasingly important role in direct lending.
In the insurance sector, consolidation plays continue. BPI sold its life insurance company (BPI Vida e Pensões) to VidaCaixa (the Spanish life insurance subsidiary of CaixaBank); BPI renegotiated its insurance alliance with Allianz; China Tianyng purchased the insurance company Groupama in Portugal; Montepio sold its majority stake in its insurance holding company, which owns Lusitania (one of the largest Portuguese insurance companies), to another Chinese player, CEFC Energy. Other sales processes were ongoing in H1 2018: Generali launched the sale process for its Portuguese insurance company, which is likely to complete in the second semester of 2018; Novo Banco was selling its stake in life insurance company GNB Vida, also expected to close in 2018.
These moves have brought an important dynamic to the sector and insurance companies are regaining their momentum and taking advantage of the increase of housing loans activity and the exponential growth of the private health sector in Portugal. In fact, the purchase by Fosun of insurance company Fidelidade and the subsequent purchase by Fidelidade of private health company Luz Saude triggered several consolidation movements in the health care sector (some made by Luz Saude itself), bringing a considerable dynamic to the healthcare and insurance sectors.
At an insurance regulatory level, the entry into force of European Union Directive no. 2016/97, which has not yet been transposed in Portugal, will entail significant changes to the distribution of insurance products in order to achieve harmonisation in consumer protection irrespective of the insurance distribution channel. Such legislation will also determine changes to the distribution rules and remuneration and incentive structures currently used. Furthermore, the continuous professional training of insurance mediators will be required. All of these changes are leading to a renegotiation of existing insurance partnerships or distribution agreements in both the life and non-life insurance sectors.
Now the rain seems to have passed
After a period of dark clouds and following the resolution measures applied to failing banks, as well as the support provided by the Portuguese state to the banking sector and the entry of new players, the banking and financial sectors are now seeing a clear path forward; the skies are becoming bluer.
It is a fact that the boom in the tourism and real estate markets have helped to clean-up most of the problems in the banks and that this boom could always come to a quick halt. However, Portuguese banks have already gone some way along the path of unburdening themselves of most of their problems. It is now more question of refocusing their activities on sustainable and profitable banking in the digital era and with the trend of de-intermediation in the background. Sustainable profitability is the big challenge for banks, particularly those that do not have a European or worldwide dimension.
About the author
Maria João Ricou
Managing partner, Cuatrecasas Gonçalves Pereira
T: +351 21 355 38 00
F: +351 21 353 23 62
Maria João Ricou is the managing partner of Cuatrecasas in Portugal. She has been a partner of the firm since 1990 and is 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 in the European Banking & Finance Deal of the Year at the Lawyer Awards 2016.
With extensive experience and in-depth knowledge of the banking, finance and capital markets sectors, Maria focuses her practice 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
T: +351 21 355 38 00
F: +351 21 353 23 62
Manuel Requicha Ferreira has been a partner in the banking, finance and capital markets practice of Cuatrecasas since 2016 and associate lawyer since 2006.
Manuel 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 (the CMVM). He was also a partner in the European Banking & Finance Deal of the Year at the Lawyer Awards 2016.
The main projects on which he has advised in recent years include, in particular, banking law and regulatory, 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.