Portugal Banks’ Concern: Still Wobbly After All These Years

Updated on
  • Country’s lenders still being hurt by high burden of bad loans
  • Low profitability is likely to remain a challenge for banks

For all the capital they are raising, Portuguese banks are not out of the woods yet.

Banco Comercial Portugues SA, the country’s biggest publicly traded lender by assets, last week raised 1.3 billion euros ($1.4 billion) in capital, while state-owned lender Caixa Geral de Depositos SA is set to get the rest of its 5 billion-euro capital boost from March. Meanwhile, Novo Banco SA, which emerged from the breakup of Banco Espirito Santo SA, still carries a “for sale” sign more than two years after it was put on the block.

The country’s banking sector remains wobbly almost three years after Portugal exited its international bailout. Credit at risk at Portuguese banks, which was 32 billion euros at the end of 2015, has been stuck at about 12 percent of the total for the last two years. That’s after Portugal’s eight biggest banks raised more than 26 billion euros in capital from 2008 through 2014, including state aid during the bailout and the rescue of Banco Espirito Santo, according to the central bank.

“We’re in a situation where we are still dealing with the same issues we had years ago regarding the clean-up of the banks’ balance sheets and writing down bad loans to correct levels,” said Benjie Creelan-Sandford, a bank analyst at Jefferies Group.

Nervous Markets

The banking sector’s woes have weighed on the country’s sovereign debt, with Portugal’s 10-year bond yield on Monday touching the highest level in a year.

It hasn’t helped that Prime Minister Antonio Costa, who has yet to achieve a goal he set last year of overcoming issues penalizing the banking system, has suggested he might nationalize Novo Banco if the sale terms are unfavorable. The highly indebted government has also said it might take its cue from the Italian bank-rescue fund.

“Any solution for the financial sector and its impact on the government’s balance sheet will be closely watched,” said Federico Barriga, director for sovereign ratings at Fitch Ratings. Portugal, whose junk rating was affirmed by Fitch on Friday, is one of the most indebted countries in the world, he said.

Prime Minister Costa reassured parliament on Wednesday that his government was on the case. “What we know is that there is no new problem” in the financial system, “and various of the old problems have been solved or are in the process of being solved,” he said.

Asset Quality

Banco Comercial Portugues raised double its market value last week to pay off state aid it received four years ago and strengthen capital ratios after it succeeded in adding China’s Fosun International Ltd as a new shareholder. The rights offering ended Feb. 2 and was fully subscribed.

In the case of Caixa Geral de Depositos, Portugal secured an agreement in August with the European Commission to boost capital by 5 billion euros. The injection of 2.7 billion euros of government funds in the nation’s biggest lender by assets and the sale of subordinated debt that are part of that plan are yet to be done.

Although Banco Comercial and Caixa Geral’s capital increases relieve some pressure, concerns remain over low internal capital generation and weak asset quality, Roger Turro, director for banks at Fitch Ratings, said in Lisbon on Jan. 26.

Meanwhile, Banco BPI SA, a smaller lender, is finally being taken over by CaixaBank SA of Spain in a bid completed Tuesday, almost a year after running into resistance from minority shareholders. BPI plans to raise at least 225 million euros in subordinated debt to meet capital ratio requirements, Chief Executive Officer Fernando Ulrich said late on Wednesday.

‘Colossal Destruction’

Very low interest rates, muted growth and a large stock of problematic assets, are difficulties that “weigh on investors’ perception of Portuguese banks’ risks and constrain the banks’ ability to tap the external markets for funding,” S&P Global Ratings said in a note on Jan. 16.

There has been “a colossal destruction of shareholder capital,” BPI’s Ulrich told reporters in Lisbon on Jan. 18, comparing the capital raised by banks with their current market value. BPI was the bank that raised the least capital, he said.

“In this uncertain context, and given the Portuguese banks’ history, I don’t think it’s time for international investors to return to Portugal yet,” said Diogo Teixeira, CEO of Optimize Investment Partners, a Lisbon-based firm that manages 130 million euros and has no investments in Portuguese or Italian banks. “Banks have to prove quarter after quarter that they can be profitable” before that happens.

Resuming Dividends

While new loans show signs of picking up, total loans have been declining since 2011 as the economy remains highly indebted. Private debt was more than 180 percent of gross domestic product at the end of 2015, according to the European Union’s statistics office.

Banco Comercial is telling investors its share sale will accelerate the return to normal of its business, including potentially resuming dividend payments. The lender expects a return on equity, a key measure of profitability, of about 10 percent in 2018, with a common equity tier 1 capital ratio of more than 11 percent. In 2007, it had a ROE of 14 percent.

The average ROE for European Union banks sank to 5.7 percent as of June, a decline of more than a percentage point from a year earlier, according to the European Banking Authority.

“The challenge for Portuguese banks, as for the European banking sector as a whole, is that it’s difficult to achieve the profitability they once had,” Jefferies Group’s Creelan-Sandford said.

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