Conjoncture

Banking in a low interest rate environment: the case of Portugal

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Conjoncture // December 2019  
economic-research.bnpparibas.com  
For the first time since 2010, the five major Portuguese banks returned to profitability in 2018. The main factors behind this swing into  
profits were a faster decline in interest expense than in interest income, and tight control over operating expenses and the cost of risk.  
The widening of the net interest margin offset the decline in the outstanding amount of bank loans, increasing net interest income. Other  
things being equal, the decrease of the interest rates also contributed to the reduction in the cost of risk and the clean-up of bank  
balance sheets. Although the non-performing loan ratio and outstanding amount were halved, they remain at high levels. Recent trends  
on the profit and loss account of the major Portuguese banks show, amongst other things, how low interest rates are having a certain  
impact on a banking system that is primarily geared towards retail activities and variable-rate loans.  
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The five major Portuguese banking groups returned to profitability in the five major Portuguese banks . This high degree of concentration  
018 thanks largely to a faster decline in interest expense than interest can be attributed to a previous period of consolidation initiated in the  
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income, and to the reduction in operating expenses and the cost of risk. mid-1980s, and that was amplified when the European Economic  
Costs were reduced as part of the macroeconomic adjustment Community’s second banking directive was transposed into Portuguese  
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programme that Portugal negotiated with the European Commission, law . Currently, 32 universal and commercial banks dominate the  
the European Central Bank (BCE) and the International Monetary Fund market in terms of total assets, compared to 86 mutual agricultural  
2
(
IMF) in April 2011 . In exchange for the authorisation of a EUR 78 credit banks (caixas de crédito agrícola mútuo). Portuguese banks are  
billion credit line, only a third of which has been disbursed (EUR 26 largely geared towards the retail banking business, which involves  
billion), Portugal had to carry out reforms whose main objectives were granting loans, collecting deposits and providing payment services on  
to restore a sustainable fiscal policy, resorb internal and external behalf of a clientele of individuals, professionals and small & mid-sized  
imbalances and stabilise the financial sector. Portugal exited this enterprises.  
adjustment programme in June 2014.  
A study of recent profit and loss account trends for the major  
The financial sector was stabilised in part through recapitalisation of Portuguese banks shows some of the effects that low interest rates are  
several banks, including Millennium BCP (Banco Comercial Português), having on a banking system geared mainly towards retail banking  
Banco BPI and Banco Internacional do Funchal (Banif), for a total of activities and variable-rate loans. The decline in the outstanding amount  
EUR 6 billion. Caixa Geral de Depósitos was also recapitalised for EUR of bank loans was offset by an increase in the net interest margin, which  
1.6 billion during the adjustment programme, but the Portuguese can be attributed to a faster decline in interest expense than interest  
government is the sole shareholder. The former Banco Espírito Santo income. Other things being equal, the decline in interest rates also  
was split up in August 2014, after the end of the adjustment programme, helped reduce the cost of risk, which in 2018 returned to the pre-2007  
and its good part was renamed Novo Banco.  
level. The non-performing loan ratio was halved from the Q2 2016 peak,  
thanks to a similar-sized reduction in the non-performing loan  
outstanding amount. Although profitability is still low, solvency ratios  
have continued to improve thanks to the reduction in risk-weighted  
assets. The period of low interest rates temporarily improved the overall  
situation of the major Portuguese banks. In the medium term, however,  
The stabilisation of Portugal’s financial sector was not accompanied by  
a major consolidation movement within the banking system. According  
to ECB figures, the number of banks in Portugal declined from 162 in  
September 2010 to 149 in November 2019. There were no major  
mergers or acquisitions during this period either. The relatively mild  
consolidation of the Portuguese banking system recently is mainly a  
reflection of the previously high level of concentration. Over the past  
decade, a relatively high and stable share of the total consolidated  
assets of the domestic banking system (about 80%) has been held by  
“low for long” interest rates are bound to have a less favourable impact  
on the dynamics of banking income and risks, especially given the  
prospects of an economic slowdown.  
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By size of assets in 2018, Portugal’s third and fifth major banks are both  
subsidiaries of Spanish banks. Santander Totta is a subsidiary of Banco  
Santander SA, and Banco BPI has been a fully-owned subsidiary of CaixaBank  
since end 2018.  
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Listed by total consolidated assets in 2018: Caixa Geral de Depósitos,  
Millennium BCP (Banco Comercial Português), Santander Totta, Novo Banco  
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(
ex-Banco Espírito Santo) and Banco BPI  
Second Council Directive 89/646/CEE of 15 December 1989, which amends  
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European Commission, 2011, The economic adjustment programme for  
directive 77/780/CEE, aims to co-ordinate the laws, regulations and  
administrative provisions relating to the taking up and pursuit of the business of  
credit institutions.  
Portugal, Directorate-General for Economic and Financial Affairs, Occasional  
Papers 79, June  
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Conjoncture // December 2019  
economic-research.bnpparibas.com  
of a decline in interest rates on interest income would depend more on  
the duration of the loan portfolio: the longer the duration, the longer the  
adjustment period over which the bank’s interest income could adjust to  
lower interest rates.  
Interest rates on new bank loans to the NFCs' decrease overall  
Non-financial corporations :  
Household and ISBLSM :  
Total loans excluding revolving loans and overdrafts  
Revolving credits and overdrafts  
Consumer credit excluding revolving consumer loans and overdrafts  
Housing loans excluding revolving consumer loans and overdrafts  
Other non-revolving loans for consumption and overdrafts  
Revolving loans for consumption and overdrafts  
For the five major Portuguese banks, operating income has been fairly  
stable since 2017 (see table 1). After declining for eight consecutive  
years, it levelled off at EUR 6.5 billion in 2018 , compared to  
EUR 6.8 billion in 2017. From a historical perspective, however, this is  
still relatively low: operating income surpassed EUR 10 billion between  
5
18%  
1
1
1
6%  
4%  
2%  
2
007 and 2010 after several years of growth. Annualised operating  
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10%  
income for the first three quarters of 2019 has been roughly the same.  
For Portuguese banks, the stabilisation of operating income is  
essentially due to the continuous growth of net interest income since  
8%  
6%  
4%  
2%  
0%  
2
015.  
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Chart 1  
Source : ECB, BNP Paribas  
Under the ECB’s accommodating monetary policy, there has been a  
regular reduction in the interest rates applied to non-financial private  
sector lending in Portugal since 2012. Yet lower interest rates were not  
accompanied by an increase in the outstanding amount of bank loans,  
which has declined by nearly a third over the past ten years.  
The outstanding amount of bank loans to the non-financial private  
sector have declined by nearly a third in ten years  
After peaking at EUR 264 billion in June 2011, the outstanding amount  
of bank loans to the non-financial private sector have contracted by  
Historically low interest rates for non-financial private sector  
lending  
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9%, to EUR 188 billion in May 2019. This is comparable to the October  
005 level (see chart 2). Clearly, lower interest rates did not trigger a  
volume effect during the period. The main two explanations are the  
sharp deterioration in the cyclical environment and the initially high level  
of household indebtedness (see below).  
Other things being equal, the currently low level of interest rates has  
helped reduce the interest income of Portuguese banks. With the  
exception of new household overdraft rates, the rates applied to all  
other new loans have generally declined since April 2012. In September  
In Portugal, the decline in the outstanding amount of bank loans to the  
non-financial private sector is largely due to the decline in loans to non-  
financial corporates (NFC). Between June 2011 and May 2019, the  
outstanding amount of loans to NFC declined by 41%, from EUR  
2019, they were almost all at the lowest levels reported during the  
observation period (see chart 1).  
Theoretically, at constant loan outstanding amounts, interest income  
declines as new loans with lower yields replace existing loans and  
account for an ever bigger share of bank balance sheets. For the  
Portuguese banks, the unfavourable impact of low interest rates on  
interest income was reinforced by the high proportion of variable-rate  
loans. Contractually, variable-rate loans must be adjusted downwards,  
further reducing the interest income banks receive on loan outstanding  
amount. On average, 85% of the new loans granted to resident  
households for house purchase, between September 2009 and  
September 2019, were variable-rate loans. This compares to an  
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22 billion to EUR 71 billion.  
Outstanding loans to the non-financial private sector reduced  
to its 2005 level  
Household - Credits to consumption  
Household - Other loans  
Household - Habitat ready  
Eur Bn  
Non-financial corporations - Total loans  
Non-financial private sector - Total loans  
300  
Household - Total loans  
250  
200  
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average of 26% for the euro area, 14% for Germany and 6% for France .  
In a banking system making greater use of fixed-rate loans, the impact  
150  
1
00  
50  
0
5
Rounded off from EUR 6,549,570,000.  
It is possible to compare operating income with previous years given the low  
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seasonal nature of most of the items on the profit and loss account of  
Portuguese banks. Given its exceptional nature, Q4 2018 was excluded from  
our calculations.  
2
003  
2005  
2007  
2009  
2011  
2013  
2015  
2017  
2019  
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Chart 2  
Source: ECB, BNP Paribas  
For the most part, loans granted to non-financial corporates (NFC) are  
variable-rate loans, regardless of the country under consideration.  
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Conjoncture // December 2019  
economic-research.bnpparibas.com  
Aggregated profit and loss account of the five major Portuguese banking groups  
Million euro  
2013  
7 310  
3 697  
2 491  
1 121  
-4 984  
-2 679  
-2 305  
2 326  
-4 177  
-1 851  
-34  
2014  
6 672  
3 402  
1 969  
1 301  
-4 065  
-2 232  
-1 833  
2 608  
-3 346  
-738  
2015  
7 016  
3 602  
2 036  
1 378  
-4 250  
-2 357  
-1 893  
2 766  
-2 940  
-174  
2016  
6 187  
3 895  
1 956  
337  
2017  
6 789  
4 121  
2 042  
626  
2018  
6 550  
4 372  
2 115  
63  
2019e*  
6 790  
4 500  
2 125  
164  
Net banking income  
o/w Net interest income  
o/w Net fee and commission income  
o/w Other operating income  
Total operating expenses  
o/w Personnel expenses  
o/w Other operating expenses  
Gross operating income  
Cost of risk  
-4 008  
-2 048  
-1 960  
2 180  
-4 966  
-2 786  
-83  
-3 830  
-2 081  
-1 749  
2 959  
-2 827  
132  
-3 962  
-2 033  
-1 929  
2 588  
-955  
1 633  
-29  
-3 514  
-2 086  
-1 428  
3 276  
-1 455  
1 820  
329  
Net income before tax from continuing operations  
Profit or loss from discontinuted operations  
Corporate income tax  
268  
658  
-748  
-467  
257  
197  
-1 223  
47  
897  
1 116  
53  
713  
Other nonreccuring income and expenses  
Minority interests  
0
0
0
25  
18  
250  
316  
342  
316  
124  
166  
143  
Net income  
-1 668  
-1 044  
-55  
-1 915  
-1 613  
375  
1 310  
*
*2019 data is estimated with this of the first three quarters  
Table 1  
Source: BNP Paribas calculations  
Over the same period, the outstanding amount of loans to households Loans to households for house purchase recently picked up  
declined by 18%, from EUR 143 billion to EUR 116 billion. Automatically,  
again  
bank loans to NFC as a share of the outstanding amount of total bank  
Loans for house purchase, which are almost exclusively mortgage loans,  
loans to the non-financial private sector declined to 38% in May 2019  
accounted for 79% of the outstanding amount of total bank loans to  
from 46% in June 2011.  
resident households in September 2019. This figure has remained  
Since June 2019, the growth of loans to households (both for house  
purchase and consumption) has exceeded the ongoing decline in NFC  
loans. As a result, the outstanding amount of loans to the non-financial  
private sector rose mildly. The increase in loans to households as a  
share of total loans to the non-financial private sector might contribute  
to the reduction of the volatility of the interest income of Portuguese  
banks. This is because loans to households are less sensitive to cyclical  
fluctuations than loans to NFC.  
relatively stable throughout the observation period (starting in January  
003). Since October 2018, the outstanding amount of loans for house  
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purchase has increased moderately, halting the decline observed  
between November 2011 and September 2018 (a cumulative 18%  
decline). During this period, the outstanding amount of loans to resident  
households for house purchase diminished continuously, from  
EUR 114 billion to EUR 94 billion. This decline might seem surprising  
given the observed decline in lending rates. Yet it can be explained to a  
certain extent by the preponderance of variable-rate loans, which  
reduce the incentive for households to borrow when rates are low  
Bank intermediation declines as a share of NFC indebtedness  
The decline in the outstanding amount of bank loans to NFC was not (compared to a system of predominantly fixed-rate loans).  
offset by greater use of the bond market. Like bank loans, the  
The recent increase in the outstanding amount of loans for house  
outstanding amount of debt securities issued by NFC also diminished  
purchase was accompanied by a 379% increase in the 12-month  
between June 2011 and May 2019. The outstanding amount of NFC  
moving average of new loans for house purchase between September  
debt securities dropped from EUR 40 billion to EUR 29 billion. Since this  
2
014 (EUR 184 million) and September 2019 (EUR 880 million). After  
3
0% decline was smaller than the decline in the outstanding amount of  
virtually stagnating at historically low levels (see chart 3), new loans for  
house purchase returned to the June 2008 level of EUR 1161 million.  
Yet this figure still falls far short of the July 2007 peak of  
EUR 1875 million. Lastly, new loans cumulated over 12 months grew at  
bank loans, debt securities increased as a share of total NFC  
indebtedness (narrowly-defined). As a result, financial intermediation for  
resident NFC decreased from 75% in Q2 2011 to 71% in Q2 2019.  
Bank intermediation was thus lower than the euro area average, which  
at the same dates came to 85% and 76%, respectively.  
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Conjoncture // December 2019  
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an average annual rate of 37% between September 2014 and Household debt ratio in a few Eurozone countries  
September 2019.  
The dynamic momentum of new loans for house purchase cannot be  
attributed to buybacks or renegotiations, which remain low in Portugal  
160  
Germany  
Spain  
France  
Euro area  
Italy  
Portugal  
1
40  
20  
(
since December 2014, they have accounted for 9% of new loans on  
1
average, compared to 34% in France). Given the low proportion of  
fixed-rate loans, only a small fraction of loans are potentially affected by  
such operations.  
100  
80  
60  
40  
New production of real estate loans to households increases  
by 379% in 5 years  
Eur Bn  
New production of habitat to household and ISBLSM,  
cumulative monthly flows  
20  
0
2
1
1
0
0
.0  
.5  
.0  
.5  
.0  
0
0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19  
Chart 4  
Source: ECB, BNP Paribas  
1
1
Between July 2018 and March 2019 , the share of new loans for house  
purchase with a LTV ratio of more than 90% was virtually nil, compared  
to about 20% previously. As a result, the share of total new loans for  
house purchase with a LTV ratio of between 80% and 90% more than  
doubled to about 45%. In contrast, the share of new loans with a LTV  
ratio of less than 80% declined by more than 10 percentage points over  
the same period. The average LTV ratio seems to be in the process of  
converging at between 80% and 90%.  
2003  
2005  
2007  
2009  
2011  
2013  
2015  
2017  
2019  
Chart 3  
Source: ECB, BNP Paribas  
The Bank of Portugal’s second recommendation is to limit the debt  
Bank of Portugal recommendations could scale back this trend  
service-to-income ratio (DSTI) by limiting the amount of monthly  
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payments to 50% of the borrower’s monthly income . The DSTI ratio  
must take into account all loans already contracted by the borrower as  
well as the potential upturn in interest rates given the preponderance of  
variable-rate loans. The proportion of new loans for house purchase  
with a DSTI ratio of less than 50% rose to 89% in March 2019 from 77%  
in July 2018. The level of data aggregation prevents us from getting a  
more precise picture of the breakdown of new loans for house purchase  
with a DSTI ratio of less than 50%.  
Since 1 July 2018, the Bank of Portugal “recommends” that credit  
institutions authorised to lend within its jurisdiction set several limits on  
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their business . According to the national central bank, these  
recommendations aim in part to reduce the incentives for some banks  
to ease their lending standards in order to create a volume effect to  
offset the squeeze on margins, due notably to greater competitive  
pressures and low interest rates. They are also designed to reduce the  
indebtedness ratio of resident households, who might be attracted by  
currently low lending rates, although this phenomenon is not yet  
reflected in the figures (see above, outstanding amount of loans to  
households).  
Third, the Bank of Portugal is asking banks to limit the original maturity  
of new loans for house purchase to 40 years. The recommendation  
aims at reducing the average maturity of new loans for house purchase  
to 30 years by the end of 2022. In comparison, the original maturity of  
loans for house purchase in France averaged 20.4 years in September  
1
0
Inversely, the household indebtedness ratio has dropped off sharply in  
recent years, bringing it closer to the euro area average (95% and 94%,  
respectively, in Q2), after widening constantly between 2000 and 2007  
2
019. In Q1 2019, the original maturity in Portugal was 32.7 years,  
13  
compared to 33.7 years in Q1 2018 . Although the recommendation  
seems to be paying off, the outstanding amount of loans for house  
purchase with an original maturity of more than 30 years was the only  
category to progress in Q2 2019 (+3.5%) while those with an original  
maturity of less than 30 years declined sharply (-10.3%). These two  
trends have intensified since they first appeared in September 2017.  
The original maturity of new loans for house purchase is thus  
converging on 30 years due to both the shortening of longer maturities  
and the prolongation of maturities of less than 30 years.  
(
see chart 4). The household indebtedness ratios for Portugal and  
Spain have followed very similar trajectories, in line with their respective  
cyclical environments. In the Bank of Portugal’s first recommendation,  
banks are requested to limit the loan-to-value ratio (LTV) on new loans  
for primary residences to 90% of the value of the purchased or built real  
estate asset.  
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A recommendation is not legally binding. However, banks must comply with it  
1
1
Most recently available observation period. Bank of Portugal, 2019,  
or justify their position, otherwise the Bank of Portugal could take prudential  
measures against them.  
Macroprudential recommendation on new credit agreements for consumers –  
Progress report, May 2019  
9
Bank of Portugal, Macroprudential measure within the legal framework of  
1
2
Net annual income divided by 12.  
Bank of Portugal, 2019, Relatório de acompanhamento dos mercados  
credit for consumers, 1 February 2018  
1
0
13  
Loan outstanding amounts as a share of gross disposable income adjusted  
for changes in the amount of shares that households hold in pension funds.  
bancários de retalho - 2018  
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Conjoncture // December 2019  
economic-research.bnpparibas.com  
Fourthly, the Bank of Portugal recommends that banks avoid grace have been largely replaced by sight deposits according to the latest  
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7
periods to borrowers on payments of principal and interest, whenever Bank of Portugal figures . Arbitraging by depositors helps explain the  
possible. Through payment extensions, however, banks can offer decline in the implicit interest rate on customer deposits over and  
greater flexibility to borrowers experiencing temporary troubles, thereby beyond the decline in money market rates.  
avoiding a “credit event” whenever possible, and an increase in the cost  
After peaking at more than 11% in 2012, the share of central bank  
of risk. To our knowledge, there is no data that can be used to evaluate  
refinancing steadily ebbed until it reached only 5.3% of the liabilities of  
the impact of this recommendation.  
Portuguese banks in 2018. All in all, the outstanding amount of  
liquidities obtained by the Portuguese banking system under the LTRO  
programmes was about EUR 18 billion at October 2019. Consequently,  
Portuguese banks should make only limited use of TLTRO III for the  
sole purpose of replacing the credit lines obtained under TLTRO II  
(
which ran from June 2016 to March 2017), which reach maturity in  
June, September and December 2020 and in March 2021.  
The decline in interest expense for the major Portuguese banks can be  
attributed to the decline in the overall bank funding costs and the  
change in bank liabilities in favour of less costly funding.  
The TLTRO programmes also enabled the major Portuguese banks to  
improve their liquidity coverage ratio (LCR). They were able to use  
certain sovereign debt securities to increase their reserves with the  
central bank, which are eligible as high quality liquid assets (HQLA), the  
numerator of the LCR. The change in the structure of bank liabilities  
enabled them to reduce the opportunity cost linked to the ownership of  
HQLA. Within the European Union, the Portuguese banking system has  
one of the highest average regulatory liquidity coverage ratios. After an  
Bank funding costs continued to decline  
In 2018, the interest paid by Portuguese banks on refinancing  
operations with central banks as a share of the outstanding amount of  
such loans (the implicit interest rate) reached a historically low level of -  
0.2%. The implicit rate was negative for the first time since 2014, the  
84bp increase since Q4 2016, the average LCR culminated at 227% in  
first available observation date for this data series. This bank funding is  
comprised mostly of liquidities issued from the second targeted longer-  
term refinancing operations (TLTRO), which explains why the average  
refinancing rate is negative. The cost of debt securities issued by banks  
also fell from 4.3% in 2014 to 2.4% in 2018.  
Q1 2019, compared to 153% for the EU banking system as a whole.  
The net interest margin for Portugal’s major banks has increased as  
The customer deposit rate also fell to 0.4% in 2018 from 1.5% in 2014. interest expense declined faster than interest income. Moreover, given  
Deposit rates are downwardly rigid because banks are reluctant to pass the volatility of revenues generated by market activities and the relative  
on rates at the zero lower bound or that are negative to retail weakness of net commissions, neither can be envisioned as a new  
1
4
customers , not only for commercial reasons, but also because source of growth to replace net interest income, at least not in the short  
customers can easily convert part of their deposits into cash. In Portugal, term.  
regulations also ban the application of negative interest rates on both  
households and non-financial companies . Persistently low interest  
rates clearly limit the effectiveness of monetary policy.  
Interest expense fall more rapidly than interest income  
1
5
Between 2014 and 2018, the net interest margin of the major  
Portuguese banks rose from 1.2% to 1.7%, which is higher than the  
average for the European Union banking system as a whole (1.4% in  
Moreover, in a negative interest rates environment, a high loan-to-  
deposit ratio tends to become a handicap whereas it was rather  
advantageous when rates were more positive. As the Bank of Portugal  
18  
2
018 ). The net interest margin continued to widen in the first three  
quarters of 2019, lifted by the decline in interest expense at a time when  
interest income was showing signs of levelling off (see chart 5).  
1
6
points out , Portuguese banks managed to reduce their loan-to-deposit  
ratio by 42% in ten years, with a big reduction in the dispersion of ratios  
between banks.  
The impact of interest rate fluctuations on the net interest margin  
depends on the respective duration of banking assets and liabilities.  
Theoretically, the net interest margin rises during phases of falling  
interest rates because bank funding can be replaced more rapidly by  
other less costly resources than assets can be replaced by lower-  
yielding ones. This phenomenon is naturally linked to the traditional  
activity of maturity transformation. The cost of funding for Portugal’s  
major banks has adjusted more rapidly to the decline in interest rates  
than the return on assets, even though the preponderance of variable-  
rate loans means that returns fall more rapidly than if they were fixed-  
rate instruments.  
Customer deposits make up more than two thirds of the liabilities  
of Portuguese banks  
Household and NFC deposits comprise a growing share of the total  
liabilities of Portuguese banks, and this percentage rose to 67% in  
December 2018 from 46% in December 2008. The uninterrupted  
increase in this proportion since 2009 can be attributed to the increase  
in the outstanding amount of customer deposits (+17% between 2010  
and 2018) while the outstanding amounts of other types of bank funding  
contracted. Given the decline in their opportunity cost, time deposits  
1
4
In Portugal, there are no regulated savings accounts comparable to the Livret  
A in France, for example.  
Bank of Portugal, 2009, Carta-Circular nº 33/2009/DSB, 23/03/2009  
Bank of Portugal, 2019, Financial Stability Report, June 2019  
1
1
5
6
17  
Bank of Portugal, 2019, Financial Stability Report, June 2019  
EBA Risk Dashboard Data as of Q2 2019  
18  
7
Conjoncture // December 2019  
economic-research.bnpparibas.com  
Lastly, the positive impact of a higher net interest margin on net interest consortium of funds managed by the American KKR and the  
2
0
income neutralised the negative effect arising from the decline in the Luxembourg-based LX Investment Partners .  
outstanding amounts of bank loans. Net interest income for the major  
Portuguese banks grew at an average annual rate of 6.5% between  
2
014 and 2018, from EUR 3.4 billion to EUR 4.4 billion. In Q3 2019, the  
year-on-year increase in net interest income was 8.8%. In comparison,  
net interest income for the euro area’s 183 biggest banks rose only  
Net banking income for the major Portuguese banks has levelled off  
thanks to cutbacks in the cost of funding. Yet net income increased is  
due to cutbacks in total operating expenses and the cost of risk.  
0
.4% over the same period.  
Interest expenses are falling faster than revenues  
Eur Bn  
30  
25  
20  
15  
10  
5
0
Interest income  
Interest expense  
Portuguese banks were forced to make major adjustments in the wake  
of the troubles experienced during a series of crises in 2007-2008 and  
then in 2010-2011. As a result, total operating expenses were reduced  
by 31% on average between 2006-2008 and 2016-2018 (see chart 6).  
Cutbacks in personnel costs and other operating expenses contributed  
to this decline, with cuts averaging 34% and 27%, respectively, between  
2
006-2008 and 2016-2018. Tight cost controls offset the decline in  
operating income. As a result, the major Portuguese banks have  
managed to maintain their cost-to-income ratio at an average of about  
60% since 2005, although small improvements can be seen in 2018 and  
so far in 2019 as well.  
2
005  
2007  
2009  
2011  
2013  
2015  
2017  
2019e  
Chart 5  
Source: SNL, BNP Paribas  
Portuguese banks have increased their dependence on net Outstanding lending to the non-financial private sector has been  
reduced to its 2005 level  
interest income  
Eur Bn  
Overhead costs :  
Net interest income as a share of operating income for the major  
Portuguese banks has increased steadily since 2005. In 2018, this  
proportion reached an all-time high of 67% (compared to 51% in 2005).  
The breakdown of the different types of revenues (interest,  
commissions, gains or losses on financial instruments, etc.) is generally  
better balanced for the larger banks compared to their smaller  
competitors. Although the increasing share of net interest income can  
be largely explained by the decline in other revenues, less diversity in  
terms of the types of revenue increases the major Portuguese banks’  
dependency on interest income, which has been declining over the past  
several years.  
7
6
5
4
3
2
1
0
of wich staff costs  
of witch other operationg expenses  
2005  
2007  
2009  
2011  
2013  
2015  
2017  
2019e  
Nonetheless, net commissions collected by the major Portuguese banks  
continued to increase in 2018 (+3.6% year-on-year, vs +4.4% in 2017).  
Yet this positive trend is not yet strong enough to serve as a new source  
of growth to replace net interest income. At an annualised  
EUR 2.1 billion in 2019, net commissions still fell short of the 2010 peak  
of EUR 2.8 billion.  
Chart 6  
Source: SNL, BNP Paribas  
Personnel expenses continued to fall in 2018  
Like most of the other euro area countries, the Portuguese banking  
system has scaled back capacity over the past ten years. Bank staff in  
Portugal was reduced by 19% between 2008 and 2018, compared to  
Hit by a bout of weakness in 2018, other income amounted to only EUR  
17% for the euro area banks as a whole.  
6
3 million, down from EUR 2.6 billion in 2005. This sharp drop is mainly  
due to the decline in income generated by market activities. Between  
1 December 2017 and 31 December 2018, for example, CGD reported  
Personnel expenses for the major Portuguese banks continued to  
decline to EUR 2 billion in 2018, from a 2009 peak of EUR 3.2 billion.  
Most of these cutbacks occurred between 2011 and 2014, although  
they continued at a slower pace between 2015 and 2018.  
3
1
9
an 85% decline in net trading income . Similarly, in 2018 Novo Banco  
reported a net trading loss of EUR 242 million after a net gain of  
EUR 179 million in 2017. These losses can be attributed to the Nata  
project, under which Novo Banco sold some of its assets to a  
1
9
20  
Caixa Geral de Depósitos, 2018 annual report  
Novo Banco, 2018 annual report  
8
Conjoncture // December 2019  
economic-research.bnpparibas.com  
The decline in other operating expenses helped keep total quarters of 2019, net income for the five major Portuguese banks  
remained positive thanks to the reduction in Novo Banco losses.  
operating expenses under control  
Other operating expenses, including rent, advertising expenses and Net profit of the major Portugueses banks, between reduction of  
domestic losses and increase of the result of activities abroard  
costs pertaining to information and communications technology, did not  
decline quite as fast as personnel expenses. Even so, the number of  
1
50%  
00%  
50%  
Domestic (home or reference area)  
Rest of the World  
Portuguese bank branches was reduced by 35% between 2008 and  
018, compared to a euro area average of 27% for the same period. As  
1
2
2
1
the Bank of Portugal points out , the intensification of digitalisation  
plans and investments by Portuguese banks undoubtedly helped drive  
up other operating expenses. Novo Banco, for example, set up a  
0%  
-
50%  
digitalisation circle” to transform the group by focusing more on  
22  
-100%  
-150%  
customers, streamlining procedures and reducing risks . The bank also  
pooled together its main digital sector skills and expertise within an  
internal entity called “Novo Banco Digital” in 2018. On 4 December  
-
200%  
250%  
2
019, Caixa Geral de Depósitos director Maria João Carioca  
-
announced that the group intended to invest EUR 200 million over 5  
years to accelerate the bank’s digital transformation.  
2
014  
2015  
2016  
2017  
2018  
Chart 8  
Source: Financial communications of banks, BNP Paribas  
Compared operating coefficients of some European banking systems  
International activities made a big contribution to the consolidated net  
income of the major Portuguese banks (see chart 8). The main  
international markets are Spain and France, where Caixa Geral de  
Depósitos and Novo Banco are very active. Millennium BCP has a  
bigger foothold in Poland and Mozambique. BPI has a major subsidiary  
in Angola, where Caixa Geral de Depósitos and Novo Banco also have  
operations. Though a Portuguese-speaking country, Brazil is not a  
significant market for Portuguese banks. Although international activities  
make a positive contribution to the consolidated net income of  
Portuguese banks, this contribution is bound to diminish if they go  
ahead with plans to sell-off non-strategic assets. In 2018, Novo Banco  
sold off its activities in Venezuela, Italy, and Cape Verde, and Caixa  
Geral de Depósitos has put several subsidiaries up for sale, including in  
Brazil and Spain.  
90%  
80%  
70%  
60%  
50%  
40%  
30%  
20%  
10%  
june-2016  
june-17  
june-2018  
june-2019  
0%  
DE  
ES  
FR  
IT  
PT  
UE  
Chart 7  
Source: ECB, BNP Paribas  
The return on equity improved in 2019 but remains low  
Lastly, the cost-income ratio of Portuguese banks improved slightly in The return on equity for the major Portuguese banks was naturally  
018 and has continued to improve so far in 2019 (see chart 7) after positive in 2018, although it remains low. The weighted average return  
2
fluctuating around an average of 60% since 2005. It is now lower than on equity was 1.5% during the year (see chart 9), whereas it surpassed  
the average cost-to-income ratio for the EU banking system as a whole. 15% prior to 2008. It was also much lower than the average return for  
In this respect, the major Portuguese banks stand apart from the the other large EU banks in 2018. In 2019, in contrast, the big  
average of the major EU banks as a whole, whose cost-to-income ratio Portuguese banks began to approach the euro area average.  
has tended to erode since 2017. Yet the divergent trajectories between  
International comparison of financial profitability of major banks in  
banking systems must be kept in perspective: the decline in income  
several EU countries*  
from corporate and investment banking activities probably contributed to  
the deterioration in the cost-to-income ratios of banking systems that  
rely more heavily on these activities to generate a their income.  
2
5%  
20%  
5%  
10%  
Germany  
Spain  
France  
Portugal  
EZ  
1
In 2018, international activities made a large contribution to the  
net income of the major Portuguese banks  
5
%
Thanks to the lower bank funding costs and tight cost controls, the  
major Portuguese banks swung into positive territory in 2018 for the first  
time since 2010, with net income of EUR 375 million. This is still far  
short of the 2005-2007 average of EUR 2.6 billion. In the first three  
0%  
5%  
-
-
10%  
15%  
*
The sample is composed of the largest consolidated banking groups by country  
006 2008 2010 2012 2014 2016  
2018 2019e  
Source: SNL, BNP Paribas  
-
2
2
2
1
2
Bank of Portugal, 2019, Financial Stability Report, June 2019  
See Novo Banco, 2018 annual report  
Chart 9  
9
Conjoncture // December 2019  
economic-research.bnpparibas.com  
In the short term, however, the adjustments that had to be made during International comparison of non-performing loan ratios  
the crisis years should continue to strain the returns of the major  
Portuguese banks. In the longer term, these cost adjustments should  
5
4
4
3
3
2
2
1
1
0%  
5%  
0%  
5%  
0%  
5%  
0%  
5%  
0%  
5%  
0%  
help increase returns, although their impact could be delayed by slower  
growth and a persistently accommodating monetary policy for many  
more quarters.  
Q2 2018  
Q2 2019  
All things being equal, low interest rates have reduced the cost of risk  
for the major Portuguese banks and helped clean up their balance  
sheets. The reduction in the cost of risk helped limit the erosion of  
equity capital, but it still declined. The regulatory solvency ratios of the  
major Portuguese banks improved essentially because risk-weighted  
assets declined faster than equity capital.  
Chart 11  
Source: BAE, BNP Paribas  
2
4
According to Bank of Portugal figures , the decline in the NPL ratio is  
mainly due to a reduction in the outstanding amount of non-performing  
loans (the ratio’s numerator). The outstanding amount of NPL was  
halved, from EUR 50 billion in Q2 2016 to approximately EUR 25 billion  
2
3
The cost of risk for the major Portuguese banks dropped from a peak in Q1 2019. Over the same period, the outstanding amount of total bank  
of EUR 5.6 billion in 2011 to EUR 1 billion in 2018 (see chart 10). It has loans (the ratio’s denominator) contracted by 8%. This means that the  
now fallen below the 2007 level of EUR 1.1 billion. The temporary decline in the NPL ratio was not due to dilution but to the clean-up of  
upturn in 2016 can be largely attributed to Caixa Geral de Depósitos bank balance sheets.  
plan to clean up its balance sheet. Excluding CGD, the cost of risk for  
2
5
The tightening of bank lending conditions in 2011/2012 , which were  
maintained thereafter, helped reduce the cost of risk for Portuguese  
banks. Lower interest rates also eased the solvency requirement that  
weighed on borrowers in the repayment process.  
the major Portuguese banks would have declined continuously between  
012 and 2018. Changes in the cost of risk at Novo Banco (formerly  
2
BES) largely determined the dynamics for all of the major Portuguese  
banks. Novo Banco was largely responsible for the general downward  
trend in 2016, but also for the upturn in the first three quarters of 2019.  
Along with the decline in the cost of risk, the non-performing loan ratio  
was halved for the major Portuguese banks, from a peak of 20.1% in  
Q2 2016 to 8.9% in Q2 2019. Even so, the NPL ratio is still nearly three  
times higher than the average for the main EU banks (see chart 11).  
Sales and securitisations of non-performing loans were one of the main  
channels for cleaning up the balance sheets of Portuguese banks in  
2018. These operations reduced the NPL ratio by 1.7 percentage points  
Evolution of the cost of risk of Portuguese banks  
2
6
during the year . Their cumulative total reduced the NPL ratio by  
.9 percentage points from the Q2 2016 peak. As part of Project  
2
Eur Bn  
6
Sertorius, for example, Novo Banco sold off EUR 488 million in non-  
performing real-estate loans to Cerberus Capital Management at 33%  
of its gross book value in August 2018. The price is comparable to the  
ones paid for other sales in Spain and Italy, although it naturally  
depends on the quality of the loan portfolio being sold. Novo Banco is  
also conducting Nata 2, which should lead to the sale of another non-  
5
4
3
2
1
0
2
7
performing loan portfolio by the end of 2019 . Given the planned  
amount of the disposal (EUR 3.3 billion initially), this operation should  
have a significant impact on Novo Banco’s non-performing loan ratio,  
and to a lesser extent, on the NPL ratio of the entire Portuguese  
banking system.  
2005  
2007  
2009  
2011  
2013  
2015  
2017  
2 0 1 9 e  
Chart 10  
Source: SNL, BNP Paribas  
2
2
4
5
Bank of Portugal, 2019, Financial Stability Report, June  
Bank of Portugal, 2012, Bank Lending Survey, January 2012 and Bank of  
Portugal, 2011, Bank Lending Survey, October 2011  
2
6
The range of banks covered by Bank of Portugal data is broader than that of  
EBA data. This also explains the slight differential between the two NPL ratios.  
2
3
Impairment allowances and reversals, amounts recovered on impaired loans  
and losses on non-recoverable loans.  
2
7
Novo Banco, 5 September 2019 press release  
1
0
Conjoncture // December 2019  
economic-research.bnpparibas.com  
Write-offs have reduced the non-performing loan ratio of Portuguese EU banks as a whole, which came to 14.4% and 11.3%, respectively, at  
banks by 3 percentage points since the 2016 peak, including 1 point the same dates (see chart 12).  
during the year 2018. At 31 December 2018, the total reduction in the  
International comparison of CET1 ratios of major EU banks  
NPL ratio was 8.5 points, which means that write-offs have been the  
main channel so far for cleaning up the balance sheets of Portuguese  
3
3
2
2
5%  
0%  
5%  
0%  
banks, ahead of sales and securitisations. Yet the relative contribution  
of write-offs to the decline in the NPL ratio has gradually decreased  
while that of sales and securitisations has increased. These trends  
suggest that Portuguese banks initially cleaned up their balance sheets  
by selling their most deteriorated exposures with the highest provision  
ratios and lowest valuations. Thereafter, they sold and/or securitised  
their less deteriorated non-performing exposures with higher valuations.  
The breakdown may have been determined in part by the time it takes  
to set up sales and securitisation operations. In addition, low interest  
rates may have influenced the growing use of sales and securitisations,  
because all things being equal, a reduction in the discount rate  
increases asset value.  
Q2 2018  
Q2 2019  
15%  
10%  
5%  
0
%
Chart 12  
Source: BAE, BNP Paribas  
The net flow of non-performing loans, i.e. the difference between new  
non-performing loans and non-performing loans reclassified as  
performing, plus impairment and repossessions, contributed to  
None of the Portuguese banks made it on the list of Global Systemically  
Important Banks (G-SIBs) established by the Financial Stability Board  
1
.8 percentage points of the total decline in the NPL ratio. Lastly,  
(
FSB). Consequently, they are not subject to additional regulatory  
dilution arising from the flow of performing loans made only a small, 0.8-  
point contribution to the decline in the NPL ratio of Portuguese banks.  
requirements.  
Risk-weighted assets decline faster than equity  
Portuguese banks are expected to continue cleaning up their balance  
sheets in the quarters ahead, notably because some have been The process of cleaning up the balance sheets of Portuguese banks  
required to submit NPL reduction plans to the Bank of Portugal. and to a lesser extent the introduction of IFRS 9 on 1 January 2018  
Moreover, the introduction of accounting standard IFRS 9 on 1 January hampered the improvement in capital adequacy ratios. The outstanding  
2
018 could increase the cost of risk when a cyclical slowdown is amount of CET1 of the major Portuguese banks rose by 105% between  
expected. This accounting standard recognises expected credit losses 2007 and 2012, from EUR 13 billion to EUR 27 billion, before  
and not only incurred credit losses as was the case under the previous contracting by 24% to EUR 21 billion in 2018. Capital adequacy ratios  
(
IAS 39 standard), as well as minimum coverage requirements for non- continued to improve in the recent period because risk-weighted assets  
performing exposures imposed by the European Commission and the declined faster than equity capital. Risk-weighted assets declined by  
29  
2
8
ECB’s “supervisory expectations for prudential provisioning” . As a 31% between 2012 and 2018, from EUR 226 billion to EUR 157 billion .  
result, the Portuguese banks’ situation may seem to have deteriorated  
For the major Portuguese banks, a lasting return to profitability would  
even without an intrinsic deterioration in the quality of their portfolio.  
boost improvements in capital adequacy ratios, this time through an  
increase in equity. The major Portuguese banks have also strengthened  
their loss absorbing capacity thanks to issues of subordinated debt  
eligible as Tier 2 capital. In 2018, for example, Novo Banco and Caixa  
The major Portuguese banks have strengthened their capital adequacy  
Geral de Depósitos issued EUR 400 million and EUR 500 million,  
ratios despite low profitability and the clean-up of balance sheets.  
respectively, in Tier 2 capital. Additional requirements for Total Loss  
Ongoing clean-up efforts, however, are likely to further strain bank  
Absorbing Capacity (TLAC) and the Minimum Requirement for Own  
equity. Moreover, under certain conditions, the fiscal treatment of  
Funds and Eligible Liabilities (MREL) should continue to support debt  
deferred tax assets (DTA) provides the major Portuguese banks with  
additional loss absorbing capacity equivalent to 15% of their CET1,  
securities issues eligible as Tier 2 capital.  
without it counting as equity capital.  
DTA eligible for a special tax regime represent additional loss  
absorbing capacity equivalent to 15% of CET1  
Despite low profitability, Portuguese banks have nearly doubled  
their capital ratios over the past 5 years  
Like in the Spanish and Italian banking systems, deferred tax assets  
(
DTA) comprise a major part of the regulatory capital of the Portuguese  
Regulatory capital ratios for the major Portuguese banks have  
increased since 2014. They had a fully-loaded Common Equity Tier 1  
30  
banking system according to European Commission calculations .  
(
CET1) ratio of 13.2% in Q2 2019, up from 7.9% in Q3 2014. Despite  
this significant improvement in the solvency of the major Portuguese  
banks, it still falls short of the weighted average CET1 ratio for the major  
2
9
Without more recent data, we were unable to make acceptable estimates for  
019.  
See European Commission, Coping with the international financial crisis at  
2
3
0
2
8
Humblot, T., 2018, The project to remove non-performing loans from the  
European banking system, Eco Flash, BNP Paribas  
the national level in a European context  Impact and financial sector policy  
response in 2008-2015, Commission staff working document, November 2017  
1
1
Conjoncture // December 2019  
economic-research.bnpparibas.com  
3
1
After the introduction of the Capital Requirements Regulation (CRR) in households. All things being equal, “low for long” rates should also  
013, banks were required, as of 1 January 2018, to deduct all of their support bank lending to NFC, but the upcoming slowdown in growth is  
2
deferred tax assets that rely on future profitability, and some of those likely to hamper demand. Under these conditions, interest income is  
that did not, from their regulatory capital. At 31 December 2018, DTA might continue to decline for the major Portuguese banks.  
eligible as equity capital comprised roughly 4% of CET1 outstanding  
With interest rates already at such low levels, it seems reasonable to  
amount for the major Portuguese banks, after peaking at 9% in 2016,  
assume that most of the decline in bank funding costs has already  
which reflects the losses reported during this period. On average, DTA  
occurred. The ban on applying negative rates to customer deposits  
eligible as equity capital accounted for less than 10% of all the DTA of  
serves as a floor for the funding costs of Portuguese banks. Moreover,  
the major Portuguese banks between 2014 and 2018.  
as long as the opportunity cost for households to hold sight deposits  
Since 2014, Portugal’s tax code stipulates that under certain conditions remains so low, the structure of liabilities for the major Portuguese  
3
2
part of bank DTAs can be converted into a tax credit to cover losses . banks is likely to remain relatively akin. As a result, interest expense  
Since the latter is payable by the Treasury, it can be used to preserve should continue to decline very moderately.  
capital adequacy ratios. In return for the conversion of DTA into tax  
Low for long” interest rates could end up reversing recent trends:  
credits, a special reserve is created with an amount equivalent to 110%  
of the converted DTAs, and securities convertible into ordinary shares  
are issued for the same amount to the Portuguese state. Based on data  
published by the major Portuguese banks, about 50% of their deferred  
tax assets were eligible for this special regime in 2018. This increased  
their loss absorbing capacity by about EUR 3 billion, or nearly 15% of  
CET1 in 2018.  
interest income might begin to fall more rapidly than interest expense.  
This would squeeze the net interest margin while the positive volume  
effect necessary to offset its erosion would become hypothetical at best.  
Lastly, the outlook for operating income growth for the major  
Portuguese banks continues to be hampered by GDP growth forecasts  
(
3
1.9% in 2019 and 1.4% in 2020 according to our scenario, compared to  
.5% in 2017 and 2.4% in 2018). Without sufficient new sources of  
In 2016, for example, Novo Banco converted deferred tax assets into a growth, the major Portuguese banks will have little choice but to pursue  
tax credit for a definitive amount of EUR 154 million after the bank their cost-cutting strategies.  
reported a loss in 2015. In return, a special reserve was created  
amounting to EUR 169 million, i.e. the amount of DTA converted into a  
3
3
tax credit plus 10% . Similar operations were conducted for an end tax  
credit of EUR 99 million in 2017 and an estimated EUR 152 million in  
2018, pending validation by the tax authorities in 2019. All in all, through  
the conversion of DTA into tax credits, the Portuguese government will  
hold convertible debt amounting to 6.5% of Novo Banco’s equity capital  
at 31 December 2018 (the tax credit is postponed by a year from the  
year under consideration) and 10.3% according to the H1 2019 financial  
statement. To a certain extent, the special tax regime applied to the  
DTA of Portuguese banks shelters their capital adequacy ratios from  
any book losses.  
Although lower interest rates seem to have had a rather positive impact  
so far on the major Portuguese banks, the levelling off of interest rates  
at low levels for a prolonged period, also known as “low for long”, is  
likely to be less favourable for them in the future.  
The continuation of an accommodating monetary policy combined with  
greater competitive pressures, notably from entities in other sectors with  
more flexible prudential regulations, should continue to exert downward  
pressure on lending rates. Yet rates are likely to fall at a slower pace as  
they converge on the zero lower bound. In Portugal, where lower rates  
have not yet stimulate growth in loan outstanding amounts, the Bank of  
Portugal’s recommendations are likely to curb the growth of loans to  
3
1
EU regulation n° 575/2013 of the European Parliament and Council of 26  
June 2013  
3
3
2
3
Law no. 61/2014 of 26 August 2014 and law no. 23/2016 of 19 August 2016  
Novo Banco, 2018, Consolidated Financial Statement