Riding the storm

The President of the Portuguese Banking Association (APB), Fernando Faria de Oliveira has had to navigate the sector through some of the stormiest seas in Portugal’s recent banking history. Yet despite one or two shipwrecks and a few leaking vessels, its members are finally sailing into calmer waters.

By Chris Graeme

The Portuguese banking sector has undergone a huge revolution over the past decade, with many Portuguese banks and family owned banking interests vanishing. Does it worry you that there is no longer a strong Portuguese presence in what have become largely multinational banks?

The Portuguese banking sector has indeed gone through a very significant restricting over the past few years. Today it is in a much stronger position and better capitalised than in the previous crisis and had more liquidity. Just to get an idea, today Portugal’s banks have a capital ratio of 14.1% whereas back in 2011 it stood at 7.8%
It is important for any country to have banks whose centres of decision-making is at a national level. But, more important than where the capital comes from is having shareholders with the financial capital to invest and bolster the capitalisation of our banks whenever necessary, so they can fully fulfil their functions, namely financing the economy and its citizens.

Would you say that the sector in Portugal is more robust and agile in terms of liquidity and being able to withstand external shocks such as the current Covid-19 crisis?

The sector today is much better prepared to deal with adverse shocks than it was at the start of the last financial crisis. The banks are more solid and capitalised, with greater liquidity. The ratio of credit/deposits has fallen from more than 150% in 2011 to less than 90% now while the ratios of Non-Performing Loans have seen a sharp decline. The ratio of liquidity cover is more than 220%, very sustained by client deposits which represent two-thirds of bank finance.
That said, despite the achievements and progress of the last few years, the banks also face various challenges, namely improving their profitability, adapting their business models to new behaviour, both in terms of clients and the competition of new players, the massive amount of regulations imposed on the sector which require multiple data reports and which demand additional efforts to remain agile in carrying them out. The banking sector also needs to continue to mend its reputation. To these now is added the crisis caused by Covid-19.
We are facing a great economic recession, one without precedent in recent history, that introduces new variables while intensifying others that had already began to be apparent. This crisis, apart from the tremendous impact that it is having on the economy (placed in an induced coma), particularly for some sectors, on employment and on the income of citizens, will inevitably affect the banks, namely its profitability, in increasing its provisions and in terms of capital consumption, in Portugal like in other countries.
The real impact of this crisis, however, will depend on multiple factors which are not yet clear, in particular the public stimuli packages aimed at the economic return, namely the European financial aid, which will be implemented.

We have seen the closure of many branches and the visibility of physical banks in the street are less today than a decade ago. Do you think physical banks’ in Portugal will be totally replaced by online and mobile banking in Portugal?

This trend is global and not exclusively seen in Europe or Portugal and is an inevitability created by the emergence of the digital economy.
However, physical bank branches will not disappear. The new banking sector business model looks to serve both digital and traditional clients. Many clients will not give up going to branches, that personal human contact and advice. And many digital clients too will continue to use both forms of service. And although the use of cash (and even credit and debit cards) for payments: use of these will also decline but won’t disappear.
But the shift to digital isn’t just restricted to the level of client relationship channels but what is certain is that the lockdown to which citizens were forced to adhere speeded up the use of digital payments.
The banks have adjusted — and will continue to adjust — including their internal structures and have sought to attract new talent and retrain existing staff, not just to meet the new requirements and expectations of clients, but also to increase productivity, efficiency and quality of service. To keep up with the digital revolution will have new “banking partner”. Just as virtual bank branches will not completely replace actual branches, the introduction of automised models of banking will not replace the bank staff member. Confidence will always have to have a human aspect in banking.

Low interest rates have become a feature for the banking sector for many years now. What innovative ways can the banking sector positively react to this and if the interest rates continue low what is the incentive for people to even use banks for their savings?

The traditional banking method, essentially based in financial margins, faces huge challenges because of the current content of very low or even negative interest rates.
The banks have tired to manage their financial margins so as to minimise these effects while developing alternative ways of revenue generation, namely by offering additional banking services to clients, including diversifying products offer and services based on digital innovations.
As to deposits, I think that confidence is the greatest asset that the banks have right now. Even with interest offered to clients being at historically low levels, in Portugal client deposits have been consistently growing onwards and upwards.

The Portuguese banking sector got a bad reputation in 2019 following a heated and nasty parliamentary enquiry into “reckless lending and mismanagement”. Was the media and Parliament justified in calling the banks to account and how have you been able to improve the image of the sector?

The APB cannot discuss specific cases involving its members.
What we said at the time, and which we mention again now, is that the Portuguese banking sector was hard hit by the sovereign debt crisis which caused a very deep recession that hit Portugal harder than the majority of other European Union countries, which inevitably resulted in an increase in default and losses. And since in our country the level of State, company and private debt was already very high, as a result of the economic policies pursued and excessive structural dependence on bank loans, the impact of the recession had inevitable consequences. This was by far and in fact the main cause of the losses suffered by various banks in Portugal.
It is also important to mention that the regulatory and supervisory framework that the banks are subject too was profoundly remodelled and tightened up following the financial crisis, including regulations governing risk evaluation and the solvency of its clients. Naturally the banks are the first to have a vested interest in ensuring that clients have the right conditions to be able to pay their loans.
Corporate governance, due diligence rules and accountability procedures are also today much clearer and better audited.
Regarding political scrutiny on the way banks operate — inevitable and healthy in any democratic society — this will always matter — and this has been the main focus of the APB – taking account of the current context and bank management and relations specifically. Effective risk management does not mean eliminating them.
As to improving the reputation of the banks, the results of the recovery efforts undertaken after the sector had been affected by the sovereign debt crisis, is the most convincing argument.
But it has to be recognised that the banking sector is not held in high regard: on the one hand, people recognise that it is vital for economic and social development, on the other it is a useful scapegoat for downloading everyone’s frustrations. And since the previous world financial crisis arose from the financial system (We’d like to point out that this was not the case in Portugal, that was hit especially hard by the sovereign debt crisis) in which various banks collapsed, some of which because of fraud, it is very difficult for the banking sector to entirely recover its good reputation.

All sectors of the economy are changing with the rise of startups, alternative means of funding such as venture capital, crowd funding and other investment funds all competing with the banks in lending money to finance new companies, particularly in the technology field. How are the banks able to compete with that or is their strategy different now?

First of all, it is important to mention that rather than a challenge or a threat, this transformation has been viewed as an opportunity. The banks look at changes in consumer behaviour and technological innovation as an opportunity to be taken advantage of. Having said that, we think competition between banks and non-banks can be healthy for the market and should be encouraged.
It is important, however, that regulation and supervision is equal for all and in particular that investors all have the same level of protection. The contribution towards an innovative and competitive ecosystem requires that the same regulatory and supervisory framework applies to all players — financial institutions, large tech companies, and Fintech startups — within a logic of “same activities same risks — same rules same supervision”.
In the concrete case of the FINTECH startups, more than competitors, these have arisen as important partners for the banks.

Finance Minister Mário Centeno recently said that the Resolution Fund was the “worst of its kind in Europe” regarding Novo Banco. In your opinion and in hindsight should the banks have had to pay to support Novo Banco or should the good assets have been simply transferred to a state bank such as Caixa Geral?

As referred, the APB cannot discuss specific cases involving its members.
The resolution measure adopted at the time was the one which the authorities believed to be the best for the banks and for financial stability.
What we have questioned is the bill that the banks have had to pay through the contributions to the Resolution Fund and which is very high.
And whilst it is an inescapable reality that the banks have had to foot the bill for this measure, we continue to hear that the burden has fallen on the tax payers. Why? Because, as the Resolution Fund had already been set up and didn’t have funds, the State which created it, had to do so through a loan with the participation of the banks to the Resolution Fund with an adequate amount of compensation. This loan is being paid and will continue to be paid over 30 years from the contributions that the banks make to the Fund.
And, meanwhile, we also have to make contributions to the European Resolution Fund which penalises the banks a lot in relation to its European peers.

There seems to be a general campaign of criticism levied by the media in Portugal against the banks which the Government seems happy to allow. In other words the banks are being painted the bad guys in the story. Is this fair and has the Government done enough to support the banking sector through this crisis?

The national banking sector is absolutely committed to lending its support to the Portuguese economy at this particularly challenging moment and proof of this is the vast raft of measures that the banks have adopted. On the one hand, by reducing the monthly payments that families have through bank services, be that through moratoria, the reduction on exemption of various bank charges; on the other hand by injecting more liquidity into the economy through financing, especially loans to companies and activity sectors most affected by the current situation.
For example, the moratoria created, both by the Portuguese State and by the national banks are among the most favourable in the European Union in terms of terms and due dates, scope and conditions applicable, covering companies and private individuals, mortgages and personal loans. And the public guaranteed credit lines are also particularly beneficial for companies.
Therefore, the banks are actually a part of the solution to the current crisis and so it is completely unfair and populist to claim that they are not doing so. The main criticisms about the long time it’s taking to get the money to companies cannot be laid at the door of the banks which have even significantly reduced the normal time it takes to draw up the contracts for these operations. To this we would add that the internal procedures and rules set out to study, decide whether to make the loans, even within the context of the pandemic still have to be met.
We live in an exceptional time. It is important not to forget that there has been an abnormally high number of applications to the credit lines made by the Government and the usual procedures in place were not prepared for that reality. But adjustments have been made to the processes underway within the timeframes that are contractually foreseen. It is also important to mention that the approvals granted indicate an insufficiency in terms of the amount of money available in these credit lines which could also be behind some of the discontent, namely on the part of companies which have yet to see their needs met.
And naturally, we really must emphasise that the banks must thoroughly evaluate risk, not just because we are obliged to do so, and for the sake of banking sector financial solvency and stability, but also in terms of ensuring a prudent use of public funds. We should not forget that we are talking about loans which are backed up by public guarantees.

The banks have put aside €200 million in offsets (provisions), do you think it is enough? Can the banks really put aside any more?

The level of offsets announced correspond to estimates at the end of March.
It was difficult then — and still is — to predict the dimension of the impacts from this crisis in family and company defaults as it is for the type of recovery that will be registered.
Naturally, as in any economic crisis, this will affect the banking sector. The dimension of this impact and its reflection in terms of impairments will also be rather dependent on the level of public aid given to families and companies, it being fundamental that there should be a strong aid package at a European level.
We are facing a global crisis that is transversal but also asymmetrical in its after effects which derives from an exterior cause which is beyond the responsibility of States and which fully justifies a direct intervention from the European Union, making proportional means available to all and which do not make existing asymmetries worse and do not cause distortions at a competition level, not just in terms of the company matrix but also the banking system.
From your surveys and research what today does the public expect from a banking sector.

What products and services do they want? Do they want to go back to traditional face-to-face banking or are they happy for faceless on-line banking?

We will continue to have traditional clients who prefer the personal contact and ever more digital clients who value the immediacy and ease offered by digital channels.
In Portugal and despite the use of digital banking becoming more popular and widespread especially along the younger generations, we have seen a growth in digitalisation among bank clients (56% of users in 2019 compared to 38% in 2010).
The current context caused by the Covid-19 pandemic has significantly increased the use of online banking and digital payment services. In the month of April alone purchases using contactless technology grew in comparison to the like-for-like period by 44% and 123% in value while immediate transfers increased 197% in quantity and 58% in value.

The future – How do you see the Portuguese banking sector in 10 years from now? Will the banks in Portugal have finally cleared all their toxic assets and NPL from their balance sheets? How will technology change the sector for the good and bad? Do you see the rise of new Portuguese banks with Portuguese capital?  

The level of uncertainty that characterise the world currently only allows us to respond in terms of what is desirable, without, however, failing to take into account the big trends underway and the incentives derived from the European project and, in this case in particular, the Banking Union.
Therefore, digital transformation and the importance of the client will be the dominant foci.
But other factors will determine the configuration of the national banking system: for example, the interest of investors (which will fundamentally depend on the profitability of the sector and the expectations of the evolution in demand), the evolution of the Banking Union, of financial integration and the formation of pan-European banks, the competition of new players, be they from the payments area or financial brokerage.
What is important is having banks that are solid, modern, efficient and trustworthy, that can guarantee to provide financing to companies and citizens with a view to the economic and social development of the country.
A banking sector that is diversified and competitive, maintaining some centres of decision-making in Portugal.
Banks that meet the needs of clients, competitive in international terms, which are concerned with their reputations and ethics, with better governance and a heightened sense of responsibility fiduciary, social and ecological responsibility.

Are you worried about the banking sector’s exposure to Angola given the fall in oil prices? 

The banks presence in the Portuguese speaking countries is natural and strategically understandable. We have intense historical links which justify them.

Naturally, the banks will take into account the situation and current context since they have to ensure not only the sustainability of their participated companies in these countries as well as their impacts on the headquarters of these banks. Having said that the levels of exposure are bearable.