NB: profitability and growth to 2024

After a period of seven years offloading non-performing loan portfolios from its balance sheets, and a major restructuring plan, Portugal’s Novobanco has hinted at the content of its Strategy Plan for 2022-2024.

In an interview with the business newspaper, Jornal Económico, the bank’s CEO, António Ramalho, said it was time to leave the financial support of the Resolution Fund behind, and turn over a new leaf, consolidating the bank’s profitability, simplifying its structure, cost contention, and focusing on growth.
The bank’s CEO said that banks had a duty to be “strict when supporting the capitalisation of new and existing companies” from the point of view of viability and profitability, evaluation of own capital, and venture capital and capital risk management policies when helping companies make decisions.
Another important aspect is that a bank should “never think it is a business owner, and a business owner should never think they are bankers”, so, there should be a clear “division of functions”.
As to the impact of an increase in interest rates on Portugal’s sovereign debt, and the knock-on effects on company and public debt financing, António Ramalho admitted there was a significant change in prices caused by inflation which was “totally unforeseeable” in 2019.
Since the factors casing inflation were circumstantial and not structural, he believed inflation would be temporary, although without a crystal ball, could not say for certain and believed this would carry some risks, particularly as the government would have to enter a period of inevitable salary negotiations with unions, which could have an impact on costs and prices. “A period of prudence and reflexion is therefore required”, he said in a nod to the Portuguese parliament’s failure to pass a state budget for 2022 because of disagreements on wages and overtime, precipitating a forthcoming general election at the end of January 2022.
António Ramalho said that the situation of zero or negative interests rates was always going to be unsustainable in the long term, and even less normal was the situation of an average inflation rate of 1.3%/1.4% (forecast to be higher next year at 1.8/1.9%). This would mean it would be more difficult to keep retail bank interests rates as low as they have been.
“Any rise in inflation, and consequent rise in interest rates, will inevitably have an effect on the market risk premium which will affect our sovereign debt risk premium. At the moment we are dealing with around 60 base points difference (from the benchmark Germany) on 10-year bonds, and it is very likely we will climb to around 100 base points, and with it an increase in the risk evaluation for countries,” he said.
Portugal has a very high accumulated public debt for its GDP and population, standing at around €271Bn.
The impact of nearly zero or negative interest rates on retail banks has been that that not having flexibility in terms of assets, since banks obviously cannot offer negative interests rates to its customers, and may not have the capacity to reflect this in credits, means that “banks will have to work with very low margins, which are not compatible with the profitability ratios of the banks themselves. This had led banks like Novobanco to focus on cost contention. A change in the interest policy will permit a small increase in the base interest rate for traditional retail banks, which for the bank will be positive.
Antonio Ramalho said that this means that preparing the banking system today for what could happen tomorrow is a key element, which is why it was “so important that Novobanco undertook restructuring at the right time, so that it can support the economy later when it needs supporting”.
With the “cleaning up of Novobanco’s bank balance complete” António Ramalho explained that the right time to issue its Strategy for 2022-2024 would be in the first quarter of 2022, but revealed that the bank’s main concern was to generate capital and work with its three shareholders (the State, the Resolution Fund and the US fund Lone Star).
“Since the bank began to make a profit, it’s main concern is capital creation and working with its shareholders to increase value for the shareholders. People realise that banks are faced with new and different challenges such as providing a suitable omni-channel service, working within a low-cost logic since inefficiencies can no longer be passed on to the customer, and satisfying their demands to be more creative and innovative.
“I think the next year will be a year of cost control, a focus on the quality of the credit loaned, and a lot of imagination in terms of services offer,” said António Ramalho.
Novobanco, which unveiled its new image in November, closed the first half of 2021 with a profit of €137.7 million, rising to €154.1 million by September 2021.