Banks must beef up financial buffers

The Governor of the Bank of Portugal, Mário Centeno, has renewed his call on the banks to increase their capital cushion in case of a rainy day after the sector posted another year of bumper results.

“This round of good results, which I would term as the best ever, will be followed by a different cycle. We will have reductions – which are already happening — in interest rates that will have an impact on the banks’ financial margins,” Mário Centeno warned at the conference ‘Banking of the Future’, organised by business daily Jornal de Negócios.

“We should all, in this very good period of banking, insist on the need to strengthen the balance sheet of banks to make them more capable to face all the states of the economic cycle that are coming,” he said at the conference which was attended by all the CEOs of the main Portuguese banks.

In addition to the new interest rate cycle, Mário Centeno also warned that the Portuguese economy had been at the “top of the economic cycle” for many years, which was “an exceptional situation”.

“And when you are at the top, the way forward may be to prolong the moment, but it will not be indefinitely,” he warned.

Instead, he said that “we have to create the conditions so that the Portuguese economy can respond if some challenge comes up”.

For his analysis, Centeno reported data from Banco de Portugal’s daily economic activity indicator throughout this year, which shows an erratic behaviour in the national economy. “There is a lot of uncertainty about the path the Portuguese economy is taking. This puts some difficulty in the forecasting exercise”.

According to Centeno, some of these challenges are already cropping up. Namely, stagnation across the Eurozone economy, Portugal’s main market. “Our external demand fell in 2023, after zero growth in 2024. That is, the external demand directed at companies is now lower than in 2022, which puts pressure on Portuguese companies”.

The governor of the Bank of Portugal said that stagnation in the Eurozone was “the price you pay for fighting inflation”, but is now in a “more sustainable position than the US”. “However, you must leave the “passenger seat and take the wheel to move forward”, he said.

RODRIGO ANTUNES/LUSA
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