Alvarez & Marsal (A&M) is delighted to publish the third edition of the Portuguese Banking Pulse (“The Pulse”) Q4 ’22. In this edition, we share results from our research examining the 7 biggest Portuguese banks (“top 10”) with regard to their activities within Portugal and highlight key performance indicators of the Spanish banking industry.

The Pulse aims to help banking executives and board members stay current on industry trends. As trending topics, we include: 1. Productivity Analysis; 2. Liquidity and Deposits

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This study analyzes the evolution of the top seven Portuguese banks in terms of growth, liquidity, efficiency, risk, profitability, and solvency throughout 2022, highlighting the key performance indicators of the industry and scoring them according to the KPIs related to each area of analysis.  Additionally, the report is a summary of profitability, productivity, and efficiency ratios and, following the events of the last months, we have also included an analysis of Portuguese banks and major European countries on Held-to-maturity (HTM) portfolios and deposit quality.

The report shows that, during the year, the banks’ profitability (ROE) increased to 9.3 percent, 4.1 percent more than in the same period of 2021. Portuguese banks getting close to their double-digit profitability target, remaining above the European average of 8.0 percent. The cost of risk is trending downward, at 18 basis points less than at the end of December 2021, and in the NPL (Non-Performing Loan) ratio, which decreased to 3.16 percent, above the average in Europe (1.8%).

The industry’s solvency levels have decreased to 14.72 percent primarily due to the payment of dividends and share repurchase programs. In comparative terms, European banks still have higher levels of solvency, at around 15 percent. Portuguese banks will have to measure their solvency and resilience levels as a comparison to European banks in the 2023 stress tests.

A&M's analysis shows that net interest income (NIM) increased compared to the last year to 1.25 percent due to hike rates. As of the mid-year 2022, the EURIBOR exceeded its negative range standing above 3 percent. The sector's Operating Income (OI) improved to 2.2 percent.

Industry efficiency worsened 83 bps compared to the previous year, standing at 47.49 percent, awaiting to future inflationary cost pressures.

A&M observed a higher productivity per branch of all entities. Caixa Geral de Depósitos had the highest productivity gain in terms of turnover per branch. During 2022, the NPL ratio has been reduced across all entities to 3.16 percent, due to a decrease in non-performing loans, which were reduced by 25 percent in the last year along with portfolio sales activities of the largest banks. Coverage remains stable above 90 percent. Compared to the European average, non-performing loans remain high. The entities with the highest level of NPLs are Novo Banco and Crédito Agrícola.

Alvarez & Marsal's ranking for large banks is headed by BPI, followed by Caixa Geral de Depósitos and Santander

Additional topics included in this edition of The Pulse of Banking:

The first topic is a summary of the profitability and productivity of the Portuguese banks.

1. In terms of clients Banco BPI and Caixa Geral de Depósitos show the strongest profitability ratios.
2. Santander and Caixa Geral de Depósitos have the largest business volume regarding total employees.
3. Santander and Caixa Geral de Depósitos show the highest productivity per branch.
4. Banco BPI and Millennium bCP lead the top 7 banks in digital clients.

Thirdly, A&M has developed an analysis of Portuguese banks and major European countries on Held-to-maturity (HTM) portfolios and deposit quality. Crédito Agrícola, Banco Montepio, and Novo Banco have more than 25 percent Held-to-maturity (HTM) over Deposits, above the EU average of 15.8 percent. In terms of Customer Deposits Millennium BCP and Novo Banco have the largest share of non-retail deposits with 30 percent and 29 percent respectively. 26.8 of Customer Deposits in the Portuguese Banking Sector are non-retail which is below the EU average of 35.20 percent.

In the European landscape, France has the largest share of non-retail Deposits over Total Customer Deposits with 39.6 percent. HTM Debt Securities in Spain is 5 pbs above of the EU average. Italy has the largest proportion of HTM Debt Securities over Total Customer Deposits with 22.1

Key trends:

Inflation

• In Portugal, inflation increased since 2020 and broken the 8% levels since May 2022, with small decline in 2023.
• Last period of high inflation were 50 years ago during the decades of 1971-1992.
• According to the bank of Portugal, the Portuguese economy is suffering direct and indirect impacts from the invasion of Ukraine, resulting in increased uncertainty, higher inflation rates and sharper disruptions in global production chains.
• Inflation has been reducing, being 5,7% as of April 2023

GDP (€ billions)

• Portuguese GDP had been growing steadily since the Covid-19 pandemic

• Bank of Portugal expects GDP to increase 1.8% in 2023, 2.0% in 2024 and 2.0% in 2025, this would lead to pre-pandemic levels in 2022

EURIBOR 12m (%)

• Inflation is prompted the ECB to increase interest rates with official rates of the deposit facility standing at 2% after the December review.
• Euribor 12 months is already trading at 3,53%, highest since 2008.

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