The Portuguese Banking System
in the Transition
to the Banking Union
Pedro Duarte Neves • Vice-Governor
30 September 2014
Euromoney Conferences The Portugal Conference
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
2 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
3 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
1. The Economic and Financial Assistance Programme
Economic and Financial Assistance Programme (EFAP)
Main goals: Strengthen macro-financial stability, restore financial
market confidence and relaunch sustainable growth
Three pillars
Stabilisation of the
financial sector
Fiscal consolidation
Structural adjustment
Financial sector workstreams
Liquidity
Solvency
Supervision
Resolution
Balanced and
orderly
deleveraging
Adequate
capitalization
Strengthen
bank
supervision
Set up an
updated bank
resolution
framework
g
g
g
Debt
restructuring
Corporate and
household debt
restructuring
1. The Economic and Financial Assistance Programme
Economic and Financial Assistance Programme (EFAP)
Financial sector workstreams – Main instruments
Liquidity
Solvency
Supervision
Resolution
ECB
refinancing
operations
Regulatory
measures
Cross sector
supervisory
actions
Resolution
Fund
Funding and
capital plans
Fund, financed by
banks, intended to
finance resolution
measures.
Forward looking
reporting,
submitted
quarterly.
Conventional
measures
FRFA
VLTRO
Collateral
eligibility
requirements
Other
Capital ratio
minima (core Tier
1 of 9% by end
2011 and 10% by
end 2012); own
funds deductions.
Bank Solvency
Support
Facility
12 € billion
5 • 30 September 2014
On-site inspections
program (OIP),
Special inspections
program (SIP),
Impairment
analysis (ETRICC),
Large clients
business plans
analysis (ETRICC
2).
Recovery and
resolution
plans
Information annually
submitted by banks
with the recovery
measures and the
relevant data in case of
resolution
The Portuguese Banking System in the transition to the Banking Union
Stress tests
Evaluates banks
ability to endure
adverse financial
and economic
scenarios.
Forward looking.
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
6 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
There has been a sizeable adjustment of imbalances
 Net lender position (improvement of around 12 p.p. in the current
and capital account between 2010 and 2013)
 Deleveraging is ongoing. Nevertheless, the level of indebtedness is
still significant
4.0
Current and capital account (% GDP)
Debt of the resident non-financial sector (% GDP)
400
350
2.0
300
0.0
250
-2.0
200
-4.0
150
100
-6.0
50
-8.0
0
-10.0
1999
2001
Households
-12.0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
7 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2003
2005
2007
Non-financial corporations
2009
2011
General government
2013
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
The restructuring of the economy is proceeding
 Weight of exports in GDP increased 10 p.p. between 2010 and 2013 ;
significant share due to young firms; export market share gains of 12
p.p. in 2011-13
 Firms with highest labor productivity increased their domestic market
share
Demand components (as a % of GDP)
Export decomposition by firms’ birth year
75.0
65.0
55.0
45.0
35.0
25.0
15.0
Private consumption
Public consumption
Investment
Exports
2013
2012
2011
2010
2009
2008
-5.0
2007
5.0
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
Credit developments have been consistent with the adjustment
 Recent improvement in credit market conditions
 Credit flows have been channeled to the most dynamic and
productive firms, notably exporting firms in the private sector, albeit
there is high heterogeneity across firms
Distribution of interest rate to non-financial corporations
(new business), in percentage
30%
Credit to non-financial corporations in the private sector
(y-o-y rate of change, in percentage)
6.0
4.0
25%
Jun-10
20%
Dec-11
2.0
Jun-14
0.0
15%
-2.0
-4.0
10%
-6.0
5%
-8.0
2010
0%
0
1
2
3
4 5 6 7 8 9 10 11 12 13 14
Interest rates (percentage)
9 • 30 September 2014
2011
2012
2013
2014
Total credit
Loans and debt securities - resident banks
Loans to exporting firms by resident financial institutions
The Portuguese Banking System in the transition to the Banking Union
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
Strong and unprecedented fiscal consolidation effort in 2011-13
 Around 8.5 p.p. improvement in the structural primary deficit
 The increase in the public debt ratio was mostly associated with debt
deficit adjustments and rises in interest expenditures
The composition of structural consolidation
(in percentage points of trend GDP)
40
9
35
7
30
5
25
In p.p. of GDP
In p.p. of trend GDP
Breakdown of the change in the public debt ratio
20
3
15
1
10
-1
5
-3
-5
0
2008
2009
2010
2011
2012
Expenditure contribution
Revenue contribution
10 • 30 September 2014
2013
Cum.:
20082013
Cum.:
20112013
-5
2008
2010
Primary balance effect
Economic growth effect
Total change
The Portuguese Banking System in the transition to the Banking Union
2012
Cum.:
2011-2013
Interest expenditure effect
Deficit-debt adjustments
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
Successful exit from the Assistance Programme in May 2014
 Anchored on sounder fundamentals of the Portuguese economy,
coupled with institutional progress on a European level
 Favorable evolution of risk perception as regards the euro area
 Improved access of residents to wholesale debt markets
10-year government bond yields
Financial Account
Balance and changes in assets and liabilities
20
25
16
20
14
15
In percentage of GDP
18
12
10
8
6
4
Change in assets
Change in liabilities
Balance
10
5
0
-5
-10
2
-15
0
2007
2008
US
2009
Germany
2010
UK
Source: Thomson Reuters
2011
Italy
2012
Spain
2013
France
2008
2014
2009
2010
2011
2012
2013 2014H1
Notes: an increase in net liabilities to nonresidents corresponds to a financial
inflow and an increase in net assets corresponds to a financial outflow.
Portugal
on to the
Sources: INE and Banco de Portugal
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
A gradual recovery has been observed in Portugal since mid-2013,
in the context of a modest and uneven recovery in the euro area
 Resilient exports but still relatively weak investment dynamics
 Labor market developments have been relatively favorable
Year-on-year rate of change of GDP (per cent)
3
Unemployment rate (per cent)
20
2
18
1
16
0
14
-1
12
-2
10
The Portuguese Banking System in the transition to the Banking Union
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2012Q4
2012Q3
2012Q2
2012Q1
6
2011Q4
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2013Q1
2012Q4
2012Q3
2012Q2
2012Q1
2011Q4
2011Q3
2011Q2
2011Q1
-5
2011Q3
Euro area
12 • 30 September 2014
Portugal
Euro area
8
2011Q2
-4
2013Q1
Portugal
2011Q1
-3
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic outlook
The latest macroeconomic projections for Portugal
 GDP growth close to the euro area
 Gradual recovery of domestic demand and strong export dynamics
 Sustained correction of macroeconomic imbalances
140
2013
2014(p)
2015(p)
2016(p)
Gross Domestic Product
-1.4
1.1
1.5
1.7
Private Consumption
Public Consumption
GFCF
Exports
Imports
-1.7
-1.8
-6.6
6.1
2.8
1.4
-0.2
0.8
3.8
4.6
1.5
-1.4
3.7
6.1
4.8
1.5
0.2
3.9
5.6
5.5
120
110
100
90
80
70
13 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2016(p)
2015(p)
2014(p)
2013
2012
2011
2010
2009
60
2008
Source: Banco de Portugal.
GDP
Private consumption
GFCF
Exports
130
Projection June 2014
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
14 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
3. Balance sheet repair:
the adjustment of the banking sector
The banking sector is undergoing a balance-sheet repair…
 Reduction of total assets, with a significant contraction of credit to
customers partially offset by an increase of debt instruments held
(mainly holdings of public debt).
 Change in the financing structure, with a decrease in market based
sources partially compensated by an increase in customers' deposits
and Eurosystem refinancing.
Assets (Billion €), at end of period
600
532
513
496
500
Bank financing structure (Billion €), at end of period
600
460
449
400
300
200
100
Other Assets
500
Investment in
Credit Institutions
Capital
Instruments
Debt Instruments
400
Credit
0
2010
2011
2012
15 • 30 September 2014
2013
2Q 2014
532
513
496
460
449
Capital & Others
300
Resources from
Central Banks
Interbank Market
200
Securities
100
Deposits
0
2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
2013
2Q 2014
3. Balance sheet repair:
the adjustment of the banking sector
… characterized by a strong deleverage process
 Significant decrease of LTD ratio, chiefly driven by the credit
reduction.
 Significant reduction of the commercial gap
Loan-to-Deposits (LTD) ratio, at end of period
140
140
128
120
117
400
114
300
100
80
200
60
40
100
20
0
0
2010
2011
2012
16 • 30 September 2014
2013
Deposits
(left axis)
2Q 2014
Credit
(left axis)
Credit at risk
(left axis)
LTD ratio
€ Billion
160
500
158
€ Billion
180
Commercial gap, at end of period
180
160
140
120
100
80
60
40
20
0
133
98
70
2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
43
35
2013
2Q 2014
3. Balance sheet repair:
the adjustment of the banking sector
NPL ratio increased, also due to supervisory action, but this trend is
now reverting
 The ratio of credit at risk maintains an upward trend. Recent
developments are partially justified by a denominator effect
(deleveraging), since the flow of new overdue and non-performing
loans has been reduced since mid-2012.
 Despite the increase in the credit at risk, the respective coverage
ratios remained relatively stable throughout the period.
Credit at risk ratio by institutional sector,
at end of period
PrivateResident Sector
Non-financial corporaions
Housing
Credit at risk coverage ratio by institutional sector,
at end of period
Consumpionandoher purposes
PrivateResident Sector
Non-financial corporaions
Housing
Consumpionandother purposes
90,0
20,0
80,0
18,0
16,0
70,0
14,0
60,0
Per cent
Per cent
12,0
10,0
50,0
40,0
8,0
30,0
6,0
20,0
4,0
2,0
10,0
0,0
0,0
2010
2011
2012
17 • 30 September 2014
2013
1Q 2014
2Q 2014
2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
2013
1Q 2014
2Q 2014
3. Balance sheet repair:
the adjustment of the banking sector
Cross-sectional inspections carried out by BdP in 2011-2014
SIP
(2011)
OIP
(2012)
ETRICC
(2013)
ETTRIC2
(2013-2014)
All credit portfolio
Construction and
Real Estate portfolio
Credit portfolio,
excluding mortage,
consumer and public
administration loans
12 economic groups
Reference date
June 2011
June 2012
April 2013
September 2013
Scope universe
€ 281 billion
€ 69 billion
€ 93 billion
€ 9,4 billion
Sample for
individual analysis
€ 70 billion
€ 39 billion
€ 53 billion
€ 8,4 billion
5 516
2 856
2 206
227
# BdP resources
69
31
27
18
# external
resources
226
98
191
37
16 Dec 2011
3 Dec 2012
2 Aug 2013
28-Mar-2014
Scope
# of analysed
entities
Public release
Reinforcement of impairment and provisions levels deemed necessary as a result of the inspection exercise.
Impairments and
Provisions
€ 838 billion
€ 861 billion
€ 1 127 billion
€ 1 003 billion
3. Balance sheet repair:
the adjustment of the banking sector
The solvency ratios have clearly increased…
 Core tier 1 reached 12.3% at end 2013, clearly above the 10%
minimum defined under the Economic and Financial Assistance
Programme. (As of Jan 2014 there is a new framework, fully aligned with CRD IV,
introducing the common equity tier 1 (CET1) concept)
 The increase in core tier 1 ratio was driven both by a reduction in
RWA and reinforced capital position (with public capitalization having
a considerable role)
Solvency and leverage ratios
Contributions to the
Core Tier 1 ratio change 2010 - 2013
12
5
10
4
Percentage points
Percentage
14
8
6
4
Dec2010
Dec2011
Solvency ratio
Core Tier 1
Leverage ratio (Tier 1 / total assets)
19 • 30 September 2014
Dec2012
Dec2013
Solvency ratio regulatory minimum
EFAP minimum for Core Tier 1
The Portuguese Banking System in the transition to the Banking Union
3
RWA
2
1
Core
Tier 1
0
2010-2013
3. Balance sheet repair:
the adjustment of the banking sector
… but profitability remains under pressure, despite the recent
recovery of the net interest income
 Banks results have been declining as a reflection of the challenging
economic and financial scenario (GDP, unemployment, low level of
interest rates).
 Nevertheless, excluding BES group, the profitability of the banking
system improved significantly in the first half of 2014 when compared
to the same period in 2013
Banking sector returns
1,0
0,5
%
7,7
-6,3
-5,5
-0,4
-0,3
-8,4
-11,6
3,8
0,5
0,3
0,0
-0,5
-0,5
-1,0
-0,8
-26,5
-1,8
2010
2011
2012
Return on Equity (ROE)
2013
1H 2013
1H 2014
Return on Assets (ROA) - rhs
The lighter shaded number and dotted line are BdP estimates for the
ROE and ROA excluding BES group
20 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
-1,5
-2,0
%
15
10
5
0
-5
-10
-15
-20
-25
-30
3. Balance sheet repair:
the adjustment of the banking sector
BES resolution
• BES Group was the 3rd largest banking group in PT, with total assets of about € 81 bn,
representing almost 50% of Portuguese GDP
• Unexpected losses unveiled in late July triggered a breach in solvency ratios which further
and irreparably aggravated the liquidity shortfall
• On 3 August BdP created “Novo Banco” and transferred thereto most of the business of BES,
which was left as a “bad bank” and shall be wound up
• Capital requirements of Novo Banco were estimated at € 4.9 bn, after prudent adjustments
and targeting a CET1 ratio of 8.5%
5yr spread : Diferential vis-à-vis DE
p.b.
Eurostoxx and PSI 20 index
110
300
Early signs
point to no
systemic
implications
and sovereign
contagion
250
200
150
100
Portugal
Espanha
Itália
100 = 1st july 2014
100
90
80
50
Euro stoxx 50
0
1/Jul
21 •
12/Jul
23/Jul
3/Ago
14/Ago
25/Ago
70
01-Jul-14
12-Jul-14
23-Jul-14
PSI20
03-Ago-14
14-Ago-14
25-Ago-14
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
22 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
4. The Single Supervision Mechanism
Single Supervision Mechanism - Institutional framework
ECB
National Competent
Authorities (NCA)
Euro Area
Responsibility for the
oversight of the SSM
functioning and for ensuring
supervisory consistency
Direct Supervision of Less
Significant Banks
SSM Common Supervisory
Framework
Supervisory Decisions over
All Banks: exclusive
competence or use of
specific powers
Decision to Directly Exercise
Supervision
Assistance to the ECB in the
Supervision of Significant
Banks
Exclusively Competent for
Supervisory Tasks not
conferred on the ECB
Direct Supervision of
Significant Banks
23 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
NCA
other Member States
(optional – close cooperation
agreement)
The supervisory
framework will mirror the
one applied within the
Euro Area, but the ECB will
exercise its tasks indirectly
always by instructions to
the NCA
4. The Single Supervision Mechanism
Single Supervision Mechanism – Operational framework
GOVERNING COUNCIL
SUPERVISORY BOARD
ECB Intermediate Structures (DGs)
 a JST for every
significant
banking group
 responsible for all
supervisory tasks
JST
Coordinator
NCA sub-coordinators
ECB/NCA staff
24 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
Outline
1. The Economic and Financial Assistance Programme
2. The ongoing adjustment of the Portuguese economy:
recent developments and the macroeconomic
outlook
3. Balance sheet repair: the adjustment of the banking
sector
4. The Single Supervision Mechanism
5. Challenges ahead
25 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
5. Challenges ahead
• Improving long-run growth is of the essence
i) Need to sustain (and enlarge) the reform momentum
ii) Investments in physical and human capital are key
• The adjustment of accumulated imbalances will continue to
characterize the Portuguese economy
i) An orderly and gradual deleveraging process needs to be sustained
ii) A smooth intermediation process is crucial to an efficient allocation
of resources
• Fulfilling the current European commitments is the adequate
policy from an intertemporal perspective
Even under conservative macroeconomic assumptions, fulfilling the
Fiscal Compact ensures debt sustainability
• Restoring profitability in the banking sector is crucial
26 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union