Portuguese Banking Sector Overview

PORTUGUESE BANKING SECTOR OVERVIEW

SEPTEMBER 2013

AGENDA I.

Importance of the banking sector for the economy

II. Credit activity III. Funding IV. Solvency V. State guarantee and recapitalisation schemes for credit institutions PORTUGUESE BANKING SECTOR OVERVIEW

SEPTEMBER 2013

PORTUGUESE BANKING SECTOR OVERVIEW I. Importance of the Banking Sector for the Economy

SEPTEMBER 2013

Contrary to what occurred in the Euro area, the 2008 financial crisis did not slow down the total assets growth of Portuguese banks. Banking sector’s total assets evolution (Dec. 2005=100) Index 170

Average of the annual growth rates (YoY) Portugal = 8.7% Euro area = 1.8%


160 150

Average of the annual growth rates (YoY) Portugal = -0.1% Euro area = 1.5%

140 130

However, Portuguese banks started their deleveraging process after the Economic Adjustment Programme began. This process intensified after August 2012.

120 110 100 90 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Dec-11

Jun-12

Portugal

Source: ECB


Jun-11

SEPTEMBER 2013

Dec-12

Jun-13

Euro area 4

The Portuguese banking sector plays an important role in the economy; nevertheless, its weight on the national GDP is still below Euro area’s level. Banking sector’s assets relative to GDP* for Portugal and Euro area 400% Euro area Portugal

300%

200%

In spite of the deleveraging process that is driving Portuguese banks’ assets down, the decline of the Portuguese GDP in 2012 led to an increase of the Banking Assets over GDP Ratio. Therefore, the weight of banking assets in GDP in Portugal is now very close to the one observed in the Euro area.

100%

0% 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

* Nominal Gross Domestic Product. Source: ECB


SEPTEMBER 2013

5

In Portugal, the contribution of financial intermediation activities for the national Gross Value Added stays well above the one of the Euro area. Financial intermediation GVA relative to total GVA for Portugal and selected European Union countries (2009) United Kingdom Ireland Portugal

In Portugal, financial service activities (except insurance and pension funding and including the ones carried out by Banco de Portugal), contribute to approximately 6% of the national Gross Value Added. This weight is relatively high when compared to other Euro area countries.

Spain Greece Euro area Italy France

Financial intermediation activities (except insurance and pension funding) Germany

Insurance, pension funding and activities auxiliary to financial intermediation 0%

2%

4%

6%

8%

10%

12%

Source: Eurostat, Statistics Portugal (INE), Central Statistics Office Ireland


SEPTEMBER 2013

6

PORTUGUESE BANKING SECTOR OVERVIEW II. Credit Activity

SEPTEMBER 2013

For Portuguese banks, credit to customers absorbs almost 50% of total assets. Credit to customers* as a percentage of total assets (June 2013)

80%

Comparing to their Euro area peers, Portuguese banks’ activity is mainly centered on credit to customers.

70% 60% 50%

45.2%

40%

37.5%

30% 20% 10% 0%

* Loans to the non-monetary sector (gross outstanding amounts at the end of period). ** Aggregated data. Source: ECB


SEPTEMBER 2013

8

During the period that preceded the financial crisis, credit volumes followed a strong increasing trend, both in Portugal and in the Euro area. Trends in credit* in Portugal and in the Euro Area (Dec. 2005=100) Index 140 135

Average of the annual growth rates (YoY) Portugal = -4.6% Euro area = 0.4%


Portugal (100 = 253,683 M€) Euro area (100 = 13,678,287 M€)

130 125 120

In the summer of 2008, credit growth began to show signs of slowdown.

115 110 105 100

In Portugal, credit volume has been decreasing since the 2nd quarter of 2011, moving away from the trend registered in the Euro area. This is due to the deleveraging process followed by the sector.

95 90 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Loans to the monetary and non-monetary sectors (gross outstanding amounts at the end of period). Source: ECB


SEPTEMBER 2013

9

Despite the reduction in the Credit to GDP Ratio in 2012, the Portuguese economy still presents relatively high levels of bank debt when compared with the Euro area.  At the end of 2012, credit to customers in Portugal represented around 156% of the nominal GDP.

Credit to Customers* / GDP** Ratio

 Since 2010 this ratio dropped by approximately 14 percentage points.

% GDP** 250%

 The deleveraging process followed by Portuguese banks led to a decrease of almost 8 percentage points of the Credit to Customers/ GDP Ratio in 2012.

200% 150% 100% 50% 0%

Ireland

Spain

United Kingdom

Portugal

Euro area

Italy

Greece

Germany 2007

* Loans to the whole non-monetary sector (gross outstanding amounts at the end of period). ** Nominal Gross Domestic Product.

2010

France 2011

2012

Source: ECB, Eurostat


SEPTEMBER 2013

10

Stocks of credit to households and non-financial corporations reveal divergent trends than stocks of credit to the general government. In April 2011, when Portugal asked for international financial assistance, credit volume to general government hit its peak.

Trends in credit volumes* by institutional sector (Dec. 2005=100) Index 400 350 300 250 200

The agreement on a financial support programme for Greece in May 2010 seriously worsened the Portuguese Republic’s conditions in obtaining financing through financial markets. In that period, the 10yr bond yield hit its maximum since Portugal adopted the euro, 6.29%, leading to the abrupt growth in credit to general government.

General government**

Households

150 100

Non-financial corporations***

50 0 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Gross outstanding amounts at the end of period. ** Only includes loans (does not include public debt securities). *** Includes state-owned non-financial corporations. Source: Banco de Portugal


SEPTEMBER 2013

11

The gap between interest rates on new loans to non-financial corporations in Portugal and the Euro area increased after the beginning of the sovereign crisis. Evolution of the interest rates on MFI loans to non-financial corporations (new businesses only) in Portugal and in the Euro area

June 2013 Portugal: 5.53% Euro area: 2.59%

% 8 7

Portugal Euro area

6 5 4 3 2 1 0 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Source: ECB


SEPTEMBER 2013

12

In Portugal, the reliance on credit of households and nonfinancial corporations is considerably higher than in the Euro area. Weight of credit to households, non-financial corporations and general government in GDP*, in Portugal vs. selected European Union countries (December 2012) ∑=

158.9%

10.9% 69.4%

150.1%

149.7%

4.7%

Spain

5.0%

64.3%

81.1%

Portugal

115.2%

112.0%

107.0%

12.1%

17.1%

10.3%

103.9%

103.7%

20.7% 59.4%

78.6%

118.7%

69.6%

Ireland

* Nominal Gross Domestic Product. ** Only includes loans (does not include public debt securities). *** Includes state-owned non-financial corporations.

52.1%

47.8%

61.6%

55.3%

Greece

Euro area

55.9%

39.0%

Italy

General government**

0.5% 27.5%

43.0%

53.7%

France

14.4% 34.4%

75.9%

United Kingdom

Non-financial corporations***

54.9%

Germany

Households

Source: Ameco, ECB


SEPTEMBER 2013

13

However, state-owned entities account for almost 10% of the total debt of non-financial corporations to the resident financial sector. Credit to state-owned non-financial corporations in Portugal*

10.5% 5.7%

2007

6.0%

2008

9.8%

In Portugal, credit to the State-Owned Enterprise Sector absorbs an important share of the total outstanding amount of credit to nonfinancial corporations. Moreover, it increased substantially from 2009 onwards.

10.1%

6.6%

2009

2010

2011

2012

63.1%

74.4% 25.6%

36.9% Loans

Debt securities

* As a percentage of the total amount of loans outstanding and debt securities owed by non-financial corporations to the resident financial sector. The concept of resident financial sector includes not only banks but also other financial institutions. Source: Banco de Portugal


SEPTEMBER 2013

14

Credit to households is primarily mortgages, whereas credit to NFC is mainly intended to construction and real estate. Total credit* (June 2013)

Credit to households

Mortgages 82%

Consumer Credit 10%

Others 8%

Households 40%

Credit to non-financial corporations Others 26%

Non-financial corporations 32%

Others 36%

General Government 2% *Loans to the monetary and non-monetary sectors including non-residents (gross outstanding amounts at the end of month). Source: Banco de Portugal


Construction & real estate 32%

Agriculture, forestry and fishing 2% SEPTEMBER 2013

Industry 13%

Trade, accommodation and food services 17%

15

In Portugal, mortgages account for a bigger share on the outstanding amount of loans to households than in the Euro area. Euro area

Portugal 10.1%

8.6%

8.1%

10.8%

10.9%

9.6%

79.1%

80.5%

82.3%

2007

2010

Jun-13

15.7%

15.9%

15.6%

12.9%

12.4%

11.2%

71.4%

71.7%

73.2%

2007

2010

Jun-13

Others

Consumption

The weight of consumer credit on the stock of loans to households has decreased both in Portugal and in the Euro area. Nevertheless, this type if credit is still less relevant in Portugal than in the Euro area.

Mortgage

Source: ECB


SEPTEMBER 2013

16

The trend of residential property prices in Portugal shows a more stable pattern than the one of other Euro area countries. Residential property prices in Portugal and selected Euro area countries (Mar. 2005=100) Index 140 130 120

Euro area

110 100 90

Portugal

Spain

80 70 60

Ireland

50

When the sub-prime crisis erupted, residential property prices in Portugal remained relatively constant. The real estate sector had not been influenced by a speculative boom, as happened in Spain or in Ireland.

Source: ECB


SEPTEMBER 2013

17

Within the Euro area, the real estate sector absorbs the largest portion of the outstanding amount of loans to non-financial corporations. Portugal

Euro area

17.0%

19.3%

19.6%

22.2%

22.3%

23.5%

23.8%

21.0%

19.0%

9.7%

9.3%

9.0%

31.0%

33.2%

33.9%

15.0%

14.8%

15.5%

39.0%

45.6% 20.0%

40.7%

41.9%

21.8%

20.2%

18.1%

18.3%

19.3%

21.2%

24.3%

22.0%

20.4%

18.2%

2007

2010

2012

2007

2010

2012

Agriculture & industry

Construction

17.1%

Real estate, professional, technical and administrative activities

In Portugal, the proportion of the construction and real estate sectors, in aggregated terms, has been decreasing since 2007. Contrarily, the weight of these sectors of activity on the total credit to non-financial corporations of the Euro area, increased because of the real estate sector.

Trade, accommodation and food service activities

Source: Banco de Portugal, ECB


SEPTEMBER 2013

18

Others

NPLs grew since 2008 mainly in the corporate segment. Non-performing loans* as a percentage of the corresponding credit

12% Non-financial corporations 10%

Mortgages Total

8%

6%

Non-financial corporations’ NPLs started to grow rapidly especially at the end of 2008. They worsened even more since the beginning of the Economic Adjustment Programme (May 2011).

Meanwhile, mortgages’ NPLs remained relatively stable. However, their growth rate is increasing.

4%

2%

0%

* Overdue installments and other future installments of doubtful collection. Source: Banco de Portugal


SEPTEMBER 2013

19

PORTUGUESE BANKING SECTOR OVERVIEW III. Funding

SEPTEMBER 2013

Deposits from customers constitute the most important part of the financing structure of Portuguese banks. Financing structure of Portuguese and other European Union countries’ banks (June 2013)

13%

21%

12%

12%

15%

22%

9%

6%

14% 28% 24%

23% 9%

29% 39%

41% 7% 6%

34%

32%

41% 34%

12%

8% 19%

41% 28%

47%

Spain

42%

Greece

41%

Portugal

41%

Germany

37%

Italy

35%

Euro area

31%

United Kingdom

24%

21%

France

Ireland

Deposits

Wholesale

In the European context, the Portuguese banking system has one of the largest shares of deposits from customers in the financing structure. Compared to deposits from customers, wholesale funding plays a less important role.

Capital

Others*

* Includes external liabilities, i.e., liabilities issued by non-residents in the Euro area, except in the UK where it refers to liabilities issued by non-residents in the country. Source: ECB


SEPTEMBER 2013

21

The trend followed by deposits from customers in Portugal reveals some differences compared with the Euro area. After mid-2010, deposits in Portugal began growing at a significantly higher rate than the ones of the Euro area. More recently, their volume has been decreasing.

Evolution of deposits* in Portugal and in the Euro area (Dec. 2005=100) Index 180 Portugal (100 = 155,185 M€) Euro area (100 = 7,386,698 M€) 160

140 Average of the annual growth rates (YoY) Portugal = 0.2% Euro area = 2.1%

120

100

80 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Deposits from the non-monetary sector (outstanding amounts at the end of period). Source: ECB


SEPTEMBER 2013

22

The use of wholesale funding among Portuguese banks grew at a significantly higher rate when compared with the Euro area. The growth of deposits in Portugal was not sufficient to compensate the growth of national banks’ assets, leading to a higher dependence on wholesale funding.

Evolution of wholesale funding* in Portugal and in the Euro area (Dec. 2005=100) Index 260 240

Portugal (100 = 83,887 M€) Euro area (100 = 9,382,724 M€)

220 200

Average of the annual growth rates (YoY) Portugal = 2.3% Euro area= -0.1%

180 160 140


120 100 80 60 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Wholesale includes deposits from the monetary sector, debt securities issued and money market funds (outstanding amounts at the end of period). Source: ECB


SEPTEMBER 2013

23

In Portugal, deposits are mainly held by households and their share has been consistently increasing. Evolution of deposits* in Portugal, by institutional sector

The share of the non-monetary financial institutions increased significantly in the second semester of 2010 and in 2011, but started to decline in 2012.

M€ 300,000 General government 250,000

Non-monetary financial institutions Non-financial corporations

200,000

Households

150,000

100,000

50,000

0 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Deposits from the non-monetary sector (outstanding amounts at the end of period). Source: Banco de Portugal


SEPTEMBER 2013

24

Deposits with maturities of less than one year are the most notable, in spite of the recent growth in the share of deposits with longer maturities. Evolution of deposits* in Portugal, by maturity M€ 300,000

Over 2 years From 1 to 2 years

250,000

Up to 1 year Overnight deposits

200,000

Reedemable at notice

150,000 100,000 50,000 0 Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

* Deposits from the non-monetary sector (outstanding amounts at the end of period). Source: Banco de Portugal


SEPTEMBER 2013

25

The growth in deposits from households coincides with the decrease of their ownership of units issued by investment funds. Growth rates of households’ deposits, units issued by investment funds and savings certificates, in Portugal (YoY) 30% 20% 10% 0% Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

-10% -20% -30% -40% -50%

Deposits Units issued by investment funds Saving certificates

Source: Banco de Portugal


This trend exposes a substitution effect between investment and savings products with different risk profiles, revealing a larger preference for less risky assets after the financial crisis. However, it is starting to show reverse signs. SEPTEMBER 2013

26

The decrease of the Loan-to-Deposit Ratio reflects the deleverage of the Portuguese banking sector. Loan*-to-Deposit Ratio, on a consolidated basis 160.1% 160.3% 161.5%

165%

157.8%

152.1%

155%

143.5%

145%

134.7% 135%

136.5%

130.7%

Due to the Economic Adjustment Programme (EAP) for Portugal, Banco de Portugal recommends the eight largest Portuguese banking groups to reduce this ratio to 120% by 2014.

122.6%

125%

140.2%

115.3% 115%

127.5%

105% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

* Credit volumes net of impairments (includes securitized non-derecognized credit). Outstanding amounts at the end of period. Source: Banco de Portugal


SEPTEMBER 2013

27

In Portugal as well as in the Euro area, deposits from the monetary sector are the main component of wholesale funding. Structure of wholesale funding, by type of instrument Portugal 0.3%

Euro area 0.0%

0.9%

55.3%

49.6%

44.7%

49.5%

2010

Jun-13

68.0%

31.7%

2007 Source: ECB

Money market funds


6.6%

5.5%

4.5%

53.1%

51.4%

53.1%

40.3%

43.1%

42.4%

2007

2010

Jun-13

Deposits from the monetary sector SEPTEMBER 2013

However, in Portugal, the importance of the market for debt securities increased compared to 2007. This source of funding is currently more important for Portuguese banks than for the Euro area.

Debt securities 28

In Portugal as well as in the Euro area, debt securities issued by banks are mainly long-term. Structure of debt securities, by maturity at issue date (June 2013)

Euro area

Portugal

96% 86% 4% 10% 2% 2%

Up to 1 year

From 1 to 2 years

Still, the issuance of short-term debt securities plays a more important role within the Euro area banking sector than in Portugal.

Over 2 years

Source: ECB


SEPTEMBER 2013

29

Over the past few years, covered bonds became an increasingly important funding source for Portuguese banks. At the end of 2012, the outstanding amount of covered bonds represented approximately 6.4% of Portuguese banks’ funding.

Issuance and outstanding amounts of covered bonds in Portugal M€ 40,000 35,000 30,000

Covered bonds by type of underlying asset (2012)

25,000 20,000 15,000

96.4%

10,000 5,000 0 2006

2007

2008

2009

Outstanding amounts at the end of period

2010

2011

2012

Issuance 3.6%

Mortgages

Source: European Covered Bond Council, Factbook, 2013


Public sector

SEPTEMBER 2013

30

Restrictions of access to interbank financial markets led to a significant increase of Portuguese banks’ dependency on ECB. Liquidity-providing operations from the European Central Bank to Portuguese banks* M€ 70,000 60,000 50,000 40,000 30,000 20,000

Date Dec. 08 Dec. 09 Dec. 10 May 11 Jun. 13

M€ 10,210 M€ 16,061 M€ 40,899 M€ 47,204 M€ 49,401 M€

+383.8%

10,000 0

* Outstanding amounts at the end of period. Source: Banco de Portugal


SEPTEMBER 2013

31

In percentage, the share of Portuguese banks on the total amount of the ECB’s liquidity-providing operations also increased considerably. However, Portuguese banks Share of Portuguese banks in the total amount of ECB’s liquidity-providing operations*

efforts to decrease their share on the total amount of ECB’s liquidity-providing operations, are being successful.

9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

* Percentage of liquidity-providing operations to Portuguese banks from the total amount provided by the Eurosystem to Euro area countries (outstanding amounts at the end of period). Source: Banco de Portugal


SEPTEMBER 2013

32

PORTUGUESE BANKING SECTOR OVERVIEW IV. Solvency

SEPTEMBER 2013

Portuguese banks’ asset risk level has been decreasing over the past few years. Risk weighted assets as a percentage of total assets*

66.9%

The Risk Weighted Assets / Total Assets Ratio for Portuguese banks suffered a considerable decrease over the past years. This trend intensified after the Portuguese Economic Adjustment Programme and reflects a decline of the average risk level of the assets that constitute Portuguese banks’ balance sheet.

66.8% 64.0% 61.4%

Dec-2007

Dec-2008

Dec-2009

Dec-2010

59.1%

58.9%

58.5%

Dec-2011

Jun-2012

Dec-2012

* Risk weighted assets include off-balance sheet items. Data for the Portuguese banking sector, on a consolidated basis which excludes insurance companies. Source: Banco de Portugal


SEPTEMBER 2013

34

Total assets have been showing higher growth rates compared to risk weighted assets. Trend in Portuguese banks’ risk weighted assets and total assets* (Dec. 2007=100) Index 125 Risk weighted assets

120

Total assets

115 110 105 100 95

Growth rates Total assets = 7.5% Risk weighted assets = 7.3%

90 Dec-2007

Dec-2008

Dec-2009

Dec-2010

Dec-2011

Jun-2012

Dec-2012

* Data for the Portuguese banking sector, on a consolidated basis which excludes insurance companies. Source: Banco de Portugal


SEPTEMBER 2013

35

Portuguese bank’s better quality capital, common equity Tier 1, increased significantly since 2009. Trend in Portuguese banks’ own funds* (Dec. 2009=100) Index 160

Core Tier 1

150

Tier 1

140

Total own funds

130 120 110 100 90 80 Dec-2009

Dec-2010

Dec-2011

Jun-2012

Dec-2012

* Data for the Portuguese banking sector, on a consolidated basis which excludes insurance companies. Source: Banco de Portugal


SEPTEMBER 2013

36

Historically, the capital levels of Portuguese banks have stayed above the minimum legal requirements. Tier 1 Ratio (%) 6.7

8.3

8.0

2007

6.2

2008

7.5

2009

10.7

10.5

9.9 7.9

2010

12.0 11.0

The Basel II Agreement requires financial institutions to maintain a Tier 1 Ratio equal or above 4% and an Overall Solvency Ratio not below 8%.

8.1

2011

2012

Overall Solvency Ratio (%) 10.3 10.2

11.7 9.1

2007

2008

13.6

13.2 10.4

10.2

13.5

14.6 12.5

9.5

Portugal EU 27

2009

2010

2011

2012

* Data for domestic banking groups and stand-alone banks, on a consolidated basis which excludes insurance companies. Source: ECB


SEPTEMBER 2013

37

Portuguese banks faced new capital requirements within the scope of the Economic and Financial Assistance Program. Besides the increase of the core Tier 1 Ratio that must be fulfilled, other factors contributed to augment the capital needs of the Portuguese banks, namely:

Core Tier 1 Ratio requirements

Additional impairments recognized on the loans portfolio

Haircut on Greek debt

31.12.2011 9%

Impacts

31.12.2012

Transfer of banks’ Pension Schemes to the Social Security

10%

Source: APB, Banco de Portugal


These impacts were recognized for prudential purposes during the 1st semester of 2012, and reflected in the core Tier 1 Ratio then. SEPTEMBER 2013

Increase of the own funds requirements for credit risk

Results of the Special Inspections Programmes carried out in the 8 largest banking groups, in 2011, 2012 and 2013. This assessments aimed to validate the data that supports the calculation of the solvency position of the institutions and assess the adequacy of impairment levels. 38

Simultaneously, the EBA also imposed higher capital requirements for European banks to be fulfilled from June 2012.  In order to deal with the sovereign crisis that affects Europe, the European Banking Authority, together with other European entities, established several measures that aim to strengthen the banking sector resilience.

Core Tier 1 Ratio 9%

Additional capital needs

 New capital requirements were therefore introduced under two different measures, namely:  Increase of the core Tier 1 Ratio from 4.5% to 9%;

Buffer sovereign debt exposures

 Establishment of a capital buffer for sovereign debt exposures as of 30th September 2011.

Source: EBA


SEPTEMBER 2013

39

Results of the EU Capital Exercise revealed capital shortfalls for banks in 12 European countries. AT 3.4%

NO CY 1.3% 3.1%

SI NL 0.3% 0.1%

BE 5.5%

GR 26.2%

PT 6.1% FR 6.4%

DE 11.4% ES 22.8% IT 13.4%

∑ = 114,685 Million EUR

 In December 2011, the European Banking Authority presented the results of the assessment made to the capital levels of the banking groups that were part of the stress-test, considering the market value of their sovereign exposures and capital as of 30 September 2011.  The results of this exercise revealed that the additional core Tier 1 capital required to attain the 2 requirements imposed to all European banks was 114,685 million euro.  For the Portuguese banks included in this exercise, the overall shortfall of core Tier 1 capital identified was approximately 6,950 million euro.

Source: APB, EBA


SEPTEMBER 2013

40

Results of the EU Capital Exercise Core Tier 1 capital

Capital shortfall*

Capital surplus

(milllion EUR)

Capital shortfall Core Tier 1 capital as of 30.09.2011

26,170 85%

Capital level needed to fulfill the requirements = 100% 20%

80%

ES

14%

6%

12% 3%

15,366 29%

86%

94%

13,107

100%

97%

100%

7,324

6,950

71%

IT

DE

FR

PT

GB

IE

ES

IT

DE

FR

PT

0

0

GB

IE

* As of 30.09.2011. Source: APB, EBA


SEPTEMBER 2013

41

For Portuguese banks, the capital needs resulted from exposure to sovereign debt as well as the increase of the minimum ratio requirements. Drivers of the capital needs, by country, as of December 2011 ∑=

26,170

15,366

13,107

7,324

6,950

3,812

3,232

3,512

3,718

6,313

3,923

3,531

1,520

320

159

19,610 5,692

6,561

9,674

5,544 7,563

1,539 1,075 4,774

3,812

2,457

112

Spain (ES)

Italy (IT)

Germany (DE)

France (FR)

Portugal (PT)

Belgium (BE)

Austria (AU)

1,520 0

Cyprus (CY)

Norway (NO)

317

-24

4

183

Slovenia Netherlands (SI) (NL)

Establishment of the buffer for sovereign debt exposures Increase of the core Tier 1 ratio and change in the calculation of the risk weighted assets Source: APB, EBA


SEPTEMBER 2013

42

As a result of the recapitalisation exercise, Portuguese banks’ capital levels increased significantly, even compared to their European peers. Core Tier 1 Ratio as of 30.09.2011

Core Tier 1 Ratio as of 30.06.2012

18%

18%

16%

16%

14%

14%

12%

Minimum required until June 2012 Core Tier 1 Ratio = 9%

10%

CT1 deducted from the sovereign buffer

12% 10%

8%

8%

6%

6%

4%

4%

2%

2%

0%

Sovereign buffer

0% IE

GB

DE

FR

IT

PT

ES

IE

PT

GB

DE

IT

FR

ES

Source: APB, EBA


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43

The European-wide requirements came to exacerbate the capital needs meanwhile imposed by the national authorities. Breakdown of the capital needs for the 4 Portuguese banks that were part of the EBA exercise (as of December 2011)

 The European Banking Authority estimates did not include the impacts on core Tier 1 capital resulting from the events that occurred in 2011 and were only reflected on capital levels for prudential purposes in 2012, namely, the additional impairments on the loans portfolio, the change of the own funds requirements for credit risk, the haircut applied to Greek public debt imposed by Banco de Portugal and the transfer of the banks’ pension schemes to the social security.  Therefore, the effective capital needs until June 2012 were higher than the ones calculated at the time of the EU Capital Exercise.  Additionally, Portuguese banks had to fulfill, by December 2012, the increase of the core Tier 1 Ratio from 9% to 10%, which implied new capital needs. * Does not include the effect from the reduction of the risk weighted assets. Source: APB, EBA


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44

Recent events and regulatory changes have severely affected the capital levels of the 4 largest Portuguese banking groups. Common equity Tier 1

EUR 17,606 M

RWAs

December 2010

EUR 233,732 M

December 2011

Haircut 50%-60% on Greek debt EUR 800 M Capital increase to comply with core Tier 1 Ratio  9% (EAP)

New rules on RWAs calculation (CRD 3) EUR -133 M

7.5 %

Transfer of pension funds to Social Security EUR 929 M

EUR 19,561 M

EUR 216,593 M

9.0 %

Additional impairments on credit portfolio (SIP) EUR 318 M Buffer for exposure to sovereign debt (EBA) EUR 3,718 M

June 2012

December 2012

BdP BdP EUR EUR M 21,928 19.406 M

BdP BdP EUR EUR M 21,394 19.406 M CT1 capital increase EUR 500 M

CT1 capital increase EUR 6,650 M

EBA Buffer EUR EBA 23.125 EUR M 3,226 M

EBA Buffer EUR EBA 23.125 EUR M 3,226 M

Increase of own funds requirements for credit risk (SIP) EUR 185 M

EUR 217,940 M

EUR 211,236 M

9.8 %*

10.1 %*

11.5 %

11.7 %

* Core Tier 1 Ratio calculated by EBA’s definition and deducted from the sovereign buffer is 9.6% and 9.2% as of June and December 2012, respectively. Source: APB, EBA


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45

Portuguese banks were able to maintain the fulfillment of all capital requirements imposed, therefore strengthening their solvency positions. Portuguese banking groups core Tier 1 Ratio (as of 30.06.2013) Banco de Portugal EBA (deducted from the sovereign buffer) Minimum required core Tier 1 ratio (9%)

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Banco BPI

BCP

CGD

ESFG

TOTAL

Source: APB, EBA


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46

PORTUGUESE BANKING SECTOR OVERVIEW V. State Guarantee and Recapitalisation Schemes for Credit Institutions

SEPTEMBER 2013

Timeline of the Portuguese State guarantee and recapitalisation schemes for credit institutions Economic Adjustment Programme Oct. 2008

May 2009

Feb. 2010

Mar. 2010

Jul. 2010

Jan. 2011

Jun. 2011

• Extension till Dec 2010

• Extension till Jun 2011

• Extension Dec 2011 • Budget changed • EUR 35 B


•Extension till Jun 2011

• Extension Dec 2011 • Budget changed • EUR 12 B

Dec. 2011

May / Jun. 2012

Dec. 2012

• Extension till Jun 2012


• Extension 30 Jun 2013


• Extension 31 Dec 2013

Guarantee Scheme • Scheme approved till Dec 2009

• Budget changed

• EUR 20 B

• EUR 16 B

• Extension till Jun 2010 • Budget changed • EUR 9.15 B

Recapitalisation Scheme • Scheme approved till Nov 2009

• Extension till Jun 2010 • Budget changed • EUR 3 B*

• EUR 4 B Law nº 60-A/2008

Law nº 63-A/2008

Law nº 3-B/2010

Source: APB, European Commission – DGCOMP, Portuguese Ministry of Finance (DGTF)


Law nº 48/2011 Law nº 4/2012 SEPTEMBER 2013

* The usage of both schemes cannot exceed EUR 9.15 B.

48

Portuguese banks went through the financial crisis without any State support in terms of recapitalisation… State Support Scheme used until end of June 2011

By the end of June 2011: EUR 3 billion

EUR 9.15 billion

Not used*

Σ= EUR 4.95 B

> EUR 1,000 M

3 operations in 2008

< EUR 1,000 M > EUR 100 M

2 operations in 2009

< EUR 100 M

1 operation in 2008, 2 operations in 2009

 6 banks (of which, CGD is State-owned) had used the State guarantee scheme;  2 operations that amounted to EUR 75 M were over (one in 2009 and the other in 2010);  Outstanding guarantees totaled up to EUR 4,875 M, which corresponded to 53% of the budget.

* Not used by privately owned banks. In December 2010, CGD increased its capital by EUR 550 M, from which EUR 56 M were from the scheme budget. Source: APB, European Commission – DGCOMP, Portuguese Ministry of Finance (DGTF)


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49

… meanwhile, the public debt crisis lead to the increase in the usage of guarantees from the State. State Support Scheme used since July 2011

 Since July 2011:  6 banks used the State guarantee scheme for new operations;

Σ= EUR 5.6 B* EUR 12 billion

EUR 35 billion

3 operations*

Σ= EUR 16.5 B

> EUR 1,000 M

10 new operations

< EUR 1,000 M > EUR 100 M

3 new operations

< EUR 100 M

3 new operations

 New operations amounted to EUR 16,525 M, which corresponds to 47.2% of the budget.  As of the end of August 2013, EUR 730 M of the recapitalisation funds used had been repaid. The outsanding amount at that date was EUR 4.87 B.

* Does not include the recapitalization of CGD, in June 2012, that amounted to EUR 1.65 billion. Source: APB, European Commission – DGCOMP, Portuguese Ministry of Finance (DGTF)


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Cost with commissions upon access of the State guarantee scheme Total cost of the guarantees issued in each year (EUR Million)

2008 2009 2010

118.0 17.9 0.0

2011 2012

 The increase in commission costs results not only from the increment in the amount of guarantees issued in 2011 but also from a price effect since the commission fee has increased, on average, 39 basis points on the new operations.

485.3 186.2

Total

807.4

Source: APB, Portuguese Ministry of Finance (DGTF)


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51

Commissions paid and due upon access of the State guarantee scheme Annual commissions paid and due* (EUR Million) 2008 2009

0.0 11.2

2010

45.3

2011

56.6

2012

228.6

Cumulative paid until end 2012

341.7

2013

211.7

2014

199.2

2015 2016 2017

∑ = EUR 807.4 Million

30.1 19.2 5.7

* Estimates. Source: APB, Portuguese Ministry of Finance (DGTF)


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APRIL 2013