How safe is your money?
With Portugal’s largest private bank Millennium BCP posting a 2012 loss of over €1.2 billion, Banif €576 million and Caixa Geral de Depósitios €394 million, what is the future of the country’s troubled banking sector and just how safe is your money?
The year of 2012 was definitely a memorable one for the largest national private bank: after receiving a capital injection of €3.5 billion from the government as part of Troika’s banking recapitalisation line and registering a record €1.2 billion in losses, Millennium BCP’s future is now in the hands of the European Commission (EC), which will decide what measures will be imposed as part of the bank’s restructuring agreement.
The bank has been negotiating with the EC’s Directorate-General for Competition (DGCom) to try to avoid the sale of some of its most profitable assets in Poland which, along with its operations in Angola and Mozambique, generated €236 million in profits in 2012.
The sale of such assets could potentially expose the bank’s fragility in the struggling Portuguese market and, in order to prevent such action, Millennium BCP decided to anticipate a few measures that could be included in the restructuring process, like laying off 977 employees last year.
Four national banks - Millennium BCP, Caixa Geral de Depósitos (CGD), Banco Português de Investimento (BPI) and Banif – have asked for the government’s assistance and are now subject to negotiations with DGCom as part of their restructuring agreements.
The negotiations with the technicians of the DGCom have been taking place since July 2012, after the Portuguese government announced it would make capital injections on BCP, the state-owned CGD (€1.65 billion) and BPI (€1.5 billion). At the end of 2012, the government also decided to inject €1.1 billion into Banif, becoming its main shareholder at least until June 2013.
With the help of Troika’s recapitalisation line, the Portuguese government has invested so far a total of €5.6 billion to stabilise Portugal’s financial system.
However, out of four national banks undergoing a restructuring process, BPI was the only entity that made a profit in 2012, with approximately €249 million in gains. Banco Espírito Santo, which did not need the government’s assistance last year, also escaped the negative trend, earning €96.1 billion in 2012.
On the other spectrum is CGD, which suffered losses of more than €394 million last year (an improvement of nearly €94 million compared to 2011), whilst Banif registered a record loss of more than €576 million. This means that the DGCom will probably force this bank to sell many of its assets in Brasil and Cape Verde and focus on its operations in Madeira and Azores, as well as laying off more employees (besides the 300 people dismissed in 2012).
In total, the five largest national banks lost €1 billion in 2012.
Technicians from the DGCom came to Portugal on February 15 to continue the negotiations with the banks and the Ministry of Finance regarding the restructuring agreements - final measures must be sent to the EC by March 31.
According to Expresso newspaper, DGCom’s major goal is to make sure that the loans granted by the Portuguese government “are paid off as quickly as possible” to prevent any added pressure on the country’s crumbling economic situation.
In 2012, Millennium BCP repaid at least €128 million of its loan to the Portuguese government and is expected to hand over another €250 million in 2013, said the bank’s president Nuno Amado in Parliament earlier this year.
BCP’s Greek mess
Created in 1985 following the liberalisation of the national financial system, Millennium BCP registered severe losses in the last two years, totalling more than €2 billion. Whilst in 2011 the bank lost around €846 million, the figures were up to a record loss of €1.2 billion in 2012, mainly due to its €1.6 billion in credit impairments, €702 millions of which took place in Greece, where the bank has 120 branches and employs 1,200 people.
According to a statement released by the bank, no decision has been made, but Millennium BCP is negotiating, “exclusively with Piraeus Bank”, the sale of its Greek operation. However, according to some of its shareholders, such as João Rendeiro, the decision to sell BCP’s assets in Greece came too late. In April 2011, the former administrator of Banco Privado Português, who was accused earlier this month of swindle, wrote on his blog ‘Arma/Crítica’ that Carlos Santos Ferreira should have sold the bank’s Greek assets when he took over in 2008.
“At the time, many shareholders, myself included, advised Santos Ferreira to sell the Greek bank, but without success,” he commented.
Hoping to recover its profitability as of 2014, Millennium is also planning on laying off more employees this year. BCP’s president Nuno Amado told news agency Lusa that the bank will be laying off “between 200 to 250 people per year” until 2017, at which time the public recapitalisation of the bank will be over.
However, not all was bad news: managing to comply with the demands of the European authorities, BCP improved its solvency ratio (to 12.4% core tier 1) according to the criteria of the Bank of Portugal, and to 9.8% according to the criteria of the European Banking Authority (EBA).
Another positive figure is the increase in client deposits by 3.9% between 2011 and 2012, from €47.5 billion to €49.3 billion. But, despite higher level of savings by customers, the bank’s net amount of granted loans decreased by 6.5% compared to 2011 (from €71.5 billion to around €66 billion in 2012). Whilst corporate loans dropped by 9.9%, private loans decreased 3% in 2012, but the most significant drop was registered in the commercial sector, with loans declining by 17.9% between 2011 and 2012.
“Not all banks had losses, but all made the most of the favourable financial environment to earn significant gains, whether through their own debt or through the public debt, which had an average profitability of 57% last year. The problem is the (…) internal economic situation and past deals, many of which were made without any guarantees and which the recession exposed and made unbearable,” wrote António Costa, the director of the business newspaper Diário Económico, in his opinion column on February 13.
“Millennium BCP and Caixa Geral de Depósitos (...) are in this context the most exposed banks and therefore they continue to struggle to amend their history. They’re more solid than a year ago, they have evolved favourably (…), but 2013 will be a decisive year,” he added.
The Algarve Resident asked Gavin Scott, Senior Partner at wealth managers Blevins Franks Financial Management Ltd, for his opinion on the country’s banking sector. He believes the outlook for Portugal’s banking sector and economy remains bleak, and the fact that banks’ balance sheets are still in the red is “particularly worrying” when you consider the economic landscape they are operating in.
He explains: “The banks currently offer an unrewarded risk to depositors; they are exposed to all of the risk that the banks are taking while receiving none of the reward. Credit ratings have deteriorated at a faster rate than the interest they offer, and this is most acute in Portugal where banks have sub-investment grade credit ratings.
“Moody’s Investor Services took action on three banks in December 2012. Banco Comercial Português was downgraded to B1, with a negative outlook. Banif was downgraded to B2, while Caixa Geral de Depósitos was affirmed as Ba3, with a negative outlook. This reflects the expected further deterioration of their risk absorption capacity given the negative outlook for the Portuguese economy.
“In the event of a bank failure, the Fundo de Garantia de Depósitos is responsible for reimbursing account holders up to a set limit of €100,000 per depositor per banking group. However, this is untested should a large bank fail in Portugal, and with the government’s own low credit rating, you may be concerned about whether you would actually receive your savings back and when.”
Gavin Scott’s view is that depositors should diversify by spreading their savings among different assets, and in the case of banks, over more than one.
He said: “Look at the structures you hold your wealth in and ensure your assets are either ring-fenced from institutional failure or diversified as much as possible. You can eliminate institutional risk at the same time as benefitting from gross roll up of income and gains within tax favoured structures.”
Is Portugal’s financial system at risk?
Although the Bank of Portugal refused to comment on Millennium’s losses, the entity sent a note to the Algarve Resident on how they are safeguarding the country’s financial stability.
Released on February 1, the document was distributed during a hearing at the Commission for Budget, Finance and Public Administration as part of the banks’ capitalisation process.
According to the note, “the public investment” made on these banks “was necessary given the context of limited access to the capitals market by these national institutions” and due to the forcement of “preventative demands”.
This is also the reason why the Bank of Portugal has been demanding a solvency ratio (core tier 1) of at least 10% since the end of 2012, whilst the European authorities’ legislation stands at 8%.
Compared to other countries, Portugal’s banks recapitalisation has also cost less so far (3.3% of the GDP), whereas Spain (7%), Belgium (5.5%) and Denmark (4.5%) have spent bigger sums to reinforce their banking system.
The Bank of Portugal stated that the Troika’s Financial and Economic Assistance Programme (PAEF) recognises the importance of “the state support to ensure financial stability”, particularly when banks cannot access markets under normal circumstances.
“PAEF has included measures to ensure the system has enough liquidity, such as improving the maximum amount of obligations that can be issued by the banks under the state’s guarantee from €20 million to €35 million.”
The PAEF comprises a €12 billion bank solvency support facility (a sort of credit line) to help banks get the extra capital they need. So far, the Portuguese government has spent €5.6 billion on Millennium, CGD, BPI and Banif under the form of public investment with a subsequent partial refund.
BCP founder earns millionaire pension
Jardim Gonçalves, Millennium BCP’s founder and former president, will continue to receive a monthly pension of more than €167,000.
The Court of Appeal confirmed the decision made by the Sintra court on May 2012, in which the court ruled itself unable to judge BCP’s intentions of reducing the founder’s pension.
Although the bank cannot file an appeal against the court’s sentence, the current president Nuno Amado may file a new lawsuit in the Commerce Court in order to lower Jardim Gonçalves’ pension.
The bank’s founder has been receiving the millionaire pension since December 2007.
Barclays to close 100 branches in Portugal
Barclays bank has announced plans to close 100 agencies in Portugal and reduce staff by 300 as part of a major restructuring programme.
The UK-based bank has around 250 branches in Portugal and around 2,000 employees.
In recent years it has actively expanded its presence in a bid to increase market share and capture customers.
Globally Barclays last week announced a cost-cutting exercise designed to save £2 billion, which will involve cutting some 2,000 employees, mainly in the investment banking business.
Online business report Dinheiro Vivo said Barclays in Portugal aims to return to a more niche-based focus on the premier and business segments, with higher margins. BPCC