Focus1 : Portuguese Banks: Looking Back On A Transition Year

• At the end of a year marked by the government entering the capital of the main Portuguese banks, the banking sector has gained in terms of solvency. Liquidity conditions are steadily improving.

• In 2012, in the midst of severe recession, the profitability of Portuguese banks continued to be squeezed by deteriorating credit quality and pressures on net banking income.

In recent weeks, the main Portuguese banks presented their financial statements for 2012, a transition year hit by all the challenges facing Portugal’s banking sector, notably the public recapitalisation of its main lending institutions. Shoring up bank solvency and liquidity largely helped boost their capacity to resist shocks. Yet a particularly grim macroeconomic environment continued to erode the profitability of Portuguese banks. In 2012, none of the Portuguese banks returned to profits, and CGD1 and BCP2, the two largest in terms of assets, continued to report heavy losses.

Banks are more solvent, but at the cost of major public recapitalisation efforts

Since the collapse of Lehman Brothers and the beginning of the financial crisis, the solvency of the Portuguese banking sector has strengthened considerably: the sector as a whole had a core Tier 1 ratio of 11.3% on 30 September 20123, 4.5 points higher than at 31 December 2008 (Basel 2 definition). The improvement in the solvency ratio of Portuguese banks owes more to an increase in the numerator than a reduction in the denominator: between 31 December 2008 and 30 September 2012, capital increased by over 60% while risk-weighted assets declined by only 5%. Over the past two years, under the Economic and Financial Assistance Programme (PAEF) and the EBA’s recapitalisation efforts, Portuguese banks have been hit by double capital adequacy requirements.

BY Julie Enjalbert

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