CaixaBank starts its Portuguese adventure amid a troubled financial sector

Caixabank's target price potentialCaixabank's headquarters

After a long wait, as a result of Banco Portugués de Inversiones (BPI) shareholders’ voting restrictions and after improving its initial offer, CaixaBank is on the verge of gaining control of the Portuguese lender. But it is embarking on this adventure at a time when that country’s financial sector is immersed in a serious crisis. And its economy is once again looking to Brussels, ahead of a possible second bail-out.

In its last report on Portugal, the IMF highlights the challenges facing the Portuguese banks, identifying two main areas of vulnerability: low profitability and poor quality assets.

The IMF states that the principal characteristics which have contributed to an accumulation of weaknesses in the Portuguese banks date back to the mid-1990s. Then they continued after the country joined the euro over the period 1999-2007. The banking sector was profitable during this time, although it was over-dependent on wholesale financing, on the increase in liquidity risk and on the higher ratio of loans to deposits in the Eurozone (150% compared with 100% in 1999).

To maintain profitability levels, bank lending quickly expanded as a result of bad credit allocation. This can be seen from the fact that bank assets increased from 184% of GDP in 1997 to 250% in 2007.

The concentration of ownership was also another of the sector’s weak points. Four large banks dominated the market (CGD, BCP, BES and BPI), in which big economic groups played an important role as shareholders. This probably facilitated lending activity based on relationships with construction and property companies. And, in fact, the concentration was a disincentive for making capital hikes which could dilute shareholders’ stakes.

Capital levels trended lower during the above-mentioned period, falling to below 7% of risk-weighted assets in 2007. This, combined with the dependence on potentially volatile financing sources, limited the banks’ capacity for absorbing shocks, increasing liquidity and solvency risks.

The IMF believes the Portuguese banks’ low profitability in the period 2010-2015 is due to their low capital levels; less liquidity; and weaker macroeconomic fundamentals, like lower GDP growth and higher public debt.

In the last few years, the Portuguese banks have been able to increase their liquidity and, to a lesser degree, their capital. But there still are significant problems in terms of profitability, which has been dragged down by low growth and by the bad quality of assets due to doubtful loans.

To restore profitability and improve asset quality, the IMF recommends cutting operational costs even further, increasing the rate of elimination of doubtful loans and raising capital to absorb the losses derived from restructuring and depreciation.

It’s not going to be easy for CaixaBank to be successful in Portugal. There is no getting around the fact that in the current environment of low growth, low inflation and low interest rates, it’s complicated for the Portuguese banks to strengthen their capital cushions due to the high cost. Santander Totta Banif is a reference. With a market share of 14.5%, it has become the second biggest private bank in Portugal, after BCP, and the number one in terms of profits with 290 million euros

About the Author

Carlos Díaz Guell
Editor at consensodelmercado.com and innovaspain.com, Carlos began his career in financial journalism as founding member of El País. He's been communications director of Bank of Spain, member of the ECC at the European Central Bank, Institutional Relations director at Iberia and editor at La Economía 16 magazine.