portuguese banking system: latest developments • 4 th 7 1 portuguese banking system – main...

Portuguese Banking System:

latest developments

4th quarter 2017

Lisbon, 2018 • www.bportugal.pt

Prepared with data available up to 20th March of 2018.

Macroeconomic indicators and banking system data are quarterly and are presented until the last quarter

available, while financial market indicators, whose frequency is daily, are presented until the last day of available

information.

Portuguese Banking System: latest developments • Banco de Portugal Rua Castilho, 24 | 1250-069 Lisboa •

www.bportugal.pt • Edition Financial Stability Department • Design Communication and Museum Department | Design Unit

• ISSN 2183-9654 (online)

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1 Portuguese Banking System

– Main Highlights Balance sheet

Banking system’s total assets decreased in the fourth quarter of 2017. This development reflects

a decrease in several items, in particular debt securities, and the increase in cash balances at

central banks. Loans to customers (net of impairments) remained virtually unchanged, despite

different developments in its components.

Liquidity and funding

The reduction of the central banks’ financing became more marked in the last quarter of 2017,

standing at the lowest level since the first quarter of 2010.

Liquidity indicators remained at high levels and, in general, have improved.

Asset quality

Asset quality improved in the fourth quarter of 2017, with a decline of the non-performing loans

(NPL) ratio. This development continued to reflect the decrease of the numerator (NPL stock), in

particular in the Non-financial corporations segment. Additionally, the NPL coverage ratio has

increased in the same period.

Profitability

Banking system profitability was positive in 2017, in contrast with the negative value in 2016.

Comparing to 2016, the improvement in profitability reflects a significant reduction in the flow of

impairments, particularly in the last quarter.

Solvency

Banking system’s own funds ratios increased in the last quarter of 2017 due to the increment of

capital.

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2 Macroeconomic and Financial

Indicators Chart 2.1 • GDP growth rate, in % | Volume

Source: INE.

Note: National Accounts figures are presented according to the rules of the European System of National and Regional Accounts (ESA 2010).

• In 2017, GDP grew by 2.7%, 1.1 p.p. above the figure for 2016.

• GDP year-on-year growth rate stood at 2.4%, similar to the previous quarter. GDP

quarter-on-quarter growth rate was 0.7%, a slight acceleration from 2017 Q3 (0.6%).

Chart 2.2 • Unemployment rate, % of active population

Sources: Banco de Portugal and INE.

Note: The unemployment rate corresponds to the figure of the central month of each quarter published by the National Statistical Institute,

seasonally adjusted.

• The unemployment rate stood at 8.1% in 2017 Q4, decreasing by 0.7 p.p. vis-à-vis the previous

quarter.

• In 2017, the unemployment rate was 9.0%, a decline of 2.2 p.p. from 2016.

-4.0

-1.1

0.9

1.81.6

2.7

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2.4 2.4

0.6 0.7

-5

-4

-3

-2

-1

0

1

2

3

4

2012 2013 2014 2015 2016 2017 2017 Q3 2017 Q4 2017 Q3 2017 Q4

annual change yoy change qoq change

// //

15.816.4

14.1

12.6

11.2

9.0 8.88.1

0

2

4

6

8

10

12

14

16

18

2012 2013 2014 2015 2016 2017 2017 Q3 2017 Q4//

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Chart 2.3 • Sovereign debt yields 10Y, in %

Source: Thomson Reuters.

Note: The last observation is dated 19 March 2018. Daily data.

• The 10-year Portuguese sovereign bond yield dropped 42 basis points between 29 September

and 29 December of 2017. The spread vis-à-vis the 10-year German sovereign bond yield

decreased by 45 basis points in the same period.

• The downward trajectory of the 10-year Portuguese sovereign bond yield was maintained in the

beginning of 2018 and its level has stabilised below 2%. The disclosure of positive

macroeconomic and budget execution data might have contributed to this development.

Chart 2.4 • Euro area interest rates, in %

Source: European Central Bank.

Note: The last observation is dated 19 March 2018. Daily data. (a) Corresponds to the Eurosystem official interest rate on the main refinancing

operations (b) Corresponds to the Eurosystem official interest rate on the marginal lending facility (c) Corresponds to the Eurosystem official

interest rate on the deposit facility.

• European Central Bank (ECB) interest rates remained stable since March 2016: the deposit

facility interest rate at -0.40%, the main refinancing operations interest rate at 0% and the

marginal lending facility interest rate at 0.25%.

• In 2017, the euro area interbank market rates (EURIBOR) remained negative, reflecting the

banking systems’ favourable financing conditions in the context of ECB’s accommodative

monetary policy.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Apr.17 Jun.17 Aug.17 Oct.17 Dec.17 Mar.18

Portugal Germany Spain Italy

-0.45

-0.30

-0.15

0.00

0.15

0.30

0.45

Jan.16 Mar.16 May.16 Jul.16 Sep.16 Nov.16 Jan.17 Apr.17 Jun.17 Aug.17 Oct.17 Dec.17 Mar.18

ECB - Main ref. Op. (a) ECB - Lend. Facility (b) Dep. Facility (c)

Euribor 3M Euribor 6M Euribor 12M

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3 Portuguese Banking System

3.1 Balance sheet

Chart 3.1 • Asset structure, in €Bn

Source: Banco de Portugal.

Note: The Other assets item includes cash and cash balances at central banks, cash balances at other credit institutions, derivatives, tangible

and intangible assets and other assets.

• Banking system’s total assets returned to a downward trajectory, decreasing by 1.1% in 2017 Q4

to 381 €Bn.

• In 2017 Q4, the development in total assets reflected the decline in several items, in particular

the reduction of the exposure to Portuguese public debt securities and the decrease in loans

to credit institutions. This was partly offset by a significant increase in cash balances at central

banks. Loans to customers (net of impairments) remained virtually unchanged, despite the

different developments of its components.

Chart 3.2 • Bank financing structure, in €Bn


Note: The Other liabilities item includes derivatives, short positions and other liabilities.

• Deposits from other credit institutions declined in 2017 Q4 (and as a result net interbank

funding also decreased). Deposits from central banks and securities also diminished in this

period.

493457

426 408 386 385 381

0

200

400

600

Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Sep. 17 Dec. 17

Thousands

Loans to credit institutions Debt securities Equity instruments Loans to customers Other assets

2.9 2.7 2.02.5 2.3 2.1 2.0

//

Total assets / nominal GDP

493457

426408

386 385 381

0

200

400

600


Thousands

Deposits from central banks Deposits from other credit institutions Securities Deposits from customers Other liabilities Equity

//

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• Customer deposits increased sharply in 2017 Q4, reflecting the growth in the Non-financial

corporations and Households segments, which more than offset the decline in the public sector

deposits.

3.2 Liquidity and funding

Chart 3.3 • Central banks’ funding, in €Bn


• Central bank’s funding declined further in 2017 Q4, albeit more sharply (-3.3%) than in the

previous two quarters, reaching its lowest level since 2010 Q1.

• Long-term refinancing operations (LTRO) have become more prevalent in relation to the main

refinancing operations (MRO) – which are very residual at this point – and to other type of

funding from central banks.

Chart 3.4 • Loan-to-deposit ratio, in %


• The loan-to-deposit ratio declined slightly in 2017 Q4, mainly reflecting the growth in deposits.

52.847.9

31.226.2 22.4 22.7 22.1

3.4

3.3

2.5

2.42.3 1.9 1.8

0

20

40

60


Thousands

Monetary policy operations with Banco de Portugal Other deposits from central banks

//

122.6

111.8102.1

96.1 95.3 94.0 92.6

0

30

60

90

120

150

Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Sep. 17 Dec. 17//

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Chart 3.5 • Commercial gap, in €Bn


• The commercial gap (loans subtracted from customer deposits) has become more negative, by

3 €Bn, in 2017 Q4.

Chart 3.6 • Liquidity gaps for domestic institutions(a) and Liquidity Coverage Ratio (LCR)(b),

in %


Notes: a) The liquidity gap is defined as the difference between liquid assets and volatile liabilities in proportion of the difference between

total assets and liquid assets, for each cumulative maturity scale. An increase of this indicator reflects an improvement of banks’ liquidity

position; b) The liquidity coverage ratio is expressed as the ratio between the value of the stock of high quality liquid assets and the total net

cash outflows for a 30 calendar day liquidity stress scenario.

• Portuguese banking system's liquidity continued to stand at a comfortable level. Even though

the liquidity coverage ratio declined slightly in the last quarter of 2017, it remained at a level

higher than in the end of 2016, well above the 100% regulatory minimum required as from 1

January 2018.

• Liquidity gaps of domestic institutions increased for all maturity scales. In the shorter maturities,

this evolution mainly reflected the positive development of cash balances at central banks,

which more than offset the increase in volatile liabilities. In the remaining maturities (up to 6

months and up to 1 year), both the increase in liquid assets and the reduction in volatile

liabilities contributed to this indicator’s increase.

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5.8

9.810.6

13.412.0

15.9

18.1

3.4

7.79.2

12.2

10.1

14.6

17.3

1.3

3.4

6.7

8.9 8.4

13.6

16.0

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Up to 3 months Up to 6 months Up to 1 year

//

174

Liquidity coverage ratio

177151

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3.3 Asset quality

Chart 3.7 • Non-performing loans ratio, in %


Notes: The non-performing loans ratio is the amount of non-performing loans in relation to total loans, according to EBA’s ITS on Supervisory

Reporting. The non-financial private sector comprises the Non-financial corporations and Households.

• Non-performing loan (NPL) stock continued to decline in 2017 Q4. This 2.9 €Bn drop was the

largest quarterly reduction since the publication of this data series based on the EBA’s ITS

(December 2015). The NPL stock decreased by 9.3 €Bn vis-à-vis December 2016 and by 13.5

€Bn in comparison to its peak in June 2016.

• The NPL ratio decreased by 1.3 p.p. in this quarter, standing at 13.3%, which represents a 3.9

p.p. reduction in comparison to the end of 2016 and a 4.6 p.p. decline vis-à-vis June 2016. In

turn, the Non-financial private sector NPL ratio decreased by 1 p.p. compared to September

2017.

• Despite the positive contribution of all segments, the developments observed in 2017 Q4

mostly reflect a 1.6 €Bn decline in the NPL stock of Non-financial corporations. This stock

decreased by 5.9 €Bn and by 8.9 €Bn comparing to December and June 2016 respectively.

Chart 3.8 • Non-performing loans coverage ratios, in %


Note: The coverage ratio is the percentage of non-performing loans that is covered by impairments.

7.2 7.2 7.1 7.0 6.7 6.5 6.2 5.7

13.5 12.4 12.410.8 10.0 9.6 9.0 7.9

28.330.3 30.1 29.5 29.0

27.5 26.625.2

17.5 17.9 17.6 17.2 16.4 15.5 14.613.3

17.9 18.5 18.3 17.5 17.116.2 15.6

14.6

0

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10

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20

25

30

35

Dec. 15 Jun. 16 Sep. 16 Dec. 16 Mar. 17 Jun. 17 Sep. 17 Dec. 17

Housing Consumption NFC Total Non-financial private sector

23.5 23.9 24.321.0 21.8 21.9 23.3 22.8

67.271.5

70.3 68.771.4 71.1 70.7

66.2

44.4 46.4 46.8 48.9 48.7 49.1 50.453.840.8

43.2 43.7 45.3 45.5 45.9 46.5 49.3

0

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Dec. 15 Jun. 16 Sep. 16 Dec. 16 Mar. 17 Jun. 17 Sep. 17 Dec. 17

Housing Consumption NFC Total

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• In December 2017, the NPL coverage by impairments ratio stood at 49.3%, increasing 2.8 p.p.

vis-à-vis the previous quarter. This development was driven by a 3.4 p.p. increase of

Non-financial corporations’ coverage ratio. In turn, the NPL coverage ratio of the Non-financial

private sector increased by 2.4 p.p. compared to September 2017.

3.4 Profitability

Chart 3.9 • ROE and ROA, in %


Note: Return is measured by profit or loss before tax.

• The return on equity and the return on assets were positive in 2017, in contrast with the

negative figures recorded in 2016. The return on equity rose by 10.8 p.p., while the return on

assets grew by 0.9 p.p.

• In 2017, the rise in profitability reflects, above all, a significant reduction in the flow of

impairments, due to the base effect related with the substantial increase in the flow of credit

impairments recorded at the end of 2016, as well as the increase in total operating income

(supported to a large extent by the triggering of the contingent capitalization scheme agreed

upon the sale of Novo Banco).

Chart 3.10 • Income and costs, in % of average total assets


Note: Recurring operating result corresponds to the sum of net interest margin and net commissions minus operational costs, as a percentage

of average total assets.

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2012 2013 2014 2015 2016 2017

Return on Equity (ROE) - lhs Return on Assets (ROA) - rhs

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2012 2013 2014 2015 2016 2017

Net interest income Net commissions Financial operations results

Other income Operational costs Impairments and provisions

Operating result (recurring) ROA

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• In 2017, net interest income contribution to ROA increased slightly vis-à-vis the previous year,

due not only to a higher decline in interest expenses than in interest income, but chiefly due to

the decline of total assets (denominator effect).

• The contribution of other operating income to ROA increased in 2017, largely as a result of the

triggering of the contingent capitalization scheme agreed upon the sale of Novo Banco.

• Operational costs remained virtually unchanged vis-à-vis 2016. It should be noted, however, an

increase in staff costs and a decrease in general and administrative expenses of the same order

of magnitude.

Chart 3.11 • Operational costs and Cost-to-income, in €Bn and in %


• Cost-to-income ratio stood at 52.9% at the end of 2017, about 6 p.p. lower than in 2016. Given

the relative stabilisation of operational costs, this development was mainly driven by the growth

in total operating income (which in turn reflects the increase in other operating income).

• In 2017, staff costs continued to be negatively impacted by non-recurrent factors associated

with the restructuring processes carried out by some of the largest institutions. This year

profitability was also affected by the aforementioned triggering of the contingent capitalization

scheme agreed upon the sale of Novo Banco, which impacted other operating income (and,

therefore, total operating income). Excluding these non-recurrent factors, it is estimated that

cost-to-income ratio would stand at 54.4%.

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2012 2013 2014 2015 2016 2017

Operational costs - lhs Cost-to-income ratio - rhs

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Chart 3.12 • Banking interest rates (new business), in % | Average value of the period


• Interest rates on new loans to Non-financial corporations and to Households (housing) fell in

2017 Q4 (22 basis points and 4 basis points, respectively).

• The cost of new deposits decreased in both segments (4 basis points in the Non-financial

corporations segment and 2 basis points in the Households segment).

3.5 Solvency(a)

Chart 3.13 • Tier 1 capital to total assets ratio and Leverage ratio, in %


Note: The Tier 1 capital to total assets ratio is a proxy for the leverage ratio, allowing for a more comprehensive period of analysis. The leverage

ratio is calculated as the capital measure (Tier 1 capital) divided by the total exposure, in accordance with the methodology set out in article

429 of the Regulation (EU) No 575/2013.

• The leverage ratio increased by 0.3 p.p. vis-à-vis the previous quarter, standing at 7.8%, well

above the minimum benchmark defined by the Basel Committee on Banking Supervision,

reflecting essentially an increment of the banking system’s capital position. In the same vein,

the ratio between Tier 1 capital and total assets increased by 0.3 p.p. to 8.1%.

(a) In 2014, the transition to a new prudential regime determined the existence of breaks in the series of solvency indicators justified by methodological

differences in the calculation of own funds components, affecting the comparability of ratios with previous years.

0

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2012 2013 2014 2015 2016 2017 2017 Q3 2017 Q4

Loans to Non-financial corporations Loans to Households (Housing)Deposits of Non-financial corporations Deposits of Households

//

7.0 6.8 6.97.6

6.97.8 8.1

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7.8

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Leverage ratio

7.56.6

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Chart 3.14 • Own funds ratios, in %


• The total capital ratio stood at 15.2% in December 2017, increasing by 0.5 p.p. compared to

September 2017. The Common Equity Tier 1 (CET 1) ratio stood at 13.9%, an increase of 0.4 p.p.

vis-à-vis the previous quarter. These developments reflect solely an increment in the capital

position.

11.512.2

11.312.4

11.413.5 13.9

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4

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14

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Core Tier 1 ratio CET 1 ratio

//

Total Capital Ratio

12.6 13.4 14.712.3 13.3 12.3 15.2

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