The Portuguese Banking System in the Transition to the Banking Union Pedro Duarte Neves • Vice-Governor 30 September 2014
Euromoney Conferences The Portugal Conference
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 2 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 3 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
1. The Economic and Financial Assistance Programme
Economic and Financial Assistance Programme (EFAP) Main goals: Strengthen macro-financial stability, restore financial market confidence and relaunch sustainable growth
Three pillars Stabilisation of the financial sector
Fiscal consolidation
Structural adjustment
Financial sector workstreams Liquidity
Solvency
Supervision
Resolution
Balanced and orderly deleveraging
Adequate capitalization
Strengthen bank supervision
Set up an updated bank resolution framework
g
g
g
Debt restructuring Corporate and household debt restructuring
1. The Economic and Financial Assistance Programme
Economic and Financial Assistance Programme (EFAP) Financial sector workstreams – Main instruments Liquidity
Solvency
Supervision
Resolution
ECB refinancing operations
Regulatory measures
Cross sector supervisory actions
Resolution Fund
Funding and capital plans
Fund, financed by banks, intended to finance resolution measures.
Forward looking reporting, submitted quarterly.
Conventional measures FRFA VLTRO Collateral eligibility requirements Other
Capital ratio minima (core Tier 1 of 9% by end 2011 and 10% by end 2012); own funds deductions.
Bank Solvency Support Facility
12 € billion 5 • 30 September 2014
On-site inspections program (OIP), Special inspections program (SIP), Impairment analysis (ETRICC), Large clients business plans analysis (ETRICC 2).
Recovery and resolution plans
Information annually submitted by banks with the recovery measures and the relevant data in case of resolution
The Portuguese Banking System in the transition to the Banking Union
Stress tests Evaluates banks ability to endure adverse financial and economic scenarios. Forward looking.
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 6 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
There has been a sizeable adjustment of imbalances Net lender position (improvement of around 12 p.p. in the current and capital account between 2010 and 2013) Deleveraging is ongoing. Nevertheless, the level of indebtedness is still significant
4.0
Current and capital account (% GDP)
Debt of the resident non-financial sector (% GDP) 400 350
2.0
300
0.0
250
-2.0
200
-4.0
150 100
-6.0
50
-8.0
0
-10.0
1999
2001
Households
-12.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 7 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2003
2005
2007
Non-financial corporations
2009
2011
General government
2013
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
The restructuring of the economy is proceeding Weight of exports in GDP increased 10 p.p. between 2010 and 2013 ; significant share due to young firms; export market share gains of 12 p.p. in 2011-13 Firms with highest labor productivity increased their domestic market share Demand components (as a % of GDP)
Export decomposition by firms’ birth year
75.0 65.0 55.0 45.0 35.0 25.0 15.0
Private consumption
Public consumption
Investment
Exports
2013
2012
2011
2010
2009
2008
-5.0
2007
5.0
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
Credit developments have been consistent with the adjustment Recent improvement in credit market conditions Credit flows have been channeled to the most dynamic and productive firms, notably exporting firms in the private sector, albeit there is high heterogeneity across firms Distribution of interest rate to non-financial corporations (new business), in percentage 30%
Credit to non-financial corporations in the private sector (y-o-y rate of change, in percentage) 6.0 4.0
25%
Jun-10
20%
Dec-11
2.0
Jun-14
0.0
15%
-2.0 -4.0
10%
-6.0
5%
-8.0 2010
0% 0
1
2
3
4 5 6 7 8 9 10 11 12 13 14 Interest rates (percentage)
9 • 30 September 2014
2011
2012
2013
2014
Total credit Loans and debt securities - resident banks Loans to exporting firms by resident financial institutions
The Portuguese Banking System in the transition to the Banking Union
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
Strong and unprecedented fiscal consolidation effort in 2011-13 Around 8.5 p.p. improvement in the structural primary deficit The increase in the public debt ratio was mostly associated with debt deficit adjustments and rises in interest expenditures The composition of structural consolidation (in percentage points of trend GDP) 40
9
35
7
30
5
25
In p.p. of GDP
In p.p. of trend GDP
Breakdown of the change in the public debt ratio
20
3
15
1
10
-1
5
-3 -5
0 2008
2009
2010
2011
2012
Expenditure contribution Revenue contribution
10 • 30 September 2014
2013
Cum.: 20082013
Cum.: 20112013
-5 2008
2010 Primary balance effect Economic growth effect Total change
The Portuguese Banking System in the transition to the Banking Union
2012
Cum.: 2011-2013 Interest expenditure effect Deficit-debt adjustments
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
Successful exit from the Assistance Programme in May 2014 Anchored on sounder fundamentals of the Portuguese economy, coupled with institutional progress on a European level Favorable evolution of risk perception as regards the euro area Improved access of residents to wholesale debt markets 10-year government bond yields
Financial Account Balance and changes in assets and liabilities
20
25
16
20
14
15
In percentage of GDP
18
12 10 8 6 4
Change in assets Change in liabilities Balance
10 5 0 -5
-10
2
-15
0 2007
2008 US
2009
Germany
2010 UK
Source: Thomson Reuters
2011 Italy
2012
Spain
2013
France
2008
2014
2009
2010
2011
2012
2013 2014H1
Notes: an increase in net liabilities to nonresidents corresponds to a financial inflow and an increase in net assets corresponds to a financial outflow.
Portugal on to the
Sources: INE and Banco de Portugal
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
A gradual recovery has been observed in Portugal since mid-2013, in the context of a modest and uneven recovery in the euro area Resilient exports but still relatively weak investment dynamics Labor market developments have been relatively favorable
Year-on-year rate of change of GDP (per cent) 3
Unemployment rate (per cent) 20
2
18
1
16
0
14
-1
12
-2
10
The Portuguese Banking System in the transition to the Banking Union
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2012Q4
2012Q3
2012Q2
2012Q1
6
2011Q4
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2013Q1
2012Q4
2012Q3
2012Q2
2012Q1
2011Q4
2011Q3
2011Q2
2011Q1
-5
2011Q3
Euro area
12 • 30 September 2014
Portugal Euro area
8
2011Q2
-4
2013Q1
Portugal
2011Q1
-3
2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook
The latest macroeconomic projections for Portugal GDP growth close to the euro area Gradual recovery of domestic demand and strong export dynamics Sustained correction of macroeconomic imbalances
140
2013
2014(p)
2015(p)
2016(p)
Gross Domestic Product
-1.4
1.1
1.5
1.7
Private Consumption Public Consumption GFCF Exports Imports
-1.7 -1.8 -6.6 6.1 2.8
1.4 -0.2 0.8 3.8 4.6
1.5 -1.4 3.7 6.1 4.8
1.5 0.2 3.9 5.6 5.5
120 110 100 90 80 70
13 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
2016(p)
2015(p)
2014(p)
2013
2012
2011
2010
2009
60
2008
Source: Banco de Portugal.
GDP Private consumption GFCF Exports
130
Projection June 2014
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 14 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
3. Balance sheet repair: the adjustment of the banking sector
The banking sector is undergoing a balance-sheet repair… Reduction of total assets, with a significant contraction of credit to customers partially offset by an increase of debt instruments held (mainly holdings of public debt). Change in the financing structure, with a decrease in market based sources partially compensated by an increase in customers' deposits and Eurosystem refinancing. Assets (Billion €), at end of period 600
532
513
496
500
Bank financing structure (Billion €), at end of period 600
460
449
400 300 200 100
Other Assets
500
Investment in Credit Institutions Capital Instruments Debt Instruments
400
Credit
0 2010
2011
2012
15 • 30 September 2014
2013
2Q 2014
532
513
496
460
449
Capital & Others
300
Resources from Central Banks Interbank Market
200
Securities
100
Deposits
0 2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
2013
2Q 2014
3. Balance sheet repair: the adjustment of the banking sector
… characterized by a strong deleverage process Significant decrease of LTD ratio, chiefly driven by the credit reduction. Significant reduction of the commercial gap
Loan-to-Deposits (LTD) ratio, at end of period
140
140
128
120
117
400
114 300
100 80
200
60 40
100
20 0
0 2010
2011
2012
16 • 30 September 2014
2013
Deposits (left axis)
2Q 2014
Credit (left axis) Credit at risk (left axis) LTD ratio
€ Billion
160
500
158
€ Billion
180
Commercial gap, at end of period 180 160 140 120 100 80 60 40 20 0
133 98 70
2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
43
35
2013
2Q 2014
3. Balance sheet repair: the adjustment of the banking sector
NPL ratio increased, also due to supervisory action, but this trend is now reverting The ratio of credit at risk maintains an upward trend. Recent developments are partially justified by a denominator effect (deleveraging), since the flow of new overdue and non-performing loans has been reduced since mid-2012. Despite the increase in the credit at risk, the respective coverage ratios remained relatively stable throughout the period. Credit at risk ratio by institutional sector, at end of period PrivateResident Sector
Non-financial corporaions
Housing
Credit at risk coverage ratio by institutional sector, at end of period
Consumpionandoher purposes
PrivateResident Sector
Non-financial corporaions
Housing
Consumpionandother purposes
90,0
20,0 80,0
18,0 16,0
70,0
14,0
60,0
Per cent
Per cent
12,0 10,0
50,0
40,0
8,0 30,0
6,0 20,0
4,0 2,0
10,0
0,0
0,0
2010
2011
2012
17 • 30 September 2014
2013
1Q 2014
2Q 2014
2010
The Portuguese Banking System in the transition to the Banking Union
2011
2012
2013
1Q 2014
2Q 2014
3. Balance sheet repair: the adjustment of the banking sector
Cross-sectional inspections carried out by BdP in 2011-2014 SIP (2011)
OIP (2012)
ETRICC (2013)
ETTRIC2 (2013-2014)
All credit portfolio
Construction and Real Estate portfolio
Credit portfolio, excluding mortage, consumer and public administration loans
12 economic groups
Reference date
June 2011
June 2012
April 2013
September 2013
Scope universe
€ 281 billion
€ 69 billion
€ 93 billion
€ 9,4 billion
Sample for individual analysis
€ 70 billion
€ 39 billion
€ 53 billion
€ 8,4 billion
5 516
2 856
2 206
227
# BdP resources
69
31
27
18
# external resources
226
98
191
37
16 Dec 2011
3 Dec 2012
2 Aug 2013
28-Mar-2014
Scope
# of analysed entities
Public release
Reinforcement of impairment and provisions levels deemed necessary as a result of the inspection exercise.
Impairments and Provisions
€ 838 billion
€ 861 billion
€ 1 127 billion
€ 1 003 billion
3. Balance sheet repair: the adjustment of the banking sector
The solvency ratios have clearly increased… Core tier 1 reached 12.3% at end 2013, clearly above the 10% minimum defined under the Economic and Financial Assistance Programme. (As of Jan 2014 there is a new framework, fully aligned with CRD IV, introducing the common equity tier 1 (CET1) concept)
The increase in core tier 1 ratio was driven both by a reduction in RWA and reinforced capital position (with public capitalization having a considerable role) Solvency and leverage ratios
Contributions to the Core Tier 1 ratio change 2010 - 2013
12
5
10
4
Percentage points
Percentage
14
8 6 4 Dec2010
Dec2011
Solvency ratio Core Tier 1 Leverage ratio (Tier 1 / total assets)
19 • 30 September 2014
Dec2012
Dec2013
Solvency ratio regulatory minimum EFAP minimum for Core Tier 1
The Portuguese Banking System in the transition to the Banking Union
3
RWA
2
1
Core Tier 1
0
2010-2013
3. Balance sheet repair: the adjustment of the banking sector
… but profitability remains under pressure, despite the recent recovery of the net interest income Banks results have been declining as a reflection of the challenging economic and financial scenario (GDP, unemployment, low level of interest rates). Nevertheless, excluding BES group, the profitability of the banking system improved significantly in the first half of 2014 when compared to the same period in 2013 Banking sector returns 1,0
0,5
%
7,7 -6,3
-5,5
-0,4
-0,3
-8,4 -11,6
3,8
0,5
0,3
0,0 -0,5
-0,5
-1,0
-0,8
-26,5 -1,8
2010
2011
2012
Return on Equity (ROE)
2013
1H 2013
1H 2014
Return on Assets (ROA) - rhs
The lighter shaded number and dotted line are BdP estimates for the ROE and ROA excluding BES group 20 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
-1,5 -2,0
%
15 10 5 0 -5 -10 -15 -20 -25 -30
3. Balance sheet repair: the adjustment of the banking sector
BES resolution • BES Group was the 3rd largest banking group in PT, with total assets of about € 81 bn, representing almost 50% of Portuguese GDP • Unexpected losses unveiled in late July triggered a breach in solvency ratios which further and irreparably aggravated the liquidity shortfall • On 3 August BdP created “Novo Banco” and transferred thereto most of the business of BES, which was left as a “bad bank” and shall be wound up
• Capital requirements of Novo Banco were estimated at € 4.9 bn, after prudent adjustments and targeting a CET1 ratio of 8.5% 5yr spread : Diferential vis-à-vis DE
p.b.
Eurostoxx and PSI 20 index
110
300
Early signs point to no systemic implications and sovereign contagion
250 200 150 100 Portugal
Espanha
Itália
100 = 1st july 2014
100
90
80
50
Euro stoxx 50
0 1/Jul
21 •
12/Jul
23/Jul
3/Ago
14/Ago
25/Ago
70 01-Jul-14
12-Jul-14
23-Jul-14
PSI20 03-Ago-14
14-Ago-14
25-Ago-14
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 22 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
4. The Single Supervision Mechanism
Single Supervision Mechanism - Institutional framework ECB
National Competent Authorities (NCA) Euro Area
Responsibility for the oversight of the SSM functioning and for ensuring supervisory consistency
Direct Supervision of Less Significant Banks
SSM Common Supervisory Framework Supervisory Decisions over All Banks: exclusive competence or use of specific powers Decision to Directly Exercise Supervision
Assistance to the ECB in the Supervision of Significant Banks Exclusively Competent for Supervisory Tasks not conferred on the ECB
Direct Supervision of Significant Banks 23 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
NCA other Member States
(optional – close cooperation agreement)
The supervisory framework will mirror the one applied within the Euro Area, but the ECB will exercise its tasks indirectly always by instructions to the NCA
4. The Single Supervision Mechanism
Single Supervision Mechanism – Operational framework GOVERNING COUNCIL SUPERVISORY BOARD ECB Intermediate Structures (DGs) a JST for every significant banking group responsible for all supervisory tasks
JST Coordinator
NCA sub-coordinators
ECB/NCA staff
24 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
Outline
1. The Economic and Financial Assistance Programme 2. The ongoing adjustment of the Portuguese economy: recent developments and the macroeconomic outlook 3. Balance sheet repair: the adjustment of the banking sector 4. The Single Supervision Mechanism 5. Challenges ahead 25 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union
5. Challenges ahead
• Improving long-run growth is of the essence i) Need to sustain (and enlarge) the reform momentum ii) Investments in physical and human capital are key
• The adjustment of accumulated imbalances will continue to characterize the Portuguese economy i) An orderly and gradual deleveraging process needs to be sustained ii) A smooth intermediation process is crucial to an efficient allocation of resources
• Fulfilling the current European commitments is the adequate policy from an intertemporal perspective Even under conservative macroeconomic assumptions, fulfilling the Fiscal Compact ensures debt sustainability
• Restoring profitability in the banking sector is crucial 26 • 30 September 2014
The Portuguese Banking System in the transition to the Banking Union