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Portugal’s banking sector: Facts & Figures

Updated December 2021 – For earlier editions of Facts & Figures click here

The Portuguese economy was severely impacted by the measures enacted to contain and mitigate the Covid-19 pandemic. After seven years of consecutive growth, GDP dropped by 7.6% in 2020. This evolution is mainly explained by the negative contribution of the domestic demand, mostly due to the sharp fall in private consumption. Net external demand also had a more negative contribution than in 2019 due to the more significant reduction in exports, especially tourism, than in imports. The Portuguese economy experienced the most significant fall in activity during the first lockdown period (Q2) when GDP fell 16.4%.

The progress made by the Portuguese banking sector after the great financial crisis proved extremely important in the current context of the pandemic crisis. The sector is better prepared and more resilient, especially in terms of liquidity and solvency, and has been playing a critical role in supporting the economy’s financing and liquidity needs.

At the end of 2020, the Portuguese banking system comprised 145 institutions, 60 of which were banks, 82 mutual agricultural credit banks and 3 savings banks, with the five largest banks accounting for 77% of total assets. The number of bank employees stood at 45,889 (1% of the country’s total active workforce).

Solvency has been strongly reinforced: CET1 reached 15.4% in 2020 (versus Core Tier 1 of 7.4% in 2010); liquidity stood at comfortable levels (loan-to deposit ratio of 84.9% versus 158.7% in June 2010; liquidity coverage ratio at 251.6%); non-performing loans (NPL) had an impressive evolution, falling by €36.1 billion since the highest level attained in June 2016. Nonetheless, on the back of the COVID-19 pandemic context, the profitability of the banking system suffered a significant decrease (RoE of 0.5%), reversing the recovery trend being experienced since 2016.

In terms of balance-sheet structure, on the asset side, the stock of loans to customers rose 2.1% year-on-year influenced by the support measures adopted in response to the pandemic crisis (moratoria and loans backed by public guarantee schemes). Considering the domestic activity only, loans to non-financial corporations (NFCs) rose 10.1%2 to €74 billion. Loans to households rose 1.5%, mainly due to the growth in new lending for house purchase and the reduction in repayments, reflecting the effects of the moratoria.

Asset quality continued to improve on the back of the ambitious strategies implemented to reduce NPL: since the peak reached in June 2016, the NPL ratio has decreased from 17.9 to 4.9% and the NPL coverage ratio increased from 43.2% to 55%. The net NPL ratio stood at 2.2% (-0.8 p.p. YoY).

Customer deposits continued to rise due to the increase in savings as a consequence of reduced consumption, related with the mobility restrictions imposed by the pandemic, and the high uncertainty regarding the duration of the crisis and its impacts.

The profitability of the banking system suffered a significant decrease with net income reaching €469 million (versus €1.9 billion in 2019), reflecting not only a drop in total operating income, but, above all, a significant increase in the flow of provisions and impairments.

The digital transformation is a priority for the Portuguese banks and strong progress has been achieved in this front. Internet banking users have increased from 38.1% in 2010 to 60.1% in 2020. Moreover, 61% of internet banking customers use mobile networks and 69.2% of current accounts have online access. The number of payment cards issued totalled 21.9 million and the amount of online purchases represented 12.8% of card purchases, which compares to 7.5% in 2019. Card payments using the contactless technology increased significantly and grew by 163% in volume and 271% in value. At the end of 2020, approximately 32% of purchases in terminals (19.4% in terms of value) were made using this technology.

Developments in the sustainable transition are also noteworthy. The Portuguese government is strongly committed in promoting a more efficient, sustainable and inclusive economy. The additional investment needed to achieve carbon neutrality by 2050 is estimated in €2.1 to €2.5 billion per year (around 1.2% of GDP). Tax incentives, subsidies, regulatory measures and special lines of financing are some of the measures implemented. The Portuguese National Recovery and Resilience Plan has the commitment to have, at, least 38% of expenditure in investments and reforms supporting climate objectives, and 22% towards the digital transition. In addition to public intervention, national credit institutions are playing a pivotal role in financing the transition to a sustainable economy, by providing a complementary suite of direct financing options targeting energy efficiency, renewable energy, electric vehicles and other sustainable investments, as well as channelling individual savings to sustainable investments through, inter alia, carbon neutral savings accounts, structured deposits linked to ESG factors, green bonds and ESG investment funds.

Contributor: Vera Flores  vera.flores@apb.pt