Keith Mullin, Editor at Large, International Financing Review
TO PORTUGAL, where I’m normally taking time out for some well deserved R&R. But it just so happens that the EC, ECB and IMF (aka the Troika) followed me here so I couldn’t resist writing a dispatch from the front-line, which I must admit doesn’t happen that often when, like me, you cover investment banking!
The Troika is checking on the progress of the government’s austerity plans. More specifically, it’s going over the banks’ books in fine detail to get a sense of their liquidity, leverage, exposure to real estate, and their overall solvency levels.
The issues facing Portugal and its banks are pretty serious. Just think about what’s happened in the past few months.
The intro to Banco Espirito Santo’s 1H 2011 earnings statement laid it out neatly: “The second quarter of 2011 was a particularly adverse period for Portuguese banks: [the] previous government resigned, Portugal requested international financial aid, new minimum core capital ratios were established for Portuguese banks, a new government was elected, new austerity measures were announced, stress tests results were released, Moody’s downgraded Portugal to below investment-grade … in a period of huge volatility and turbulence in the markets”. Wow!
I should show my hand right up front: I’ve been coming regularly to Portugal for more than 30 years now and am very fond of the place and its people. My current trip takes in the northern town of Braga, as well as Oporto and Lisbon, so it’s a good opportunity to gauge some broad views about what’s going on.
The Portuguese tend not to be overly demonstrative so it’s hard to spot any obvious signs of trouble or concern at first sight. But it doesn’t take a lot of quizzing to figure out that people here feel a mixture of worry, fear and anger.
THERE’S A REAL sense in Portugal that the economy is moving inexorably and inescapably towards tougher times. Everyone’s bracing themselves for a lot worse to come. And they’re likely to be right. Austerity measures haven’t really had an impact yet but they will undoubtedly lead to higher unemployment, higher taxes and fewer perks at a time of low economic growth and poor overall prospects. People here get that. And it’s bothering the hell out of them.
Corporate bankruptcy rates are rising, and companies are finding it hard to make ends meet. Living in and trying to make your way in a country that has had to be rescued has got to be tough.
Portuguese banks are very concerned in particular that the Troika will force the value of real estate and other assets held on their books to be marked down to the point where collateral values fall below the loans extended against them, which will force further write-downs and undermine capital levels. The banks are already under the cosh on capital levels since the Bank of Portugal forced them to higher minimum capital adequacy standards as a condition of the bail-out.
There’s a real sense in Portugal that the economy is moving inexorably and inescapably towards tougher times.
Unlike Spain and Ireland, banks here didn’t engage in frenzied real estate lending to developers or households leading to an unsustainable bubble in asset values, so applying the same logic to Portugal would be wrong. I do almost feel sorry for Portugal’s embattled. In fact strike that; I don’t feel sorry for them at all. But it is clear that the banks’ room for manoeuvre has been undermined by profligate government spending and fiscal imbalances, That, and the severe economic downdraught here, has trapped them in a cycle of low credit demand and accelerating levels of delinquent and overdue loans.
A report by the Diario Economico noted that bad debt provisions at the four largest private banking groups (BCP, BPI, BES and Santander Totta) rose by 57% in the first half of 2011 to more than €1bn, equivalent to more than three times their combined profits over the same period.
The banks have all been working overtime to get themselves straight. They’ve tapped the equity market with rights issues, engaged in liability management (hybrid debt buybacks, etc), marked out billions of euros worth of loan portfolio sales, re-strategised to focus in core activities, offloaded non-core subsidiaries or affiliates, sold third-party equity stakes in order to reduce risk-weighted assets and capital charges, reduced loan-to-deposit ratios to obviate the need for wholesale funding and are generally doing everything they can to deleverage.
SO WHERE HAS it got them? Well, they passed the stress tests (although the EU pass mark was below the bar set by the Bank of Portugal). But by the same token, they’re shut out of funding markets and their shares are trading as penny stocks; shares of BCP, BPI, and Banif were all trading below one euro on August 4.
BCP, the country’s largest listed banking group, closed at a pretty alarming 28 euro cents on August 4. The bank’s first-half earnings statement didn’t make for particularly pleasant reading, to be sure, but 28 cents? The problem with bank shares at this level is that they can often succumb to a death-spiral. Cash has been earmarked from EU bail-out funds to recapitalise the banks, but still.
Corporate Portugal is about to spend two years in the wilderness as far as wholesale markets are concerned. No matter how you look at it, it’s hard to escape the ignominy of penury.