Portuguese Banking System: latest developments · PDF filePortuguese Banking System: latest developments ... segment. The 1.5 p.p. decline observed in the NFC segment ratio reflects

Portuguese Banking System: latest developments 2nd quarter 2017

Lisbon, 2017 • www.bportugal.pt

Prepared with data available up to 20th September of 2017.

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

www.bportugal.pt • Edition Financial Stability Department • Design Communication Directorate | Image and

Graphic Design Unit • ISSN 2183-9654 (online)

http://www.bportugal.pt/

http://www.bportugal.pt/

Contents 1. Banking System – Main Highlights | 4

2. Macroeconomic and Financial Indicators | 5

3. Portuguese Banking System | 7

Balance sheet | 7

Liquidity and funding | 8

Asset quality | 10

Profitability | 11

Solvency | 13

4 BANCO DE PORTUGAL • Portuguese Banking System: latest developments

1. Portuguese Banking System – Main Highlights

Balance sheet

In the second quarter of 2017, banking

system’s total assets decreased slightly vis-à-vis

the previous quarter.

The continued reduction of the loans to

customers’ portfolio was partially offset by the

increase in the sovereign debt securities’

portfolio. Customer deposits remained stable.

Liquidity and funding

Financing obtained from the Eurosystem

declined in the second quarter of 2017, in

contrast to the preceding quarter.

Banking system’s liquidity indicators improved,

in line with the latest quarters. The liquidity of

domestic institutions, measured by the liquidity

gaps, increased and remained at a comfortable

level.

Asset quality

The non-performing loans ratio decreased

again in the second quarter of 2017, reflecting

a greater reduction in non-performing loans

than the one observed in total loans. This

development was common to all segments

analysed.

Profitability

The profitability of the banking system was

positive in the first half of 2017, which

compares with the virtually nil figure observed

in the same period of the previous year.

The improvement in profitability vis-à-vis the

first half of 2016 was chiefly driven by a

significant reduction in the flow of impairments.

Solvency

Solvency levels increased in the second quarter

of 2017, due to the growth of the banking

system’s own funds and the reduction of the

risk-weighted assets.

2nd quarter 2017 5

2. Macroeconomic and Financial Indicators

Chart 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 Q2, year-on-year GDP growth stood at 2.9%, a slightly higher rate than the one observed in

the previous quarter (2.8%).

• GDP grew 0.3% quarter-on-quarter, which represents a slowdown from the previous quarter.

Chart 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 9.2% in 2017 Q2, falling by 0.7 p.p. vis-à-vis the previous quarter.

• On a year-on-year basis, the unemployment rate declined by 2.1 p.p.

-4.0

-1.1

0.9

1.61.4

0.0

2.8 2.9

1.00.3

-5

-4

-3

-2

-1

0

1

2

3

4

2012 2013 2014 2015 2016 2017 Q1 2017 Q2 2017 Q1 2017 Q2

annual change yoy change qoq change

// //

15.816.4

14.1

12.6

11.2

9.99.2

0

2

4

6

8

10

12

14

16

18

2012 2013 2014 2015 2016 2017 Q1 2017 Q2//


Chart 3 • Sovereign debt yields 10Y, in %

Source: Thomson Reuters.

• The Portuguese 10-year government bond yield fell by more than 90 basis points between 31 March

2017 and 30 June 2017, while the spread vis-à-vis the German 10-year government bond yield

decreased by 108 basis points. This downward movement has persisted throughout the third quarter

of 2017, with the yield of the Portuguese 10-year government bond declining an additional 58 basis

points between 30 June 2017 and 19 September 2017. The Portuguese public debt outlook

improvement, from stable to positive, by Fitch and Moody's and, more recently, the increase to an

investment grade rating level by Standard & Poor's, should have contributed, inter alia, to this

development.

Chart 4 • ECB rates, in %

Source: ECB.

• ECB rates remain 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%.

• The accommodative monetary policy, including ECB's asset purchase programme, continues to be

reflected in the levels of benchmark interbank interest rates.

-2

0

2

4

6

8

10

12

14

16

18

20

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17

Portugal Spain Italy Germany Greece

-0.45

-0.30

-0.15

0.00

0.15

0.30

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17

Main refinancing rate Deposit facility rate Marginal lending facility rate

2nd quarter 2017 7

3. Portuguese Banking System

Balance sheet

Chart 5 • Asset structure, in €Bn | Value at end of period

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.

• In 2017 Q2, Portuguese banking system’s total assets diminished by 0.6% vis-à-vis the previous

quarter. This development mainly reflects a reduction in loans to customers and other assets, which

was partially offset by an increase in sovereign debt securities, including Portugal.

• The decline of the loans to customers’ portfolio reflects mainly a decrease in loans to Non-financial

corporations.

Chart 6 • Bank financing structure, in €Bn | Value at end of period


• On the financing side, the stability of customer deposits in the quarter should be stressed. On the

contrary, deposits from other credit institutions decreased by 4.5% and its weight in total assets

decreased by 0.4 p.p. to 9.2%.

493457

426 407 386 386 384

0

200

400

600

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

Thousands

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

2.9 2.7 2.12.5 2.3 2.1 2.0

//

Total assets / nominal GDP

493457

426407

386 386 384

0

200

400

600

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

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

//


Liquidity and funding

Chart 7 • Central banks’ funding, in €Bn | Value at end of period


• Central bank’s funding decreased by 1.9% in 2017 Q2, reflecting a reduction of monetary policy

operations with Banco de Portugal. Central banks’ funding accounted for 6.6% of total assets, virtually

the same figure as in the previous quarter.

Chart 8 • Loan-to-deposit ratio, in % | Value at end of period


• The loan-to-deposit ratio stood at 93% in 2017 Q2, decreasing about 1 p.p. from the previous quarter.

This development reflects a decrease in loans and a stabilisation of deposits.

52.847.9

31.226.2

22.4 23.7 23.2

3.4

3.3

2.5

2.42.3 2.2 2.2

0

20

40

60

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

Thousands

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

//

123

112102

96 95 94 93

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 2017 Q1 2017 Q2//

2nd quarter 2017 9

Chart 9 • Commercial gap, in €Bn | Value at end of period


• The commercial gap (loans minus deposits) diminished approximately 17.2% in 2017 Q2, standing at

-16 €Bn.

Chart 10 • Liquidity gaps for domestic institutions(a) and Liquidity Coverage Ratio (LCR)(b),

in % | Value at end of period


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 coverage ratio increased by 18 p.p. to 185%, due to an increase

in liquid assets held by institutions.

• Liquidity gaps for domestic institutions increased for all maturities, as in the previous quarter.

57

30

5

-10 -11-14

-16-20

-10

0

10

20

30

40

50

60

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

//

5.8

9.810.6

13.412.0

13.6

16.0

3.4

7.79.2

12.2

10.1

13.214.9

1.3

3.4

6.7

8.9 8.4

10.8

12.9

0

5

10

15

20

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

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

//

185

Liquidity coverage ratio

166154


Asset quality

Chart 11 • Non-performing loans ratio, in % | Value at end of period


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

Reporting.

• The non-performing loans ratio stood at 15.5% in 2017 Q2, which represents a 0.9 p.p. reduction

vis-à-vis the previous quarter. The 6.1% decrease of non-performing loans (numerator effect) more

than offset the reduction in total loans (denominator effect). This decline of non-performing loans is

the largest since December 2015 and since June its value fell by 16.2%.

• The decrease of the total non-performing loans ratio in 2017 Q2 reflects positive developments in all

segments, but more significantly in the Non-financial corporations (NFC) segment. The 1.5 p.p. decline

observed in the NFC segment ratio reflects a non-performing loans reduction of 2.1 €Bn (7%) in 2017

Q2 (5.9 €Bn since June 2016, which amounts to an 18% fall).

Chart 12 • Non-performing loans coverage ratios, in % | Value at end of period


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

• In 2017 Q2, the non-performing loans coverage by impairments stood at approximately 46%. The

Non-financial corporations’ coverage ratio increased slightly to 49.2%, due to the decline of

non-performing loans (denominator effect).

7.2 7.4 7.2 7.1 7.0 6.7 6.5

13.5 13.512.4 12.4

10.8 10.0 9.6

28.329.3 30.3 30.1 29.5 29.0

27.5

0

4

8

12

16

20

24

28

32

2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

Housing Consumption NFC Total

23.5 23.3 23.9 24.321.0 21.8 21.9

67.2 66.471.5 70.3 68.7

71.4 71.1

44.4 45.4 46.4 46.8 48.9 48.7 49.2

0

10

20

30

40

50

60

70

80

2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

Housing Consumption NFC Total

2nd quarter 2017 11

Profitability

Chart 13 • ROE and ROA, in % | Value in the period


Note: Return is measured by profit or loss before tax. Intra-annual returns are annualised.

• The return on equity and the return on assets were positive in 2017 H1, which contrasts with the

virtually nil values observed in the same period of the previous year. On a year-on-year basis, the

return on equity grew by 3.9 p.p., whilst the return on assets increased by 0.3 p.p.

• In the context of a slight decrease in gross income, the rise in profitability vis-à-vis 2016 H1 reflects a

considerable decrease in the flow of impairments, especially for credit impairments.

Chart 14 • Income and costs, in % of average total assets | Value in the period


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.

• Net interest income remained virtually unchanged vis-à-vis 2016 H1, reflecting similar reductions in

interest income and in interest expenses. Notwithstanding, its contribution to ROA increased slightly

given the decrease in total assets.

-7.3-0.1

3.9

-0.6

0.0

0.3

-1.5

-1.0

-0.5

0.0

0.5

-25

-20

-15

-10

-5

0

5

10

2012 2013 2014 2015 2016 2016 H1 2017 H1

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

//

-4

-3

-2

-1

0

1

2

3

2012 2013 2014 2015 2016 1S 2016 1S 2017

Net interest income Net commissions Financial operations results

Other income Operational costs Impairments and provisions

Operating result (recurring) ROA

//


Chart 15 • Operational costs and Cost-to-income, in €Bn and in % | Value in the period


Note: The recurring cost-to-income ratio corresponds to operational costs as a percentage of the sum of net interest income and net

commissions.

• The cost-to-income ratio stood at around 61% in 2017 H1, which represents a decrease of 1.4 p.p.

on a year-on-year basis. This development reflects a greater reduction in operating costs than in

gross income.

• In 2017 H1, the cost-to-income recurring ratio decreased approximately 3 p.p. on a year-on-year

basis, standing at about 65%. This decline chiefly reflects a reduction in operating costs.

Chart 16 • Banking interest rates (new business), in % | Average value of the period


• As in the previous quarters, interest rates on new loans to Households (Housing) and to NFC

decreased in 2017 Q2. For Households (Housing) the interest rate decreased by 9 basis points and

for NFC the interest rate decreased by 13 basis points.

• The cost of new deposits decreased again in the quarter under review, by 3 basis points in the

Households segment and by 1 basis point in the Non-financial corporations segment, standing very

close to zero.

0

20

40

60

80

100

0

2

4

6

8

2012 2013 2014 2015 2016 2016 H1 2017 H1

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

//

0

1

2

3

4

5

6

7

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

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

//

2nd quarter 2017 13

Solvency (a)

Chart 17 • Tier 1 capital to total assets ratio and Leverage ratio, in % | Value at end of

period


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. The leverage ratio is calculated in accordance with the

methodology set out in article 429 of the Regulation (EU) No 575/2013.

• The ratio between Tier 1 capital and total assets rose by 0.2 p.p. in 2017 Q2, reflecting, above all, the

banking system’s capital increase.

• The leverage ratio grew by 0.3 p.p. to 7.5% in the quarter under review, mainly due to the

abovementioned capital increase.

Chart 18 • Own funds ratios, in % | Value at end of period


• The total solvency ratio stood at 14.4% in 2017 Q2, representing an increase of 0.5 p.p. vis-à-vis the

previous quarter.

• The Common Equity Tier 1 ratio (CET 1) stood at 13.2%, which represents a 0.6 p.p. increase in the

quarter under analysis reflecting an increase in CET 1 capital and a reduction in risk-weighted assets.

(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.

7.0 7.1 6.97.6

6.97.5 7.7

0

1

2

3

4

5

6

7

8

9

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

7.5

//

Leverage ratio

7.26.6

11.512.3

11.312.4

11.412.6 13.2

0

2

4

6

8

10

12

14

2012 2013 2014 2015 2016 2017 Q1 2017 Q2

Core Tier 1 ratio CET 1 ratio

//

Total Solvency Ratio

12.6 13.3 13.912.3 13.3 12.3 14.4


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Portuguese Banking System: latest developments · PDF filePortuguese Banking System: latest developments ... segment. The 1.5 p.p. decline observed in the NFC segment ratio reflects