FERNANDO FARIA DE OLIVEIRA BELIEVES THAT WE WILL WITNESS GREATER CONSOLIDATION IN THE BANKING SECTOR IN THE MEDIUM TERM – BOTH IN PORTUGAL AND IN THE REST OF EUROPE – EITHER THROUGH THE REDUCTION OF ACTIVITIES IN SOME BANKS OR THROUGH MERGERS AND ACQUISITIONS. IN AN INTERVIEW WITH PRÉMIO MAGAZINE, THE PRESIDENT OF APB – THE PORTUGUESE BANKING ASSOCIATION ALSO ANALYSES THE CURRENT SITUATION IN THE BANKING SECTOR IN PORTUGAL AND SETS OUT THE PATH FOR BANKS TO FOLLOW SO AS TO RECOVER BOTH TRUST AND REPTUTATION AS WELL AS DISCUSSING THE CHALLENGES FACING THIS SECTOR.
How would you describe the banking situation in Portugal?
Banks have performed an intense work of restructuring, reinforcing their strengths and capacities to respond to the new banking paradigm stemming from a situation created by the global financial crisis and particularly the sovereign debt crisis. As a result and in brief: there is already a positive trend in the recovery of profitability in 2017 with work ongoing towards a progressive but swifter reduction in non-performing loans (NPLs) in some banks with banks now better capitalised and able to finance the economy (without major liquidity problems). Furthermore, their business models are now being refocused in keeping with the new contexts in which they operate alongside improvements to operational efficiency that reflect in the restructuring operations a number of institutions are now undertaking.
What reasons would you identify for the less positive situations experienced by the banking sector in recent years?
The current situation is the result, to a great extent, of the legacy of the sovereign debt crisis and the recessive economic cycle which was both rather intense and long. Banking provides a true mirror of the economy. This means that its activities are influenced – and affected – by the differing long term economic cycles, particularly recessive, and with its performance to a great extent influenced by the economic development policies in effect at any given moment. For example, the combination of recession with a change in the economic development model – from a focus on non-tradable goods and services to investing in tradable goods – has affected many sectors, such as building and construction or real estate and which account for over 40% of the imparities acknowledged by banks as these markets (such as public works) practically shut down.
The lack of new orders and the fact that, in general, these companies were already highly indebted has left them unable to meet their obligations and thus entering into default. This is clear evidence. There are obviously other contributory factors: the case of the new regulatory requirements and supervisory framework, which were implemented simultaneously to the Portuguese Adjustment Program and which introduced new requirements; excessive risk-taking during the first decade of 2000; the BPN, BES and BANIF crises, which left heavy marks on the reputation of banking in Portugal in addition to a heavy legacy of costs that the remaining institutions operating normally in the market now have to bear.
How can banking recover its capital of trust and reinforce its reputation?
Recovering its credibility, vital as this is for the banking business, requires clear improvements in terms of bank governance, the behaviours of both bank managers and their staff (even while it is worth highlighting that most bank staff display immaculate ethical behaviours), constant improvements to the relationship with clients and transparency in the promotion of best practices. This has to be the way forward.
“DESPITE THE CURRENT CHALLENGES AND UNCERTAINTIES, WE SHOULD FOCUS ON SEARCHING FOR SOLUTIONS ENABLING BANKS TO SUCCESSFULLY FACE THE FUTURE“
How would you draw the balance as regards the adaptation of Portuguese banks to the new regulatory framework, supervision and regulation?
The balance is clearly positive. The responses from banks to the new framework required great effort and great means, alongside their resulting costs, to meet these new demands. In global terms, the new framework, particularly the arrival of the Banking Union, holds the major and meritorious purpose of defending the stability of the European financial system through reinforcing banking solidity and preventing new crises in order meet the new core goal: to fully accomplish its mission of financing the economy and providing efficient and safe payment services. And banks, despite not yet concluding their adjustments to the new regulatory paradigm, are now more solid (with capital ratios around 50% higher than before the crisis). It is again worth highlighting that this new framework coincided with the enforcement of the Economic and Financial Adjustment Program and that with Banking Union implemented at the height of recession, leaving national banks in less favourable starting points in terms of profitability and their capacity to attract capital in comparison with their European counterparts.
Meanwhile and as defended by institutions such as the European Banking Federation Commission, we are now working on an eventual recalibration of requirements in order to allow for the easier financing of the economy. And we should also bear in mind how Banking Union will only ever be completed with the conclusion of its second pillar, a fully operating Single Resolution Fund, and the third pillar, launching a European Deposits Guarantee System, which is fundamental to the greater mutualisation of risks.
What are the major challenges for banking in the coming years?
Banks are faced with a number of challenges but we may “organise them,” into three major themes: the recovery of profitability and reinforcing solidity (essential to attracting investment to our banking sector), fully adapting to the new European Union regulatory framework and adjusting the operational and business models to this new banking paradigm. In their attempt to return to positive returns, banks face heavy conjunctural factors, the result of a context of negative interest rates and the legacy of sovereign debt, particularly NPLs, and as well as a scarce, albeit growing demand for credit. Digitalisation, which is an opportunity, but which also poses some threats, is quickly introducing drastic strategic changes both in how clients interact with banks and in the banking operations themselves.
Meanwhile, in the marketplace, particularly in payments but also in ‘shadow banking’, we are witnessing the arrival of new competitors with a particular emphasis on ‘Fintech’. These, however, are also bank allies and partners in many cases. And we should also add the new model of regulation and supervision with all its relevant adjustment costs and requirements.
How do you see the evolution of Portuguese banking taking into account these challenges and the times of uncertainty we live in?
Despite the current challenges and uncertainties, we should focus on the search for solutions enabling banks to successfully face the future. In the medium term, we shall witness greater consolidation in this sector either through withdrawing from some banking activities or through mergers and acquisitions. The current focus lies in recovering profitability (which also simultaneously involves solving the NPL problem), improvements to the capacity to attract capital, tailoring business models, developing and deepening digitalisation and the completion of the restructuring processes ongoing in many banks.
“WE WILL WITNESS GREATER CONSOLIDATION IN BANKING IN THE MEDIUM TERM”
Will concentration in this sector be inevitable?
At the European level, this concentration will surely occur not only because there is oversupply, which has to be adjusted to the now declining demand, but also because the European authorities are themselves encouraging such movements. Take the examples of BANIF and Banco Popular. The objective is for there to be a banking system with pan-European banks, regional banks (for example in the Iberian space) and national banks (more akin to offer banking services closer to the population). In Portugal, it is difficult to forecast this with any degree of certainty.
There is currently some overcapacity which leads to the need for consolidation but this in turn requires both capital and synergies. Such operations may appear: our banking system is only moderately concentrated and there is strong competition. One additional remark: technological changes may influence the current trends more into the future.
What is the current and future role of banking in supporting the economy and the growth of the country?
In Portugal, as in the rest of Europe and contrary to what happens, for example, in the USA, banks are by far the major source of financing the economy. The recent years of recession have brought about the need for individual citizens, private companies and the state to all reduce their levels of leverage to preferably lower levels. However, given the role of financial broker performed in the transformation of savings into financing, banking plays and will always play a fundamental role in supporting the economy.
There is a growing need for families to increase their saving levels. What is the role of banking as regards these challenge? Should financial literacy be reinforced? How?
The picture as regards developed countries – drawn particularly by the OECD – shows that, as regards the levels of financial literacy, there is still a long way to go. Portugal is no exception and for that reason, work in the field of financial education has to be continued and the banking sector has a fundamental role in this area. The work developed by banks, directly and through the APB, and by the supervisors in the financial sector – the Bank of Portugal, the CMVM (the Portuguese securities and exchange commission) and the ASF seeks precisely to improve financial literacy, investing strongly in young people as one of the fundamental engines that may enable deep changes in society and profound changes in behaviour. It is in everybody’s interest that we have better informed citizens. In this respect, awareness as to the importance of savings habits is absolutely fundamental.
PROFILE
Fernando Manuel Barbosa Faria de Oliveira, aged 76, married and father of three. Born in lisbon, he graduated in mechanical engineering at the lisbon higher technical institute in 1965.
He is currently president of the portuguese banking association (apb), a position held since 2012, a member of the board of the european banking federation, of the advisory boards of the bank of portugal and of the cmvm.
Faria de oliveira was chairman of the caixa geral de depósitos board of directors (2008-2011), minister of commerce and tourism (1990-1995), joint secretary of state and of finance (1989-1990) and secretary of state of finance and treasury (1988-1989).
He is visiting professor at iesf – the institute of higher financial and fiscal studies. He has received a number of national and international awards and was made “personality of the year” by the portuguese chamber of commerce in brazil (são paulo) in 2009, and by the portguese-brazilian chamber of commerce and industry (lisbon) in 2012.
