The banker by Biblioteca Faculdade de Direito da Universidade de Lisboa

EDITOR'S

LETTER

I THIS MONTH

Trade finance: big and too clever for the regulators Brian Caplen THE MOSTWORRYING ASPECTOFTHEREGULATORYRESPONSETOTHECRISISwas when it looked as if trade finance would be hit. Trade is the lifeblood of the global economy and one of the safest ofbanking assets. Lending for trade is what everyone agrees banks should be doing rather than putting together clever structures. But ironically it is clever structuring of trade finance assets that is keeping trade going in spite of tougher rules on capital and liquidity, as Jane Cooper reports in this month's cover story (page 18) .: New banking and markets regulations are reshaping finance across the board. ln this issue we also report on howthe unbundling of payments for research and execution in equities trading is causing a rethink, while brokers are looking at outsourcing their trading desks (see report on page 36). lnterchange fees for payments cards have long been a controversial area and the European Commission is pushing ahead with a cap as part of its Payments Services Directive. We analyse the merits ofthis in Reg Rage (page 108). For readers wanting even greater depth on regulatory matters, The Banker's sister publication, Global Risk Regulator, provides a monthly update and analysis ofleading prudential and markets developments (www.globalriskregulator.com). Some of the countries hardest hit in the financial crisis are now well on the way to recovery. Portugal is one and is looking at exiting from its bail-out programme in May (coverage starts on page 46). Nigerian banks are still paying for cleaning up the country's banking sector in the form of the Arncon levy (the state-owned bad bank) but, as Paul Wallace reports in a series of articles starting on page 94, this is not preventing them from making good returns, ltalian banks are still struggling but have been helped in bolstering their capital by a

revaluation oftheir shares in the central bank, the Bank ofItaly (page 54). ln Kazakhstan, consolidation is taking place with the reprivatisation ofbanks rescued bythe sovereign wealth fund SamrukKazyna (page 60). Kazakhstan's capital Astana is the host of this year's Asian Development Bank annual meeting and our April issue has a strong Asian flavour. We report on the banking sectors of the Philippines (page 68) and lndonesia (page 72) and we look at the emergence of the Greater Mekong Delta as an economic bloc (page 64). The Banker's ranking is the Top 100 Association of South-east Nation banks (page 74) and we analyse howforeign banks are faring in China (page 84). Other country coverage includes Iraq (page 90) and a special outbound report on Kuwait. As always, The Banker's staffhave been out interviewing senior industry figures, with Silvia Pavoni talking to Scotiabank's CEO Brian Porter (page 88) while Philip Alexander interviews Deutsche Bank's senior executive Miles Millard for the Agenda column (page 26). The Banker's editor emeritus Stephen Timewell profiles National Bank ofKuwait's retiring CEO lbrahim Dabdoub (page 96). ~ BRIAN CAPLEN EDITOR

TRADE

1S THE UFEBLOOD

OF THE GLOBAL

ECONOMY AND ONE OF THE SAFEST OF BANKING ASSETS. LEND1NG FOR TRADE 1S WHAT EVERYONE AGREES BANKS SHOULD BE DOING RATHER THAN PUIT1NG

TOGETHER

CLEVER STRUCTURES

April

2014

â&#x20AC;˘â&#x20AC;˘

THE BANKER

CONTENTS

TheBanker ESTABLISHED 1926 VOLUME 163 NUMBER 1059

THIS MONTH'S HIGHLIGHTS ........................................................................................................... .......................................................................................................... ........................................................................................................... ...........................................................................................................

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Tel: +44 (0)20 m5 plus extension (unless olherwise slaled) EDITORIAL • Editor. Brian Caplen: 6364, brian.caplen@ft.com • Senior Editor, Investmenl Banking and Capital Markels: Philip Alexander: 6363, philip.alexander@ft.com • Editor Emeritus: Stephen Timewell: +44-7764ó17824, stephen.timewell@ft.com • Economics Edilor: Silvia Pavoni: 6366, silvia.pavoni@ft.com • Africa Editor, Capital Markels Wriler: Paul Wallace: 6361. paul.wallace@ft.com • Technology and Transaclion Banking Editor: Jane Cooper: 6325, jane.coopen@ft.com • Head of Research: Guillaume Hingel: 6369, guillaume.hingel@ft.com • Database Publisher. Adrian Buchanan: 6370, adrian.buchanan@lt.com • Editorial Logislics: Simon Duffy: 6359, simon.duffy@ft.com • Contributing Editors: Edward Russell-Walling, Nick Kochan, David Lane, Frances Faulds, Michael Marray, Jane Monahan, Dan Sarnes, Joanne Hart, Michael Imeson, James Gavin, Peter Wise, David O'Byrne, David Wigan, Charles Smith, Jules Stewart PUBlISHERS • Publishing Director: Angus Cushley: 6354, angus.cushley@ft.com "ADVERTISING • International Sales Manager: Adrian Northey: 6333, adrian.northey@ft.com • Associate Publishers: • Andrew Campbell (Iechnology): 6317,andrew.campbell@ft.com • Philip Church (Asia and Alrica): 6328, philip.church@ft.com • Luke McGreevy (Middle East and north Africa): +97143914398, luke.mcgreevy@ft.com • Anlon Paul (cenlral and easlern Europe): 6355, anlon.paul@ft.com • Tanny Ribeiro (Lalin America): +351918 669188, lannyribeiro@yahoo.com PRODUCTION ANO DESIGN • Produclion Editor: Richard Gardham: 6367, richard.gardham@ft.com • Depuly Production Edilors: Andrea Crisp: 6338, andrea.crisp@ft.com Helen Wilson: 6918, helen.wilson@ft.com • Art Editor: Lisa Sheehan: 6539,lisa.sheehan@ft.com • Head of Produclion: Denise Macklin: 6557: denise.macklin@ft.com • Global Operalions Director - Magazines: Peler Slaughler: +44 (0)20 7873 3267, peter.slaughler@ft.com MARKETlNG, SUBSCRIPTIONS ANO ClIENT RELATIONS Senior Marketing Manager: Raj Rai: 6340, raj.rai@ft.com General Manager: Peler Cullelon: 020 7873 4847, peler.cullelon@ft.com Head of Online Publishing & Marketing - Global Finance: Davinia Powell: 6449, davinia.powell@ft.com Subscriptions and Customer Services: FinancialTimes Business,COSGlobal,SovereignPark,POBox5891,Markel Harborough, leiceslershire.lE947ZT Tel:+44 (0)1858 438 417,lax: +44 (0)1858 461873; e-mail: ft@subscriplion.co.uk Prinlers: WyndehamRachelimited Distribution: Seymour Dislribulion limiled, 2 EastPoullry Avenue,london, EClA9PT. Tel:+44 (0)20 7429 4000, Fax:+44 (0)20 7429 4001 Reprintsareavai~ble01 anyTheBankerartíce, with yooroompanylogoandconlact delailsinserted il required(minimumarder IDOcopies).Fordelailslelephone+44 (0)207 8734816.Forone-of copyrighl licenceslor repnoductionolThe Bankerartides lelephone+44 (0)207 8734871. Attemalive/y,lor both servicesemai!synd.admin@flcom Reglslered Number: 00202281 (England and Wales) ISSN: 0005·5395@ Flnancial Times 2014. TheBankerisa lrademarl<01 Rnanc~1TimesUmiled2014."FinandalTimes"and"FT' areregistered lradernarl<sandservicemarl<s01 lhe FinancialTimesltd.AII rightsreserve<!.Nopartofth~ publication maybereproducedor usedin anylonm01 advert~ingwilhout priorpermissioninwr~inglrom lhe edrtor.Noresponsibilitylorloss oocasklnedlo anypersonactingar relrainingIrom actingasaresull 01 malerialinthis publicalioncanbeaccepled.Onanyspedfic matter,relerenceshouldbemadelo an approprialeadviser.Regisleredoffice:NumberOneSouthwarkBr~ge,london SE19Hl,UK

I THE

BANKER

I April

2014

COVERSTORY

Trade finance securitisation deals are starting to materialise and, with these deals structured in such a way that they reduce risk weighting, lower leverage and increase liquidity, appetite for them is growing.

IN FOCUS: ASIA-PACIFIC

Ahead of the annual Asian Development Bank (ADB) meeting, The Banker looks at some of the key developments taking place in the region, starting on page 60 with a look at the difficult consolidation process in Kazakhstan, this year's host of the ADB meeting. This is followed on page 64 with an examination of growth and its associated challenges in the Greater Mekong Delta, and a look at the maturing banking sectors in the Philippines (page 68) and Indonesia (page 72). Coverage is rounded off'with a ranking of the Top 100 Association of South-east Asian Nations banks on page 74 and a look on at how foreign banks are trying to gain a foothold in China (page 84).

OUTBOUND REPORT: KUWAIT The Banker's special report on Kuwait examines some of the challenges facing the country as it seeks to grow its Islamic banking footprint, increase activity on its stock exchange and fulfil its energy potential.

CONTENTS

This month on

NEWS, COMM:ENT AND SECTORS .......................................................................................................................... ......................................................................................................................... .......................................................................................................................... .........................................................................................................................

HelIo

Trade finance: big and too c1ever for the regulators.

6The Banker Opinion

Risk weights - use them (wisely) or los e them; A cautionary tale for African banks.

Bracken Eduard Dzhagityan

The regulation of the global financial sector should be extended to inc1ude intensive monitoring of merger and acquisition deals, which are a key source of instability.

viewpoint Zoran Stavreski

Macedoniàs deputy prime minister and minister of finance discusses his country's economic outlook and prospects for 'EU membership.

DataBank

Some western European banks have pulled out of Ukraine in recent years, but Russian players are among the most exposed to the country's troubles.

News

Banks' forex trading bonuses on hold; Russia sanctions expected.

15 18

people Nemat Shafik, Isam Al-Sager.

~jhebanketcom WATCH

Issuer Strategy

Despite an unusual structure as the holding company for a fixed-line monopoly, B Communications issued Israel's first dual-listed bond to considerable demando

32 High-yield Bonds

The European high-yield bond market has come a long way to record issuance in 2012 and 2013, But with interest rates threatening to rise, can the market stay on track for another bumper year in 2014?

34 Banking Fraud

What measures can banks take to protect themselves against fraud scandals and minimise the repercussions if a fraudster does slip through the net?

26 Agenda

Miles Millard's latest appointment represents another step for Deutsche Bank on its journey towards a unified client coverage structure.

WATCH

36 Trading

Brokers are outsourcing their dealing desks to other sell-side firms, The Banker investigates what is left of a broker that does not trade.

40 Wealth Management

As banking groups redefine their exposure to wealth management across the world, will private banking become a game better played by local and specialised names?

104

Fcs

106

Tech Vision

Christian Goerlach. director of cash management at Deutsche Bank. talks to The 8anker about mitigating the effects of regulation.

DATABANK • The top five banksjrt.Kuwait

IShanghai top for FDI into Asia- Pacifico

• How QE brought a bond boom to Latin America • Are eurozone banks underestimated?

Cover Story

Martin Boyle, divisional director of business transformation with the UK's Nationwide. and Hugh Morris. Genpact's vice-president of banking. financial services and insurance. talk to The 8anker's editor. Brian Caplen. about transforming banking.

A profile of Jeffrey Sloan, CEO of Global Payments.

107 Shaping Tomorrow

ON WWW.THEBANKERDATABASE.COM

Chris Skinner explains why channel hopping is so last century.

108

Reg Rage EC weighs in on interchange

The Iop 100 Association of South-east Asian Nations Banks ranking on page 74 was produced using The Banker Database. which provides comprehensive financia I data and insight for 4000 of the world's leading banks in more than 190 countries. Our data has been normalised for regional reporting and regulatory variations. ensuring accuracy and reliability.

fee battle.

JOIN THE BANKER COMMUNITY

Team ofthe Month

When a wave of global and domestic uncertainty hit the Turkish lira, BNP Paribas proposed a long-term bond to re-establish the sovereign's credentials.

COTA N?EX,

1)Q'So4 ~2 0(1

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youtube.com/ftthebanker

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google.coml +thebanker

April 2014

I THE

BANKER

CONTENTS

COUNTRYFEATURES .........................................................................................................................

......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ...............................................................................................................................

WESTERN EUROPE Portugal

With Portugal set to make a clean exit from its rescue programme in May, The Banker looks at the transformation that has taken place in the country's banking sector (page 46) and wider economy (page 50).

~ li. Asean ranking

1"1:1 The

Top 100 Asean Banks ranking.

China

A look at how foreign banks are positioning themselves to take a bigger share of China's banking spoils.

AMERICAS

56 Austria

MIDDLEEAST

taly IItaly's

banks received a windfall from its central bank after it revalued its share 'capital', but other eurozone lenders say this gives Italian players an unfair advantage.

The sale of the Austrian unit of state-rescued Hypo Alpe Adria opens up new possibilities oftrade links and marks the beginning of the lender's sell-off

58 Vatican City State

The Vatican has acknowledged that it needs to reform its bank, but carrying out this task is not easy.

CENTRAL & EASTERN EUROPE

10Macedonia

Viewpoint by Macedonia's deputy prime minister and minister of finance. See also: Data Bank, page 12, on exposure to Ukraine's banking sector.

ASIA-PACIFIC

Kazakhstan

The difficult task of reprivatising restructured banks rescued by the sovereign is under way in Kazakhstan.

64 Greater Mekong Delta

The Greater Mekong sub-region is posting stellar growth, but each country within it has its own hurdles to overcome.

Philippines

The Philippines' banks are performing well domestically, but they must diversify if they want to compete regionally.

Indonesia

There is little wonder that lenders are eager to crack the Indonesian market given the potential rewards, but penetrating this vast archipelago is no easy task.

I THE

BANKER

I April 2014

canada

Scotiabank's chief executive explains the rationale behind what may sound to some like a risky plan for the lender.

Iraq

New opportunities are helping re-energise the previously sluggish Iraqi banking sector but there are still regulatory issues that need to be addressed.

As A BANK, ONE OF THE THINGS THAT DISTINGUISHES US FROM OTHERS IS OUR ABILI1Y TO [)NVEST]

LONG

TERM Brian Porter, chief executive,

Kuwait

The Banker reflects on the legacy that Ibrahim Dabdoub willleave behind as he steps down from his position as chief executive of the N ational Bank of Kuwait.

Scotiabank, page 88 ••

OUTBOUND REPORT: KUWAIT The Banker's special report on Kuwait examines some of the challenges facing the country as it seeks to grow. See also: Issuer strategy, page 30, profiling Israel's first dual-listed bond.

AFRICA

94 Nigeria

Political tensions are unearthing some of Nigeria's economic weaknesses (page 94). However, the banking sector remains robust, shrugging off the difficulties posed by a wave of new regulation (page 98), and, in interviews with The Banker, both Amcons chief executive Mustafa Chike-Obi (page 100) and the likely successor to central bank governor Lamido Sanusi, Godwin Emefiele (page 102), remain cautiously optimistic about the country's future.

THE MOST OUTSTANDING BANKER IN THE ARAR WORLD OVER THE PAST 30 YEARS MichelAccad on Ibrahim Dabdoub, retiring chief executive ofNational Bank ofKuwait, page 92 ••

WESTERN EUROPE

I PORTUGAL

BANKING

Back to business: BPI has already repaid €580m of its state funding

THENEW-LOOK PORTUGAL Portugal's banks have undergone a radical transformation in the pastfew years, emergingfrom the country's economic crisis better capitalised, leaner and more efficient than ever. Profitability, however, is yet to recover. WRITER Peter Wise

fter the global financial crisis and a three-year baíl-out programme, the new-look banking sector that emerges in Portugal will have undergone a considerable transformation: fewer branches, fewer staff, fewer non-core operations, a tighter focus on domestic lending and possibly, following potential consolidation, fewer big groups. "There will be big differences," says Nuno Amado, chief executive ofMillennium BCP, the largest listed lender. "The market for financial products and services has shrunk. Core income is down 40% from just a fewyears ago. There is less appetite for risk, less demand for credit and a sharp decrease in mortgage lending. This means banks have to adjust." Banks are entering a new era marked by regulatory and legislative changes, according to António Vieira Monteiro, chief execu-

I THE

BANKER

I April

2014

tive of Banco Santander Totta, Portugal's fífth largest bank by assets. "Banking will change completely in the next decade," he says. "Relationships with customers will be reinvented and retail banks such as ours will have to focus much more on transparéncy and intelligibility." José Maria Ricciardi, chief executive of Espirito Santo Investment Bank (ESIB), sees 2014 as "a year of transition" for both the Portuguese economy and the banking industry. He is confident that "important turnarounds" made by lenders in response to the adjustment programme will have a "positive effect on their strength" creating an "optimistic framework" for growth.

TRIMMING THE FAT Portugal's post-bail-out banking sector will inevitably be smaller and leaner. But bankers believe it will also be more efficient. In the dec-

ade to June 2013, for example, BCP reduced staff numbers by 36%, or almost 5000 jobs, to 8700 employees. It cut its branch network back by 26%, or 280 branches, to 797branches over the same period. Restructuring on this scale has been partly driven by state support provided to severalleading banks as part of the rescue programme agreed with the 'troika' of the European Commission, International Monetary Fund and European Central Bank. Overall, funds totalling more than €7bn have been injected into Caixa Geral Depósitos (CGD), BCP, Banco BPI and the smaller Banco Internacional do Funchal (Banif) on the condition of extensive restructuring. State-owned CGD and BPI, the largest and fourth largest lenders by assets, respectively, have also made commitments to reduce staff numbers and trim branch networks to comply with rules for companies receiving state aid. The restructuring plan that BCP agreed with the EU's competition authorities is "very demanding", says Mr Amado. In October, the bank sold its stake in Greece's Piraeus Bank for €494m as part its agreement to divest non-core assets. BCP is already ahead of the plan, however. Mr Amado says: "I think the result will be a bank that is leaner and more focused on delivering better products and services to our customers, in line with their specific needs." As part of its commitment to reduce staff costs, the bank also reached an agreement with its workers in December on temporary salary cuts ofbetween 3% and 11% for a maximum ofthree years as an alternative to eliminating more jobs. The cuts are to be repaid from future pr9fits. "Profitability is the 'hig issue for the banking sector;' says Joaquim Souza, chief executive of Caixa- Banco de Investimentos (CaixaBI), CGD's investment bank. However, like most Portuguese bankers, he is confident that profitability will not fall again as low as it did in 2013, an annus horribilis for Portuguese bank earnings.

PROFIT SQUEEZE Among Portugal's banks, only Santander Totta achieved a net profit (€88.6m) for its domestic operations last year. BPI posted a consolidated net profit of €66.8m, but recorded a €28.3m loss in Portugal. BCP's losses improved 40% on 2012, but were the biggest in the sector at €740.5m. CGD saw it losses fall to €576m and Banco Espírito Santo (BES), the third largest bank in Portugal by assets, to €5l7.6m. Since the beginning of the crisis, banks' profits have been under pressure from

I WESTERN EUROPE

PORTUGAL !

BANKING

TOP 15 BANKS IN PORTUGAL Rank

Bank

Tier 1 capital $m

Iier 1 capital %ch.

Assets$m

9645

19.67 6.37

154,164

8493

Pre-tax profits $m

Pre-taxprofits %ch.

Retum on capital % lates!

·484.83

30.04

-5.03

110,410

6.35

267.48

L->P

3.15

0.24

-2.l2

-1734.83

-9.76

-21.13

-1.47

L->P

10.98

118.59

12.81

0.90 0.76

8210 4807

32.52 63.72

118,396

BancoPortugues de Investimento

58,792

5.78

BancoSantanderTotta

3224

3.27

54,617

-0.03

1899

20.82 47.18

27,669

-0.52

-221.32

-11.66

-0.80

1530

18,459

-9.84

-889.84~

-264.83

-58.l51

-4.82

1434

7.91

18,136

·1.58

54.09~

-29.25

3.77

6518

-5.04

2.l91

0.30 0.22

-234.33

-17.4,

-0.94

n/a

-1.36

-0.11 0.27 0.73

Banif-BancolnternacionaldoFunchal

0.0

h ..•

••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

527.84

412.93 " ... .........................................

........................................•...

P->L

L->P

Bancoltaúlnternational

645'

6.67 ,

BBVAPortugal

438

-3.41

8138

·11.37

14.13~ ·76.23

435

5209

n/a

-5.91<

2980

-8.65

8.16

61.69

2.62

6.07 9.34

L->P 23.18

7.4 13.76

1.65

L->P

2.81

,11 12

BancoFinantia

312

n/a -7.l2

Banco In\lest

24.67

829

10.26

1557

19.34 -18.3

0.2

430

10.91

14 15 ..........

Return on assets % -0.31

Millennium BCP

6 7

Assets %ch. -1.18

BancoPrivadoAtlantico Europa

...............................................

.............................. Source:

impairment costs and higher provisioning requirements. At the same time, domestic operating income hás been hit by low interest rates, lower business volumes and increased non-performing assets that have to be funded even though they generate no revenue. According to a recent report by credit rating agency Moody's, Portuguese banks rank among the least profitable in Europe, but are also some ofthe most efficient, having significantly reduced.operating costs. "The cuts," says Moody's, "achieved partly by closing unprofitable branches and reducing staff, have resulted in efficiency indicators that compare well with western European peers," At the end of 2013, the average costto-income ratio for the top five Portuguese lenders was approximately 64%. A heavyweight of mortgage loans - which represent more than 45% oftotallending to the private sector - is among the biggest constraints on Portuguese banks' profitability. Manuel Preto, chieffinancial officer at Santander Totta, says most mortgage loans were negotiated at 100 to 150 basis points above Euribor, the European interbank interest rate, when the cost of deposits for Portuguese lenders was close to Euribor ar even lower. Now banks have to compete with deposit rates at much higher spreads, significantly increasing their funding costs and adding to the pressure on profits.

insurance products) compared with 16% for debt, noting that this was a "significant contrast to 2009". BPI and Santander Totta posted similar percentages, while CGD and BCP were dependent on deposits for 68% and 67% of their funding, respectively. Bank deposits have remained considerably more resilient in Portugal than in some of the eurozone's other crisis economies, such as Greece, Ireland or Spain, suggesting, says BES, that "confidence in the banking sector has remained strong" and reflecting a rising trend in savings in Portugal. According to the National Statistics Institute, household savings have risen by almost 8 percentage points since 2008 to 13.5% of disposable income. Competition for this increasingly important source of funding has grown steadily more intense, straining efforts to reduce cost-toincome ratios. "It is important to diversify our deposits base and strengthen customer relationships," says Mr Amado of BCP. "We also need to ensure that our cost structure is appropriate for the new environment;" Mr Vieira Monteiro of Santander Totta says: "The emphasis has to be on customers and market segmentation. This is a consequence ofthe huge transformation we have seen in the banking market in recent years when the focus has moved from selling mortgage loans and other products to tailoring services to customers' specific needs and lifecycles,"

THERE

0.60 0.38

www.thebankerdatabase.com

1S LESS APPETITE

FOR R1SK, LESS DEMAND FOR CREDIT AND A SHARP DECREASE LENDING.

1N MORTGAGE TH1S MEANS

BANKS HAVE TO ADJUST NU'TWAmado ••

THE RISE OF THE DEPOSITS Deposits have become the predominant source offunding for the sector as the crisis restricted alternative sources of finance. BES says that deposits accounted for 46% of its total financing in 2013 (53% including life

RIGHT DIRECTION The bail-out years have seen a significant improvement in solvency levels. The average core Tier 1 capital ratio ofPortuguese banks has risen from 8.1% in 2010 to 11.7%, well

» April 2014

I THE

BANKER

I 47

WESTERN EUROPE

I PORTUGAL

BANKING

As THERE'S NO LONGER ANY QUESTION OF A EURO BREAK-UP, INVESTORS ARE jJ

SHOWING MORE APPETITE FOR PORTUGUESE RISK Joaquim Souza ••

above the 10% minimum set by the Bank of Portugal in 2012. This increase has been mainly driven by state support. From Portugal's €78bn bail-out, €12bn was set aside for bank recapitalisation, of which about half has been used by the BCP, BPI and Banif, while state-owned CGD received €1.6bn directly from the state. Injections of state capital were administered to BCP and BPI by means of contingent convertible bonds, or CoCos, which convert into state-owned equity if a trigger, such as a bank's core capital ratio, breaches a predetermined limito BCP has outlined plans to repay €400m this year, when it expects to return to profit, and the remaining €2.6bn by mid-2017. BPI has already repaid €580m and was expected to pay back a further €500m by the end ofMarch. Banif has repaid €150m ofthe €400m it received. Access to private sector finance has been steadily improving for banks and corporates, however, with some lenders tappingthe capital markets with senior and covered bond issues. BES, for example, has issued €3bn in debt since it led the way in reopening wholesale debt markets for Portuguese banks in November 2012. In December 2013, it became the first Portuguese lender to issue subordinated debt since the global financial crisis with a€750m Tier 2 issuethat attracted some 300 mainly foreign investors. In January this year, it issued €750m in senior unsecured debt at a yield of 4%, compared with 6% in late 2102. "The markets are now open," says Mr Souza at CaixaBI. ''As there's no longer any question of a euro break-up, investors are showing more appetite for Portuguese risk. It's now a management decision for banks whether they want to use ECB funding, which is cheaper, or to issue an unsecured senior bond, which helps them diversify their funding, create a yield curve and set a benchmarkfortheirrisk." . _ ~

NATURALSELECTION One area of investment that has rallied rather than closed down during the bail-out has been privatisation. Since 2011, Lisbon has raised an impressive €8.1bn from a series of successful sell-offs, comfortable outstripping the €5bn target set by the troika. The sales include stakes in Energias de Portugal (EdP), the dominant power utility, Redes Energéticas Nacionais (REN), the national power and gas grid operator, and Correios de Portugal (CTT), the national postal service. CGD sold 80% of its insurance business, the market leader in Portugal, for €lbn and France's Vinci bought 100% of

THE BANKER

I April

2014

Aeroportos de Portugal, the national airports operator, in a deal worth €3.1bn. More than halfthe privatisation revenue raised so far during the adjustment programme has come from Chinese stateowned and private sector companies. "AlIthe privatisations were decided on the basis of price, not political influence," says Pedro Siza Vieira, a Lisbon-based managing partner of the law firm Linklaters. "That is very comforting - you pay the price, you get the deal," Despite being privatised during the depths ofthe crisis, companies were not sold at knockdown prices. The EdP stake, for example, was sold at premium of almost 54% per share and REN at a premium of 33.6%. The sale ofCTTin November marked Portugal's first initial public offering (IPO) in five years, raising €579m for a 70% stake. The highest proposal for a direct sale had previously valued the whole company at €600m. Since the IPO, the company's market value has risen by about 20% to approximately €lbn. CaixaBI and JPMorgan Chase were global coordinators and bookrunners for the IPO. Spain's BBVAand ESIB were colead managers. The privatisation programme is now drawing to a close with only waste management company Empresa Geral do Fomento (EGF), CP Carga, a railway logistics company, and a number ofmanagement concessions to run ports and urban transport systems remaining on the list of planned sell-offs. TAP-Air Portugal, the national airline, may also be put on the market, but bankers say the government will have to resolve complex labour and.tax issues with its Brazil-based maintcnance operation before TAP is likely to attract investors. In 2012, Lisbon rejected an offer for the airline from a Brazilian investor, citing a lack of financial guarantees. As the privatisation programme dwindles, investment bankers see their main sources of revenue shifting more towards mergers and acquisitions, IPOs and private placements. "You have to reinvent yourself," says Mr Souza. "The loss of business from privatisations should be compensated for by capital markets operations." ESIB has responded to shrinking domestic demand by expanding in overseas markets where the bank believes it has "natural competitive advantages". The bank is already active in Brazil and Spain, says Mr Ricciardi, and plans to expand in Angola and Mozambique. "In 2015, ESIB will be a very different bank to the one that went into the crisis," he says. The same will almost certainly be true for every other Portuguese lender .•

WESTERN EUROPE

I PORTUGAL

ECONOMY

"The adjustment programme has gone a long way to restructuring the economy and making it more competitive," says Nuno Amado, chief executive of Millennium BCP, the country's largest listed bank by assets. "We are starting to see signs ofreal growth and many companies are ramping up their activities, particularly in export markets,"

NEW GROWTH STAR According to the centre-right coalition government of prime minister Pedro Passos Coelho, exports will account for 41% of gross domestic product (GDP) this year, compared with 31% in 2010. Export growth of24.2% in the four years to December 2013 has helped deliver Portugal's first current account surplus in two decades. The trade balance is also moving steadily towards a surplus next year. "Strong export growth reflects the tremendous resilience of Portuguese firms in the face of tough conditions that would leave many other European companies struggling," says Pedro Siza Vieira, managing partner at the Lisbon office of globallaw firm Linklaters. "The Portuguese as a whole have shown themselves ready to make sacrifices that I don't think many other people would support," Exports have been driving growth at a pace that, according to Commerzbank analyst Ralph Solveen, makes Portugal "the biggest positive surprise" among peripheral eurozone countries. Year-on-year growth of Talking the talk: the government of Portugal's prime minister, Pedro Passos Coelho, has faced an unenviable task at times, but now has reason for some optimism 1.6% in the final quarter of 2013 surpassed the performance of every other member of the currency bloc, including Germany. Overall, however, the economy. contracted by n Lisbon, a large digital clock 1.4% in 2013, the country's third consecutive installed by Paulo Portas, Portugal's year of recession. deputy prime minister, in the head In recognition of Portugal becoming the quarters ofhis conservative Popular "eurozone's new growth star", as Berenberg Party is counting down the minutes senior economist Christian Schulz puts it, to midnight on May 16, 2014, the hour when the troika concluded its penultimate quarthe country's punishing international bail~_ terly review ofthe bail-out programme on a In the three years since its bailout officially ends. - positive note in March, lifting its growth out, Portugal has impressed The Portugal that emerges from three forecast for 2014 to 1.2%, up from 0.8%. It many onlookers with its years of painful austerity measures as part of also projected a significant turnaround in efforts to tum its economy a €78bn rescue programme agreed with the investment, which it expects to grow by 3.1% around. Now it is on track 'troika' of the European Commission, Interthis year, having previously forecast a 6.5% to make a clean exitfrom its national Monetary Fund and European Cencontraction. Unemployment, which has tral Bank will still face years oftough fiscal soared to recorded highs ofmore than 17%, rescue programme in May, consolidation and far-reaching reformo But was projected to fall to 15.7% this year. but the question is will the with economic growth beginning to pick up "The key issue for the future is the susprogress made over the at one of the fastest rates in the eurozone, tainable growth rate that Portugal can past three years continue? pulling Portugal out of its deepest recession achieve," says Joaquim Souza, chief executive for more than 40 years, there are signs that ofCaixa-Banco de Investimento, the investWRITER the bail-out has accelerated a long-soughtment banking arm of state-owned Caixa Peter Wise after transformation to a more productive Geral de Depósitos, Portugal's largest lender economy in which exports rather than by assets. "Are we going to be growing at 2% domestic demand drive growth. or 1% a year? The difference is very big in

ACLEAN

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WESTERN EUROPE

PORTUGAL

ECONOMY

terms of job creation and bringing public debt to a manageable level,"

down

TOUGH MEASURES

THE [BUDGET]

DEFICIT AND

THE DRAMATIC SITUATION OF OUR PUBLIC DEBT REQUIRED TOUGH MEASURES AND DIFFICULT DECISIONS José Maria Ricciardi ••

I THE

BANKER

I April

2014

Public debt as a percentage of national output has risen exponentialIy during the crisis, peaking at just less than 129% of GDP in 2013. As Rui Constantino, chief economist at Banco Santander Totta, Portugal's fifth largest bank, points out, maintaining debt on a downward trend towards a sustainable leveI will require annual economic growth of 1.5% to 2% overthe longterm, as well as continued fiscal consolidation. "The process of adjustment will have to continue for many more years after the bail-out ends," he says. Further public spending cuts and tax increases are a daunting prospect for the Portuguese after a bail-out programme that has left deep scars. Tens of thousands of smalI businesses have gone under. An estimated 200 emigrants, many ofthem among the brightest and the best ofPortugal's young graduates, have been leaving the country every day, propelled by youth unemployment of almost 35%. Many public sector workers have seen their incomes cut by about 30% over the past three years, "It is debatable whether [the adjustment programme] went too far in some aspects and in some areas, or if austerity could have been fine-tuned with more sensibility to avoid the very strong social impact it has had," says José Maria Ricciardi, chief executive ofEspirito Santo lnvestment Bank. "But the [budget] deficit and the dramatic situation of our public debt required tough measures and difficult decisions." Fiscal consolidation has already been extensive. Between 2011 and 2014, the government will have implemented deficitreduction measures totalling more than €26.5bn - the equivalent of 16% of GDP. Spending cuts will account for 55% of the reduction and increased revenue, including what the government itselfhas described as "enormous tax rises" for the remainder. This consolidation has delivered Portugal's first primary budget surplus (excluding interest rates) since the mid-1990s. The country has also become a net externallender for the first time in two decades. Continuing to hit budget deficit targets agreed with bail-out lenders means Lisbon will still face what Mr Schulz calIs "significant fiscal headwinds". But the strength of the economic and fiscal turnaround, coupled with a positive change in debt market sentiment towards peripheral eurozone countries, has enabled Lisbon to consider making an Irish-style 'clean exit' from its rescue pro-

gramme in May, without the safety net of a precautionary credit line. This marks a significant turnaround from only a few months ago when many investors and Brussels policy-makers feared Portugal would need a second full bail-out.

CULTURESHOCK Encouraging economic signs and the upbeat mood of investors towards the eurozone periphery has seen the yield on Portugal's benchmark lO-year government bonds fali to less than 5% this year, the lowest level since 2010 and down from a peak of more than 18% at the height ofthe eurozone debt crisis in January 2012. lncreased investor appetite has also enabled Lisbon to tap the capital markets successfully, swapping €6.6bn in government bonds for debt with longer maturities in December and issuing €3.25bn in five-year debt in January. The public debt agency has now covered all the country's financing requirements for 2014, and begun to build a cash cushion for 2015, easing the way for a full post-bail-out return to the market. The improving economy has also triggered renewed interest from foreign direct investors. "Three years ago, anything Portuguese was treated like toxic waste," says Mr Siza Vieira of Linklaters. "Now investors are actively looking for opportunities here." One of the main attractions, he says, is a relatively highly skilled workforce combined with comparatively low wage costs. "Is there any other country in Europe where you can pay an engineer with 10 years' experience €1000 amonth?"heasks. ,-" According to govêrnment figures, more than 400 structural t~forms aimed at improving competitiveness and making Portugal an easier place to do business have been introduced over the past three years as part of the adjustment programme. These range from adding seven days to the working year.and speeding up civil court decisions, to liberalising energy markets and restricting colIective bargaining. "We need to change our culture and establish an ecosystem that encourages wealth creation," says Mr Souza of CaixaBI. "You cannot waste two or three years in court ifyou go bankrupt. You also need stable tax laws and fiscal regulations, a flexible labour market and institutions willing to lend to start-ups. "We have made a start," he says. "Now that the economy is improving and we are moving away from the cliff edge, the biggest danger is that Portugal wilIlose the impetus to reform,"