-
Morgan Stanley Banks ConferenceAn updated picture on Portugal and BES
Ricardo Espírito Santo Salgado
Chairman of the Executive Board of Directors of BES
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1
Agenda
i. Quick Overview of Portuguese Economy
ii. How BES has tackled the financial crisis
iii. Conclusion
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2
116.7
82.5 76.766.380.385.4
124.9
82.9
0
20
40
60
80
100
120
140
160
Ireland Greece Spain Italy Portugal UK France Germany
% 2009 2010 2011
0
2
4
6
8
10
12
14
Gre
ece
Irelan
dUK
Spain
Lithu
ania
Portu
gal
Latvi
aFr
ance
Rom
ania
Czec
hPo
land
Slov
enia
Slov
akia
Belgi
um Italy
Neth
erl.
Malt
aAu
stria
Hung
ary
Cypr
usG
erm
any
Esto
niaFi
nland
Luxe
mb.
Swed
enDe
nmar
kBu
lgaria
% o
f GDP
2.8 2.93.4
6.1
3.9
2.6 2.7
9.38.3
0.01.02.03.04.05.06.07.08.09.0
10.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Portugal is not Greece. Public debt is in line with the EU average.
Public Deficit 2002-2010E (% of GDP) Public Deficit vs. EU (% of GDP)
Before the global economic crisis, Portugal was going through a path of fiscal consolidation, having lowered the budget deficit from 6.1% to 2.7% of GDP between 2005 and 2008 (in an environment of relatively low growth). In the same period, Greece’s deficit increased from 5.2% to 7.7% of GDP, in spite of stronger GDP growth.
Portugal’s public debt is expected to reach 85.4% of GDP in 2010, which is still in line with the EU average of close to 84% of GDP.
2009 2010 2011
Sources: European Commission, Ministry of Finance.
Public Debt (% GDP)
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3
Portugal suffered the negative impact of the “Greece effect”, but sovereign spreads are now declining.
10-year Government Bond spread vs. Germany (bps).
5-year Sovereign CDS Spreads (bps).
Following a sharp deterioration in Greece’s public accounts in the context of high global risk aversion, financial assets in the Euro Area’s periphery were put under pressure, as a result of market speculation. Portugal has
suffered the contagion effect of market worries with Greece.Portuguese sovereign spreads have now been declining consistently, as a result of (i) an ease in market pressure
on Greece; and possibly (ii) a closer look at fundamentals, which differentiate Portugal from Greece.
Source: Bloomberg. NOTE: Data from March 18th. From March 11th onwards Bloomberg has changed the 10Y Bond reference for Portugal
0
50
100
150
200
250
300
350
400
Out. 2007 Mar. 2008 Ago. 2008 Jan. 2009 Jun. 2009 Nov. 2009
Basi
s Po
ints
Greece
Ireland
PortugalSpain78
117137
316
85
Italy
Italy
0
50
100
150
200
250
300
350
400
450
Jan.2008
Abr.2008
Jul.2008
Out.2008
Jan.2009
Abr.2009
Jul.2009
Out.2009
Jan.2010
Bas
is P
oint
s
IrelandGreece
Portugal
Austria
Italy
Spain
121
295
11698
5093
Mar. 2010 Mar. 2010
-
4
Portugal’s public debt affordability in line with higher rated economies.
Sources: IGCP, ES Research.
Public Debt Affordability (Interest Payments as % of annual tax revenues)
02468
101214
Finla
nd
Spain
Neth
erlan
ds
Fran
ce
Austr
ia
Ger
many
Portu
gal
Irela
nd
Belgi
um Italy
Gre
ece
Aaa countries Non-Aaa countries
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5
Public Debt Redemption Schedule, 2010 (EUR Billion).
Outstanding Public Debt Distribution, Principal and Interest (EUR Billion).
Public financing needs are being fulfilled with no particular stress. Portugal is not facing any liquidity risk.
0
1
2
3
4
5
6
7
8
Jan.2010
Fev.2010
Mar.2010
Abr.2010
Mai.2010
Jun.2010
Jul.2010
Ago.2010
Set.2010
Out.2010
Nov.2010
Dez.2010
Jan.2011
EUR
Billio
ns
OthersCedicTBillsBonds
0
5000
10000
15000
20000
25000
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
T-BillsBonds
Sources: IGCP, Bloomberg.
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6
Central Bank liquidity provision(% of banks’ assets).
No risk of public debt securities becoming ineligible as collateral for financing operations with the ECB.
0
2
4
6
8
10
12
Greece
Ireland
Belgium
Germa
nyAus
triaNet
herland
sSpa
inFra
ncePor
tugal Italy
Finland
Investment grade Moody's
Investment grade
Standard & Poor's Fitch
Aaa Spain AAA Spain Aa1 Ireland AA+ Spain Aa2 Portugal/Italy AA Ireland Portugal Aa3 AA- Ireland/ItalyA1 A+ Portugal/Italy A2 Greece A A3 A- Baa1 BBB+ Greece Greece Baa2 BBB Baa3 BBB-
Euro Area “periphery” sovereign ratings.
Portugal’s rating would have to be lowered by three notches to reach Greece’s rating, both in the case of S&P (A+ vs. BBB+) and Moody’s (Aa2 vs. A2). The problem with Greece’s current negative outlook for its rating is that, if it leads to
a further downgrading, it would risk having its public debt securities ineligible as collateral for financing operations with the ECB. Portugal and, specifically, its banking sector, are not subject to this risk. The stability and soundness of
Portugal’s banking sector also favours the Portuguese economy’s outlook. Portuguese banks’ borrowings from the central bank amount to less than 2% of banks’ assets. This is below the levels observed, for example, in France,
Spain, Germany and Greece.
Sources: Bloomberg, National Central Banks.
Portuguese Banks among the lowest in
Europe
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7
0
10
20
30
40
50
60
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Non-Residents Domestic Banks Other Financial Institutions Other Residents
Public Debt by Holders (% GDP).
Domestic banks have a low exposure to Portuguese public debt, and IMF has stated that “…Portuguese Banking System has weathered the global financial crisis relatively well…”
The IMF report released in January stated that “The (Portuguese) banking system has weathered the global financial crisis relatively well, reflecting pre-existing strengths.”
Source: Bank of Portugal..
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8
Sources: Confidencial Imobiliário, Bank of Spain.
House Prices, Portugal vs. Spain(1988=100 and % annual nominal change)
Having had its period of stronger expansion in
the 1990s, the Portuguese housing market
faced the recent global financial crisis in a very
different cyclical position from those in
economies such as the US, UK, Ireland or
Spain. House price growth has been moderate
over the last years, essentially reflecting
macroeconomic developments and
fundamentals. The lack of evidence of
overvaluation in house prices mitigates any
potential credit risks.
No Spanish-style bubble in house prices
0
100
200
300
400
500
600
700
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 H
1
Inde
x
-20
-10
0
10
20
30
40%Price index Portugal (lhs)
Price index Spain (lhs)Nominal change Spain (rhs)Nominal change Portugal (rhs)
-
9
Sources: Confidencial Imobiliário, INE.
Average Mortgage Loan Rate(%)
Index of Housing Affordability(Ratio of household nominal disposable income to
the nominal house price index, 2000=100)
Housing affordability, as measured by the ratio of household nominal disposable income to the nominal house price index, has remained relatively stable and supported over the last years (in contrast with the euro
area average, where it has declined more visibly until 2007, improving slightly after that). This has mainly resulted from a combination between low interest rates (benefiting disposable income) and moderate house
price growth.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Nov.2003
Mai.2004
Nov.2004
Mai.2005
Nov.2005
Mai.2006
Nov.2006
Mai.2007
Nov.2007
Mai.2008
Nov.2008
Mai.2009
Nov.2009
%
90
95
100
105
110
115
120
125
2003 2004 2005 2006 2007 2008 2009
Moderate price growth and low interest rates support housing affordability.
-
10
0
20
40
60
80
100
120
Spain
Irelan
dGr
eece
Belgi
umGe
rman
yFr
ance Italy
Neth
erlan
dsPo
rtuga
lFi
nland Malt
Cypr
usSl
oven
iaLu
xem
burg
Austr
iaEu
ro Z
one
%
0
10
20
30
40
50
60
70
80
90
Belgi
um
Germ
any
Irelan
d
Gree
ce
Spain
Fran
ce
Italy
Cypr
us
Luxe
mbo
urg
Malt
a
Neth
erlan
ds
Aust
ria
Portu
gal
Slov
enia
Finla
nd
Owne
r Occ
upat
ion ra
te
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
2000 2001 2002 2003 2004 2005 2006 2007 200825
30
35
40
45
50
55
60
Number of contracts (rhs)
EUR million (lhs)
0
1
2
3
4
5
6
1991 1996 2001 2006 2007
Sources: DGT, Bank of Portugal, INE, ECB.
Number of Dwellings (Million) Owner-Occupation Ratio (%)
Mortgage Production Loan-to-Value Ratio (%)
Relatively high owner-occupation ratio, relatively low LTVs.
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11
Source: Bank of Portugal.
Non-Performing Loans(% of total)
Household Loan Growth(%, y-o-y)
Mortgage loans have been decelerating gradually, from the high growth rates of the 1990s and, more recently, reflecting the impact of the global financial crisis. Recent data shows a stabilisation in y-o-y growth rates, at around 2.5%. Non-performing mortgage loans have increased recently, as economic activity declined in 2H2008-1H2009 and unemployment increased, but they remained well contained, below 2% of total mortgage loans. Consumption non-
performing loans have shown a more visible increase, but they represent a small share of total household loans (around 20%).
Mortgage loan growth has stabilised. Housing NPLs remain contained.
-5
0
5
10
15
20
25
30
35
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
%
Mortgage
Consumption2.60.9
-
12
Unemployment rate (% of labour force). Households’ savings rate (% of disposable income).
4
6
8
10
12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
%
8.3%
Higher unemployment and higher households’ savings rate.
Unemployment has increased to 10.1% of the labour force in 4Q 2009 (annual average of 9.5% in 2009), as a result of the retreat in GDP. The unemployment rate should increase a little further in 2010, stabilising by year-end and starting
to decline in 2011, as activity growth gradually strengthens.Household savings have increased to 8.3% of disposable income, benefiting from a higher disposable income and an
increased sense of precaution on the part of individuals.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
10.1%
Source: INE.
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13
-3-2-1012345678
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
%
-4
-2
0
2
4
6
8
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
%
Coincident indicator of activity
GDP
Relatively fast return to positive GDP growth, with the help of a recovery in exports and a stabilisation in domestic demand.
Coincident indicator of economic activity vs. GDP (%, y-o-y).
Coincident indicator of private consumption (%, y-o-y).
Indicator of expectations demand in manufacturing and services (net balances).
Indicator of external demand (net balances).
Sources: INE, Bank of Portugal, European Commission..
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14
January 2010 data for exports is reinforcing recovery trend witnessed in previous months
-30-25-20-15-10-505
101520
2006 2007 2008 2009 2010
%
2.0%
-40
-30
-20
-10
0
10
20
30
2006 2007 2008 2009 2010
%
4.3%
YoY Exports – January 2010YoY Exports – January 2010 Moving Average 3M
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15
-2.7
0.7 0.91.3
1.7
-3-2.5
-2-1.5
-1-0.5
00.5
11.5
2
2009 2010 2011 2012 2013
76.6
85.4
88.9 90.1 89.3
65
70
75
80
85
90
95
2009 2010 2011 2012 2013
9.38.3
6.6
4.7
2.8
0123456789
10
2009 2010 2011 2012 2013
Stability and Growth Program – Budget Deficit (% GDP)
Stability and Growth Program – External Deficit (% GDP)
Stability and Growth Program – GDP Growth Forecasts (%)
Stability and Growth Program – Public Debt(% GDP)
8.4
8.8
8.2 8.2
7.98
8.18.28.38.48.58.68.78.88.9
2010 2011 2012 2013
Stability and Growth Program 2010-2013 sees public debt declining in 2013
Source: Ministry of Finance.
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16
Stability and Growth Program 2010-2013 focuses on spending cuts.
Highlights of the 2010-2013 Stability and Growth Program:
• According to the Program, cuts in public spending should contribute to close to 50% of the deficit reduction. Around 15% should come from higher revenues and 35% should come from the effects of higher activity growth.
• The main measures on the side of spending include: (i) a freeze in nominal wages in 2010 and a fall in real wages in 2011-2013 (i.e. wage increases below inflation); (ii) hiring in the civil service limited by the “1-for-2” rule (1 admission only when 2 other civil servants leave); this rule becomes law; (iii) cuts in health-related spending and in all social benefits that are not linked to contributions; (iv) cuts in public investment, including the postponement of 2 projected high-speed train lines (Lisbon-Porto and Porto-Vigo) and a 40% reduction in military spending; (v) extra penalties in pensions in the case of early retirements; (vi) phasing out of the extraordinary stimulus measures implemented during the financial crisis; (vi) reduction in intermediate consumption spending; (vii) zero net indebtedness in regional and local Government until 2013 and new limits to public companies’ indebtedness.
• The main measures on the side of revenue include: (i) lower tax benefits, including the creation of progressive ceilings on deductions in the Personal Income Tax; (ii) an increase in the tax on capital gains; (iii) a new 45% personal income tax rate on incomes above EUR 150000 (until 2013); (iv) new highway tolls. The Government expects revenues from privatisations to reach EUR 6 billion in the period 2010-2013 (these revenues contribute directly to a reduction in public debt).
• The SGP rightly focuses the efforts of deficit reduction on the spending side, tackling spending components that, until now, hadn’t been subject to this kind of restrictive measures (ex. wages and social benefits); nevertheless, there are some explicit and implicit increases in taxes. A OECD report has stated that it “…welcomes the (Portuguese) authorities’ consolidation strategy, which goes in the direction of maintaining market confidence, supporting growth and ensuring fiscal sustainability.”
ILLUSTRATIVE
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17
Changes in Primary Cyclically Adjusted Budget Deficit vs. Business Confidence.*
Where will growth come from? From higher confidence levels as public finances improve.
Periods of fiscal
consolidation (involving
discretionary policy
measures) tend to give
way to improvements in
business confidence
levels. This is because
lower budget deficits
and lower public debt
ratios tend to increase
the prospects of
sustained activity
growth. Source: Reuters Ecowin, ES Research. * 2-year changes in the budget deficit. Business confidence advanced 1 year. 12 month MA.
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18
Where will growth come from? From an expansion in the relevant market of the Portuguese economy.
0
2
4
6
8
10
12
2002 2003 2004 2005 2006 2007 2008 2009(Nov.)
0.0
0.5
1.0
1.5
2.0
2.5AFRICA (LHS)ASIA (LHS)LATIN AMERICA (RHS)
Weight in total Portuguese exports (%).*
Sources: INE, Eurostat,ES Research. * Merchandise.
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19
External Deficit (% GDP).
Where will growth come from? From reducing the external dependence on energy imports.
Source: Bank of Portugal.
3.4
4.9
6.4
8.9 9.0
6.6
4.2
6.1
8.39.2
8.1
10.59.4
1.4
3.54.6
5.8 6.1
4.0
1.7
3.2
4.45.2
4.3
5.66.4
0
2
4
6
8
10
12
1997 1999 2001 2003 2005 2007 2009
Current and Capital Account Deficit (% of GDP)Current and Capital Account Deficit,Without Energy (% of GDP)
-
20
Sources: DGEG, CE, ES Research – Research Sectorial.
1
Portugal has already reached 44.7% in 2009,
above the target
78.1
60.0
39.031.5 29.4 29.0 25.0 22.0 21.0 20.1
13.2 12.5 10.0 9.0 6.0 5.7
Aus
tria
Swed
en
Por
tuga
l
Finl
and
Spa
in
Den
mar
k
Italy
EU-1
5
Fran
ce
Gre
ece
Irela
nd
Ger
man
y
UK
Net
herla
nds
Belg
ium
Luxe
mbo
urg
44.7
With the estimated investments, by 2020 Portugal is expected to reach a level of 60% in electricity
produced through renewable energy
Targets for electricity production through renewable energy in 2010 (%)
Where will growth come from? From investments in renewable energy.
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21
Agenda
i. Quick Overview of Portuguese Economy
ii. How BES has tackled the financial crisis
iii. Conclusion
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22
The financial and economic crisis has brought extraordinary challenges to Banks at different levels affecting the industry returns
Subdued volume growth; Wholesale funding scarcity;Increased cost of funding;Increased deposit competition;Historically low interest rates;
Increase in non performing loans;Guarantees and collaterals value pressure;Increase in cost of risk;Deterioration of coverage ratios globally;
Pro-cyclicality of Basel II IRB and advanced methods;Markets meltdown and impact on pension funds returns;New recommendations for minimum tier I;Basel III new rules;
Commercial Banking income growth pressure
Solvency requirements & capital management
Deterioration of asset quality indicators
Main challenges imposed by the
financial and economic crisis
on Banks
Profitability pressure
and significant decline of Industry ROE’s
1
2
3
-
23
European Banks ROE has fallen significantly since 2006 and market relative valuation has been reflecting this trend, with Price to Book Value for the sector falling accordingly
18.216.5
7.76.0
7.3
2.4
1.8
0.8 1.0 0.9
2006 2007 2008 2009 2010E
ROE (%) P/BV (x)
ROE and P/BV Evolution since 2006
Source: Research Reports compilation
Note: ROE used is the last estimated ROE for the year, while P/BV takes into account prices at the end of that year
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24
BES has taken important steps to overcome the challenges imposed by the crisis in order to moderate profitability decline. In terms of NII and commissions, BES posted a very good performance in 2009
Commercial Banking income growth pressure
Main challenges imposed by the
financial and economic crisis
on Banks
1
Actions ResultsNet Interest IncomeEur mn, YoY %
Commissions & Fees*
Commercial Bkg. Inc.
2007 2009
Increase in corporate credit spreads by 164 basis points since 2007, reflecting the increased funding costs and risk and benefiting from BES bigger focus on corporate segment;
Avoidance of price leadership in deposits, leveraging on solid and trustworthy image of BES and on the ability to maintain with better clients a strong commitment in terms of access to credit;
Focus on high growth areas, like trade finance and bancassurance, while optimising pricing in traditional banking fees and continue to promote cross selling initiatives. Recovery in IB fees.
NII
F&C
954
+15%
2008
1,086
1,200
+14%
+11%
2007 2009
643
+10%
2008
636
718
-1%
+13%
2007 2009
1,597
+13%
2008
1,722
1,919
+8%
11%
-
25
Good NII performance is also a function of the prudent and timely liquidity and wholesale funding management, which avoided liquidity bottlenecks and tapped the market when the price was fair
Commercial Banking income growth pressure
Main challenges imposed by the
financial and economic crisis
on Banks
1
Actions Results
Focus on Customer funds as the primary source of funding (representing 60% of the funding structure)
Anticipation of wholesale funding needs, benefiting from market windows of opportunity in specific instruments (covered bonds and unsecured senior debt);
Increasing the maturity profile of BES wholesale funding debt;
The Bank has built a repoablesecurities stock of Eur 9.3bn, ow Eur4.4bn are eligible with ECB
Wholesale Funding & Liquidity
BES has never faced, during the crisis, any liquidity bottleneck;
BES ended 2009 with a short term (up to 1 year) cash surplus position in the balance sheet of Eur 1.7bn;
BES is a net lender in ECB with a deposit at year end of Eur 3.75bn;
2010 medium to long term refinancing needs have been almost 90% covered. In 2009 BES issued Eur 7.0bn for Eur 3.2bn of needs;
Ability to keep on growing credit, which has grown since 2007 by Eur6.6bn (7% CAGR 07-09)
Wholesale Funding & Liquidity has not been a constraint, but rather a source of value and differentiation
-
26
BES increased focus on international area has been critical to sustain top line growth at good levels in the current environment
Main challenges imposed by the
financial and economic crisis
on Banks
Actions Results
Int. Commercial Bkg Inc.Eur mn, YoY %
Int. Operating Income
Credit
1
Commercial Banking income growth pressure
International Business
In Angola, BES continues benefiting from the strength of the country’s economy. Moreover BES has reinforced local partnerships, after the sale of 24% of capital to local investors, which will be important to continue on boosting the Bank’s activity in Angola;
Increased dynamism in Brazil, as BES investment bank is participating evermore in important capital markets deals;
In UK the focus on Global Trade Finance business was critical to the unit strong results;
Expansion of relevant markets to countries like Libya, Algeria, South Africa, Mozambique and Venezuela, following Portuguese economy trade links and allowing BES to be positioned in high growth economies with very interesting growth potential
2007 2009
302
+19%
2008
389
489
+29%
+26%
2007 2009
228
+56%
2008
267
416
+17%
+20%
2007 2009
7,607
+38%
2008
9,703
10,154
+28%
+8%
-
27
BES maintained its focus on operating efficiency, as sound top line performance was accompanied by a strong focus on cost control
Main challenges imposed by the
financial and economic crisis
on Banks
Actions Results
Op. Costs Evolution *YoY
Operating Jaw **
2007 2008 2009
2007 2008 2009
2007 2008 2009
Cost to Income
1
Commercial Banking income growth pressure
Operating Efficiency
* Ex post employment benefits** Commercial Bkg Income growth – Op. Costs growth
53.0%47.5%
43.1%
2.4%
6.0% 6.0%
Further simplification of process and workflows;
Centralisation of functions in highly specialised structures;
Merger and integration of activities;
Increased efficiency in the use of IT systems in International activity;
Containment of staff costs ex post employment benefits;
1.6%
6.5%
9.5%
Continuous organisation focus in increasing efficiency and
productivity
-
28
Asset quality deterioration is a given in times of economic slowdown, but the conservative stance in managing risks, namely credit, has allowed BES to maintain the best asset quality indicators among peers
Deterioration of Asset Quality
Main challenges imposed by the
financial and economic crisis
on Banks
Actions Results
Loan Growth *YoY
Corporate Loan Growth *
Credit Provision Reserve
2007 2008 2009
2007 2008 2009
2007 2008 2009
2
Increased selectivity in credit concession, focusing on corporate segment, better scoring clients and international activity;
Refinement of credit risk evaluation metrics with IRB Foundation certification;
Pro-active increase of levels of guarantees with customers;
Reinforcement of credit provisions above amount indicated by impairment models;
Decision to maintain high levels of coverage, above peers in spite of lower non performing loans ratio;
3.8%
9.7%
16.9%
* Total Loans including securitised
5.8%
13.4%
21.5%
3.1%2.4%
2.3%
107bp
57bp49bp
Cost of Risk
-
29
BES credit quality has outperformed the system consistently, with particular relevance for times of credit quality deterioration
1.3%1.2%1.3%1.5%
1.9%2.1%2.1%
1.8%1.9%2.3%2.4%
3.2%
1.8%
2.2%
1.6%1.7%1.9%2.0%
2.3%2.2%2.2%2.1%
2.6%
3.6%
4.8%
3.2%
1997 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 2009
Overdue Loans/Gross Loans BESOverdue Loans/Gross Loans System
1.95%
3.90%
0.75%
1.70%
3.55%
6.36%
BES
System
BES
System
BES
System
Corporate
Mortgage
Consumer
Overdue Loans Ratio EvolutionBES vs Portuguese System
Source: BoP
2
-
30
BES maintains one of the highest core tier I ratios in Iberia, and is well prepared to face Basel 3 recommendations after taking the propermeasures in the last 2 years to reinforce capital
Solvency Requirements & Capital Management
Main challenges imposed by the
financial and economic crisis
on Banks
3
Actions Results
Core Tier I2009; %
Dividend Payout
ROE
BES Peer 1 Peer 2
2007 2008 2009
BES Peer 1 Peer 2
BES did a capital increase of Eur 1.2bn in 2009, which had the strong support of its core shareholders and faced strong demand from institutional investors, despite difficult market conditions at the time (April 09);
Certification by the BoP for utilisation of IRB Foundation, being the first and still to date the only Portuguese Bank to receive such approval, which has led to improvement of RWA efficiency;
During 2008, BES has decreased the level of dividend payout to 20% from an average of 43% in the 3 previous years. In 2009 BES has announced a dividend payout of 35%;
Focus on profitability and earnings generation capacity in order to improve the level of self financing;
BES has not issued new preferred shares (current Eur 600mn, 11% of Tier I out of maximum allowed of 35%), which gives the Bank further flexibility for the future.
8.0%7.8%
6.4%
40%
20%
35%
10.0%
8.8%
4.6%
-
31
Traditional conservative management and long term value creation focus has allowed BES to emerge from the current crisis stronger, with an increased domestic market share and a continuous successful internationalisation
2.5 x
Average domestic market share(%)
Corporatebanking: 24.2
Source: APB; BoP; APFIPP; ISP; ASP; APLEASE; APEF; Euronext; SIBS; SWIFT; CMVM; BES analysis
8.5
20.421.2
1992 2007 2009
Successful Internationalisation
2007 200920082006
International Operating Income Evolution (Eur mn)
146.1
227.8
267.1
415.52.8 x
18% 22% 30% 35%*
* Based on recurrent 2009 operating income
Weight in consolidated
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32
Which is underpinned by high levels of efficiency and solid capital base…
31.9
40.4
41.7
43.1
47.1
50.8
57.9
63.6
POP
BBVA
SAN
BES
SAB
BKT
BPI
BCP
Cost to Income Core Tier I
(%) (%)
Source: Press Releases 2009.Stated Cost to income (includes D&A)
6.4
6.5
7.7
7.8
8.0
8.0
8.6
8.6
BCP
BKT
SAB
BPI
BBVA
BES
SAN
POP
Source: Press Releases 2009.
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33
… And sound asset quality and coverage…
1.60
1.80
2.30
2.46
3.03
3.73
4.30
4.80
BES
BPI
BCP
BKT
SAN
SAB
BBVA
POP
Non Performing Loans Credit Provision Reserve
Source: Press Releases FY09
NPL’s above 90 days
Source: Press Releases FY09Credit Provision Reserve = Total Provisions / Credit (gross)
1.80
1.90
2.42
2.60
2.79
2.80
2.90
3.10
BPI
BKT
SAN
BBVA
BCP
POP
SAB
BES
(%) (%)
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34
When we look at long term series of share price performance, the strength of BES franchise and long term value creation strategy consistently implied an outperformance versus the sector
BES: +240.4%
DJ STOXX 600
Banks: +105.4%
-100%
0%
100%
200%
300%
400%
500%
600%
700%
Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jul-06 Jul-09
Source: Bloomberg & NYSE Euronext
Dec-09
15th July 1991Listing of BES
shares
-
35
14%
10.0
4.5
-0.8
5.24.5
4.0 3.73.2
2.2
0.90.5
Angola Brazil Spain Lybia Egypt Tunisia Algeria Morocco USA Euro Area Portugal
Going forward, international area will be critical to sustain long term growth
GDP growth 2010E¹ Total trade flows between Portugal, Spain, Angola and Brazil
Annual growth of BES Trade Finance Fees
¹ Source: Bloomberg, IMF, INE, ES Research
0
10
20
30
40
50
1996 1998 2000 2002 2004 2006 2008
(€bn
)
Mediterranean Basin
StrategicTriangle
Countries
(%)CAGR 96-08 11.4%CAGR 05-08 15.4%
10.2 11.614.5
33.0
53.7
2005 2006 2007 2008 2009
25%
128%
62%Eur mn; YoY increase
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36
International business focuses on BES core competences and markets…
BES
’pos
ition
ing
and
stra
tegi
c fo
cus
Strategic Focus: Investment BankingSupport Portuguese companies with commercial ties to Brazil and Brazilian companies accessing European Markets
Develop asset management and private banking and expand capital markets
Strategic Focus: Corporate Banking, Private Banking and Investment Banking
Best Bank in Angola in 2009 by Global Finance. Assist international corporate with interests in Angola, provide Angolan companies with access to international markets
Develop corporate and private banking and participate in infrastructure program
Strategic Focus: Corporate Banking, Private Banking and Investment BankingRelevant investment bank, Iberian integrated approach for corporate, help Iberian companies to export to Angola and Brazil
Expand private and upper affluent banking and consolidate investment banking
Strategic Focus: Wholesale BankingFunding source and distribution platform for products commercialised in European and African markets
Leverage on expertise in infrastructure and renewable energy
Strategic Focus: Wholesale and Investment Banking and Private Banking Funding source and distribution platform of Iberian and Lat Am originated products in the US. Centre of competence for USD denominated products.
Growth drivers: leverage on expertise in project, trade finance and global markets, and private banking.
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37
… while developing new ventures and reinforcing BES positioning in high growth countries
LibyaAgreement for the acquisition of 40% of Aman Bank.
UKAgreement to acquire 51% of Execution Noble, a global investment bank with focus on covering big and mid cap pan European companies, present in the UK, USA, Hong Kong, India and Germany.
South AfricaConsidering the proper business model and strategic approach to this market, in order to develop corporate and investment banking.
AngolaBES Investimentois waiting for the authorisation of local authorities to start an Investment Banking Bank and Brokerage business in the country.
Hong KongBES will submit during 2010 a request to BoP and Hong Kong authorities for the opening of a BES branch.
MexicoBES has submitted to local authorities a request to open a Rep Office for both BES and BES Investimento.
VenezuelaRequest to BoPand Venezuelan authorities to open a BES branch.
Cape VerdeTransformation from the current Cape Verde BES branch status to Bank.
MozambiqueConsidering the proper business model and strategic approach to this market, in order to develop corporate and investment banking.
AlgeriaAgreement with BEA for a JV in leasing with a stake of 35%. Pending approval by local authorities.
BES ÁFRICABES has created a holding last November that will coordinate and aggregate BES investments in Africa. Also includes the 2.77% stake held in Banque Marocaine du Commerce Exterieur
2010 GDP growthMorocco +3.2%Algeria +3.7%Libya +5.2%Angola +10.0% Moza +5.2%Cape Verde +4.0%S. Africa +1.7%
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38
Agenda
i. Quick Overview of Portuguese Economy
ii. How BES has tackled the financial crisis
iii. Conclusion
-
39
Conclusion
BES has emerged from the current crisis stronger, reinforcing its domestic market share by 80bp in the last 2 years alone, while continuing a focused international expansion that has been, and will continue to be, critical for earnings growth and profitability enhancement;
BES long term value creation strategic approach coupled with decisive measures being taken to better cope with the challenges presented by this crisis, while counting with the permanent support of its core shareholders, has allowed the Bank to be today in a very good position – strong capital, strong balance sheet, good asset quality and with very interesting growth prospects;
BES is thus well prepared to face potential risks, namely in terms of regulation and a hypothetical slower economic recovery in its domestic market, but is also well positioned to reap the benefits of growth opportunities that might materialise;
Our commitment, as always, is to continue on working hard to serve our clients, creating value to our shareholders and honouring the 140 years of history that lie behind us.
-
Morgan Stanley Banks ConferenceAn updated picture on Portugal and BES
Ricardo Espírito Santo Salgado
Chairman of the Executive Board of Directors of BES