History and Background
Portugal is a country located in Western Europe with a population of about 10.7 million people. The country is small in size but it is one of the member partners of the European Union. The country is well known for its service industry whereby the tourism and other service industries have grown such as tourism. Portugal’s GDP at as 2008 stood at US $ 255 billion and its major trading partners include Spain, Germany and France. According to the World Trade Organization reports, inflation in Portugal stood at around 3.2% while unemployment around 7% in the year 2010. The country has enjoyed economic growth since it joined the European Community in 1986 due to liberalization of key economic sectors. Some of the sectors that benefitted from the liberalization include telecommunications and the banking industry. One of the banks that emerged in the 1980’s is the Banco Português de Investimento which was founded in 1981 (Welfens 88). The aim of the bank was to come up with funds to finance projects in the private sector. The bank made use of its strategy of lending and making use of capital sourced from different investors in the country. Banco BPI bank went public in the year 1985 when the company decided to list its shares in the Portuguese stock market. The current structure of Banco BPI is that it has shareholders and numerous subsidiaries which operate in different financial categories and countries. As at the end 2010, the Bank had close to 9,500 employees with revenues amounting to € 1.1 billion (Bastasin 67). Profits for the year 2010 close at around € 184 million while, the assets for the company stood at € 45.66 billion. Banco BPI is a huge bank with over 14 million customers located in different countries of Portugal, Spain, Angola and Mozambique. The Banco BPI group is the holding company for all the banks and subsidiaries directly owned by Banco BPI.
Banking in Portugal
The Banking industry in Portugal has grown over the years to become one of the best in Europe and the country is dominated by several private and publicly owned banks. The Portuguese economy has been steady over the years except for the recent Euro zone economic crisis that threatened the banking industry due to the credit crisis created by the situation. The banking industry in Portugal started to grow during the 1980’s when the Portuguese government changed its trading policies and liberalized the economy. As a result, banking laws were streamlined allowing for investment in the banking industry. Moreover, the growth in the economy aided the phenomenal growth of financial institutions across the country. The banking laws of Portugal do not discriminate or favour local banks over foreign owned banks. As a result, several banks have launched operations in the country. Economic boom in the last decade has assisted banks to growth their portfolios in finance. For instance, the Banco BPI has grown its asset base from € 39.6 billion in the year 2008 to the current value of € 45.66 billion. Economic growth in Portugal has recently faced threats emanating from the Euro zone credit crisis and the poor credit ratings that Portugal has received recently (Welfens 104). The Portuguese economy and banking industry is rated BB and thus the industry is averse to numerous risks associated with borrowing and credit issues.
Analysis and Financial Ratios
Banco BPI is a big financial institution in Portugal and this is obtained from its balance sheet as shown below. Loans and advances to the bank’s customers in the year 2009 amounted to € 29.9 billion and this figure rose to € 30.1 billion in the year 2010. But in the year 2011, loans and advances dropped to a figure of € 28.3 billion and this could be due to the worsening credit crisis in Europe and in Portugal in general. Meanwhile the assets of the bank were at an all time high stood at € 47.45 billion in the year 2009 but this figure continued to drop in the subsequent years of 2010 and 2011. The figures for the years 2010 and 2011 stood at € 45.66 billion and € 42.96 billion respectively. The asset base of the bank could have been affected by the economic crisis and mortgage problem in Portugal. As a result, there were revisions of the base lending rates which were increased to discourage borrowing and reduce the provisions for bad debt. While on the other hand liabilities of the bank increased as a result of increased customer deposits (Welfens 112). During the year ending 2009 total customer deposits stood at € 21.73 billion while in the year 2010 this figure stood at € 22.43 billion and this figure increased to € 24.68 billion. This is shown by figure 1 in the appendix. The income statement for Banco BPI in the year 2011 show that the company made a loss of € 204 million (Kipping 195). The loss was attributed to exposure to the Greek sovereign debt which the bank lost some € 339 million and the transfer of its pension funds to the Portuguese Social security. Some € 71 million were paid out to the Portuguese Social security. During this period, Banco BPI’s share price stood at the figure of € 0.47 per share. Moreover, the number of issued shares stood at 990 million shares bringing the paid up capital to € 463 million.
RoE: The rate of earnings for the Banco BPI stood at 11.2% in the year 2010 while the year 2011 the rate was at 10.8%. In the year 2012, the RoE rate stood at 13.8%. The year 2010 was good for the Banco BPI while the economic crises in the year 2011 made the rate drop to 10.8%. This is shown by the graph below:
P/E: The price to earnings ratio compares the price of the share to the earnings of the bank at the end of the year. The returns for the year 2010 had a figure of 6.1 while, in the year 2011 the rate stood at 3.5. The expected rate of return for the price to earnings ratio in the year 2012 is 3.0.
2010 was a good economical year for Banco BPI and this was the peak of the economical success. As a result, when the economy faced problems in the year 2011 the price to earnings ratio dropped. The P/E was affected by the Euro zone debt crisis which led to the drop of the P/E figures.
Debt Ratio: The debt ratio for Banco PBI has been decreasing in the previous years due to reduced borrowing from the customers. In the year 2009, Banco BPI had a debt ratio of about 95.14 and this reduced to 95.69 in the year 2010. In the year 2011, the debt ratio stood at 98.08 and this was a decrease of around 16% from the previous figure. The debt ratio was mainly affected by increase in costs of doing business. For instance, the bad debts contributed to losses and increased costs in undertaking various banking activities. The debt ratio is an important marker in conducting business (Kipping 256).
Dividend Per Share: The rate at which the investors are paid out on the return of their investments. Banco BPI’s dividends for the year 2009 amounted to € 70 million. However, due to the poor economic conditions and results the bank did not pay out any dividends in the consecutive years.
Customer Deposits: This factor is very important since deposits are used to determine the levels of investment or loans that could be given out to customers. Customer deposits ensure that the bank operates efficiently without hitches and that the bank does not face liquidity issues. The year 2009 the customer deposits stood at € 21.7 billion while in 2010 it stood at € 22.43 billion and it grew in 2011 to € 24.67 billion.
Factors Affecting Bank Results
Interest Rates: Due to the bad debts and the worsening economic crisis in Europe, Portugal was affected and most of its banks were exposed to the bad credit crisis. As a result, the Banco De Portugal which is responsible for setting interest rates intervened and raised the rates so as to reduce the case of bad debts. Banco BPI being one of the major banks will be affected by the decision of the Banco De Portugal. From the results of the bank, we witness that borrowing trend reduced as a result of the increased interest rates. Banco BPI will however invest more in its subsidiaries in countries like Angola and Mozambique in a bid of soaring up its return from investments (Kipping 218). Moreover, the rise in interest rates could lure FDI from investors keen on cashing in from the financial markets in Portugal. The rise in interest rates will also make it expensive for Banco BPI to raise money from Banco De Portugal. As a result, the Banco BPI could face credit and liquidity problems. However, in its financial planning the bank could come up with several offerings that could be used in solving the above problems. The bank can make use of debt swapping and financial derivative products that could reduce debt of the bank. The general effect of the above measures would be that the bank will have the capability of rising funds even with high interest rates. Moreover, Banco BPI will have the opportunity of dealing with bad or non-performing loans.
Credit: Portugal credit rating stand at BB and this fact coupled with the Euro zone debt crisis in countries such as Greece and Italy, Portugal might end up having difficulty in paying up its debts. The economic problems in the European regions will dent a blow to the Portuguese service industry. As a result, banks like the Banco BPI will have a difficult time in compelling its customers with debts to pay up on time (Bastasin 69). As a result, the bank will suffer losses due to poor economic conditions. The exposure to bad debts and provisions is not entirely avoidable but the bank has insured itself against these losses. During, this period Banco BPI has created a section that deals with assessing credit worthiness of customers so that the bank can avoid bad debts which contribute to losses. Banco BPI has taken these keen steps as it has been witnesses from its debts books whereby customer loans have reduced in the last three years.
Liquidity: Banco BPI will face liquidity problems in the coming year but, this may not last for long. This is because the economic crisis in Europe is improving and many of the troubled economies in Europe are starting to rebound. The bad economic conditions have contributed to the decline of the economy which affected the employment outlook in Portugal. As a result, many of Banco BPI customers will make use of their deposits leading to decreased liquidity for the bank. The good performance of Banco BPI will help in solving the liquidity issues in that a large proportion of the profits will be used in funding bank operations such as liquidity issues. Banco BPI could also make use of the stock markets to raise funds through bonds issuance while at the same time (Smith 186). Moreover, Banco BPI could come up with strategies and products that allow customers to save by offering them good interest rates for fixed deposits.
Capital Base: Banks with huge capital bases have an easy time seeking for credit while at the same time expanding their operation base worldwide. As at the end of 2010, the audited accounts show that Banco BPI had a capital base of € 1.34 billion and this figure was the same as the two other previous years. However, from the forecast figures for we see that the year 2012 the bank might not perform very well. This is because the bank is likely to experience poor results due to bad loans and debts. The capital adequacy ratio for the bank stood at 9.2% while the equity against assets ratio stood at 1.91%. Banco BPI was in one time being considered for merger with Banco Millennium BCP.
Forecast Balance Sheet and Income Statement
Forecasted Balance Sheet
|Balance Sheet ( in Millions €)|
|Description||2009||2010||2011||2012 (Normal)||2012 (Forecasted)|
|Less: Reserves for Impaired Loans/ NPLs||530.4||553.9||498.76||533.2||541.8|
|Other Earning Assets||14649.2||12663.8||11663.2||1301.4||1297.5|
|Loans and Advances to Banks||2644.5||1777.7||2722.4||2310.8||2415.6|
|Remaining earning assets||678.6||516.0||496.0||442.7||450|
|Total Earning Assets||44604.8||42718.8||39981.5||39560.1||39078.8|
|Liabilities & Equity|
|Deposits & Short term funding||30054.0||28402.8||29242.0||31452.3||30541.0|
|Total Customer Deposits||21729.0||22430.1||24671.3||25435.8||24896.3|
|Deposits from Banks||2789.3||4920.1||2499.2||2674.5||2499.2|
|Other Deposits and Short-term Borrowings||5535.7||1052.6||2071.5||2216.1||2083.0|
|Other interest bearing liabilities||11406.2||10760.2||7563.8||8012.8||7745.8|
|Long term funding||10663.5||9999.3||6901.9||4356.0||3567.5|
|Other (Non-Interest bearing)||3596.6||4422.4||2574.3||2438.5||2753.3|
|Total Liabilities & Equity||47449.2||45659.8||42955.9||56865.4||44763.8|
The other important financial record that is needed in the process of financial reporting is the income and balance sheet statements and reports. The income statements for Banco BPI are shown below:
|Income Statement ( in Millions €)|
|Description||2009||2010||2011||2012 (Normal)||2012 (Forecasted)|
|Net Interest Revenue||617.2||664.5||576.7||651.67||592.1|
|Other Operating Income||574.1||471.8||409.1||502.54||428.0|
|Net Gains (Losses) on Trading and Derivatives||530.4||553.9||312.3|
|Net Gains (Losses) on Assets at FV through Income Statement||41.5||19.8||38.5|
|Net Fees and Commissions||255.9||262.0||297||305.1||300.0|
|Remaining Operating Income||276.7||190.0||112.1||278.9||188.7|
|Loan Loss Provisions||150.8||105.2||192.9||231.5||200.9|
|Profit before Tax||319.3||284.6||-328.1||179.55||127.6|
|Operating Income (Memo)||1173.0||1107.2||957.4||1243.4||1032..1|
|Total Capital Ratio||11.0||11.1||9.30||9.40||9.60|
|Tier 1 Ratio||8.62||9.1||9.00||9.20||9.40|
|Tier 1 Capital||2245.5||2379.3||2272.5||2355.8||2298.6|
In the process of deciding the forecasts, we have to look at the economy and other factors that may affect the growth of the Banco BPI in Portugal. Banco BPI experienced difficult financial period in the year 2011. However, based on the economic forecasts we see that the bank will witness growth in the year 2012 in comparison to 2011. Banco BPI will witness a fall in its loans and provisions because the depressed economy will not allow for the borrowing of money. According to the Economist Intelligence Unit, the economic outlook for Portugal is weak and this will push the recession to the end of 2013 (Smith 196). The recession will slow down consumption and demand in the country and thus exports will grow and support the economy through this tough period. On the other hand, the most important factor of inflation which has a direct effect on the economy and in the year inflation in the euro zone peaked at an average of 3.6%. Portugal was not spared from this effect and the country witnessed poor economic situation. The forecast for the year 2012 show that inflation will drop in the euro zone to around 2.2 % and this is good news for Portugal and Banco BPI.
The forecasted balance sheet shows that the balance sheet is expected to improve in different sections as outlined above. In terms of loans and debts, the figures are expected to reduce by a figure of around 10%. This is due to depressed markets and economic outlook which will contribute to reduced lending to customers (Bastasin 88). Total assets in Banco BPI’s balance sheet reduced by 1%, due to reduced lending to customers. Fixed assets and non-lending assets are expected to increase due to the favourable economic and market conditions. On the other hand, the income statement is expected to improve in the year 2012. For instance, the revenue is expected to grow by 13% while other earnings are expected to grow at the same or better levels. The costs of maintaining loans will increase leading to higher losses related to loans but the revenue and income from different sources are expected to increase tremendously (Bureau Van Dijk n.d.).
The above forecasts were decided based on the strategy adopted by the bank in soaring up capital and the economic outlook in Portugal. The most important indicators in the process of deciding the financial outlook for Banco BPI is the economic outlook of the countries where the bank operates from. Moreover, credit and liquidity issues will affect the bank severely. The indicators are analysed below:
Credit: The costs of maintaining bad debts and assets which are mortgage based by the bank will increase the operating costs of the bank. As a result, the bank will look into disposing off assets as a means of preventing further losses from these assets. Availing credit to the operations of the Banco BPI is important in maintaining profitability of the bank. Reducing loans and debts in this stage of the economic outlook is good. Banco BPI in its strategy will reduce lending to its customers with the aim of reducing bad debts and boosting its financial standing. The issue of borrowing money from banks and financial sectors in Europe will be difficult going forward. Moreover, the 3.4 inflation rate in Portugal is quite high contributing to increase of interest rates which discourage borrowing (Smith 194).
Liquidity: At the end of the year 2011, Banco BPI incurred a loss of € 234 million that affected its financial books. However, the bank is optimistic of growth prospects since the inflation in Portugal will ease in the year 2012. In light of these issues, the bank decided to seek funding from the European Central Bank (ECB) to a tune of € 4.1 billion while its deposits at the ECB stood at € 100 million. Banco BPI has also invested heavily in the securities market in Europe. This is especially in the sovereign debts and corporate bonds where the bank has invested close to € 4.7 billion in the Portuguese treasury bills and bonds. Further the bank has invested € 961 million and € 333 million in Italy and Ireland bonds respectively. The process of securing further funding for its activities requires external funding which can be sourced from prospective investors and external borrowing.
Growth Strategy: In the year 2012, Banco BPI decided to follow the strategy of reducing its bad debts and loan provisions. Therefore, lending to customers will be reduced while the bank will come up with many deposit based products to shore up capital to be used in customer borrowing. The exposure to government backed sovereign bonds through investment will be done cautionary. The bank intends to increase its investment in subsidiaries in countries like Angola and Mozambique. Increase in investments in its subsidiaries outside the European zone with the aim of boosting profits and improving its financial standing in the ultimate end. The growth strategy would also look into increasing its customer base with the aim of boosting the revenues per customer and in the end (Welfens 78). Going forward Banco BPI will focus on reducing its provisions on bad customer debts while trying to shore up customer borrowing with a cautious approach. The good economic rebound is a good sign for Banco PBI and the forecasts show that the bank will announce good results in the year 2012. At the end of March in 2012, the bank had a net operating income of around € 75 million.
Bastasin, Carlo. Saving Europe: How National Politics Nearly Destroyed the Euro, Boston, MA: John Wiley and Sons, 2012. Print.
Bureau Van Dijk: Bankscope. n.d. Web. 2012.
Kipping, Matthias, and Timothy Clark. The Oxford Handbook of Management Consulting. London: MacMillan Publishers, 2012. Print.
Smith, Roy, Walter Ingo, and Gayle Delong. Global Banking. New York, NY: Elgar Elvis Publishing, 2012. Print.
Welfens, Paul, and Ryan Cillian. Financial Market Integration and Growth: Structural Change and Economic Dyanmics in the European Union. Chicago, IL: Pelshiver, 2011. Print.