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Portuguese banks pass the ‘stress’ test

By CHRIS GRAEME [email protected]

The results on the financial health of Portugal’s main commercial banks was published today (Friday) revealing that despite some weaknesses most passed the so-called ‘stress test’.

The study and subsequent report from the European Banking Association showed that BCP (Millennium), BES (Banco Espírito Santo), BPI (Banco Português de Investimento) and CGD (Caixa Geral de Depósitos) all had capital ratios above those demanded by international entities, including the European Central Bank, to withstand the crisis.

The European Banking Association, the entity that evaluates the solidity of a nation’s banking system, concluded that the measures that already had been adopted and announced by the four key Portuguese banks meant they had also complied with the ratios suggested by the Basle II guidelines into good banking practices.

In technical terms, it means that the banks presented Core Tier 1 Capital Ratios over and beyond the minimum demanded by the Troika and ECB.

The stress tests, which were carried out on 91 European banks (many Italian banks, for example, roundly failed the test, partly leading to the new round of investor jitters), are aimed specifically at evaluating if the banks have capital structures which are sufficiently solid to resist extreme crisis scenarios.

In this case, the European authority tested the banks for an adverse scenario for 2011 and 2012 including a severe European recession, the sovereign debt crisis, the development of shares on the stock markets, house prices and the impacts of these on consumption and investment.

The actual evaluation period which took place between March and June looked at three distinct possibilities: firstly what would happen to the banks without any capital reinforcement at all, secondly, what would happen if the banks increased their capital and in line with recapitalisation of public assets already carried out, and thirdly, the former two plus additional measures already adopted and to be adopted in future in line with international guidelines.

Portuguese banks passed the tests with flying colours having a capital ratio of more than the 5% minimum demanded – most achieving 6%.

Discussions between the European Banking Authority (EBA), the Bank of Portugal (BdP) and other national institutions have not yet ended, which is why no one has officially commented about the information leaked to the business daily newspaper Diário Económico on Monday.

The capital markets, particularly the Portuguese one, are undergoing considerable stress at present, even panic – on Monday, the Portuguese stock market fell by more than 4%, wiping €2.5 billion off the value of shares because of fears of sovereign debt contagion in Italy and Spain.

Portuguese bank shares lost around €415 million alone on the Lisbon ‘bolsa’.

The question is how have the Portuguese banks been so successful and shoring up their capital ratios?

This year Millennium bcp, for example, carried out a capital increase action which affected its ratios in a positive way.

Likewise a BES holding – ESFG – sold its participation in the Brazilian company Bradesco which also helped beef up its capital ratio.

At the same time most Portuguese banks have increased service charges and held on to more of their profits rather than lending them out.

The other decisive factor is that Portuguese banks never exposed themselves, to any real degree, to toxic subprime products and complicated but shady derivatives.

At the same time, there was never the kind of speculative property bubble as happened in Spain and Ireland, for example, which seriously damaged the operational capacity and financial health of these countries’ banks.