Capital and credit pressures likely to prompt consolidation over the coming year

Portuguese banks have weathered the global financial crisis relatively well thanks to conservative lending practices and the absence of a house market boom in recent years. However, more recently, they have seen a jump in funding costs and slow credit growth in a declining economy while some are now struggling to increase their capital ratios.

The ratings agencies have already downgraded the number two bank Banco Espírito Santo (BES) and the smaller Banco Internacional do Funchal (Banif) and put a further six Portuguese financial institutions on rating watch negative.

Last October the Portuguese Government was forced to nationalise Sociedade Lusa de Negócios’ (SLN) banking arm, Banco Português de Negócios (BPN). BPN had accumulated losses of €700m and was in danger of failing to meet payments. The demise of BPN means the loss of an important source of work for several law firms including Abreu Advogados, Simmons & Simmons Rebelo de Sousa and BCS Advogados.

SLN is now fighting to prevent its non-life insurance asset, Real Seguros, being placed in administration: options include a share increase, decrease or a sell off. So far though, only the private Portuguese bank, Montepio Geral, which has its own insurance company, Lusitania, has reportedly contemplated making an offer.

Meanwhile, state-owned Caixa Geral de Depositos (CGD) is fighting a rearguard action to stop it having to integrate nationalised BPN. CGD, say lawyers, would rather see a rival bank like Montepio take over BPN´s 213-branch network.

The last Portuguese banking casualty was unlisted investment bank Banco Privado Português (BPP), which was forced to suspend payments. It became the first Portuguese bank to request state guarantees, last October, as part of the Government's package to support the sector. The Government was not convinced and instead six banks agreed to provide a €450m loan, guaranteed separately by the state. However, it was the subsequent downgrading by Fitch of BPP´s ratings that effectively sealed its fate. BPP has assets under management of about €2bn belonging mostly to wealthy individuals.

Portugal´s largest listed bank, Banco Comercial Português (BCP), is still working on boosting its Tier 1 ratio to meet the Government´s recommended 8% threshold. It has plans for a €1.2bn subordinated debt issue, work that usually goes to either Cuatrecasas, Gonçalves Pereira or Morais Leitão Galvão Teles, Soares da Silva & Associados (MLGTS). Similarly Banif and BES have both recently completed rights issues to boost their core Tier 1 capital ratios. Banco Santander Totta, part of Spain´s Grupo Santander, was the only Portuguese bank to achieve profit growth in 2008.

Lawyers say that consolidation in the Portuguese banking sector is inevitable. BBVA Portugal's CEO, Jaime Guardiola, is on record as saying it is well positioned in terms of capital reserves to make a move. Similarly, Barclays, currently Portugal´s ninth largest bank, has also said it is looking at acquisitions in order to become a top five retail bank. Spain’s La Caixa, which owns a third of the number four bank, Banco Português de Investimento (BPI), may reportedly be tempted to sell out to a buyer wanting to make a full bid.

So, besides ongoing capital markets work, lawyers may yet be seeing M&A operations too, although once consolidation is complete there may however be less banking work to share between fewer firms (see table).