PORTUGAL: An Introduction to Banking & Finance

The Portuguese banking and finance sector has been navigating a complex landscape filled with both opportunities and challenges. The economic recovery following the financial crisis has been strong, though it has faced hurdles such as the uncertainties brought about by the COVID-19 pandemic, global conflicts, and interest rate hikes.

As we look back at 2023 and the first semester of 2024, the resilience and profitability of Portuguese banks continue to appear positive. This optimism is driven by higher net interest income and increased returns on variable rate loans, along with maintaining robust asset quality and a declining non-performing loan (NPL) ratio. However, challenges persist due to inflation and higher interest rates affecting borrowers, especially given the substantial exposures to residential real estate and domestic sovereign debt.

The NPL market in Portugal has been significant since the 2011 financial crisis, where Portuguese banks underwent a significant and somewhat abrupt need to restructure their riskier exposures and strengthen their balance sheets, and has therefore matured over the years. Broader structured finance deals have also been seen as an uptrend in the last few years, fuelled by both the increased robustness of the financial system as well as the advent of private credit, which has also been driven by favourable economic conditions and investor appetite in the context of low interest rates, alongside an overall economic recovery experienced in Portugal post-financial crisis.

The European Central Bank’s prolonged accommodative monetary policy has supported this trend, encouraging lending and investments. Various asset classes, ranging from asset-backed securities to mortgage-backed and real estate financing structures and NPL deals from different origination sources form the backbone of Portugal's structured finance market. These are inevitably coupled with synthetic securitisation deals and covered bonds issuances, which tend to occur mostly on the traditional banking side.

These instruments remain an essential tool for liquidity and risk dispersion, benefiting both issuers and investors keen on deploying capital in the rising Portuguese market. Additionally, the government and regulatory bodies have implemented frameworks to enhance transparency and manage systemic risks, thereby ensuring market stability while also providing certain tax benefits to foreign investors.

Capital markets are also registering positive trends. Despite a challenging political and macroeconomic context, the first six months of 2024 have shown that this segment is becoming increasingly relevant. Debt issuance reached record levels, with volumes not seen since the beginning of the last decade including a significant number of green and sustainability-linked issuances by issuers in multiple sectors (eg, energy, telecoms, media and hospitality).

On the equity side, which tends to be less prominent in Portugal (due to the relatively small number of listed companies) the acquisition of a majority stake by KKR and subsequent tender offer over Greenvolt (one of the most active players in the Portuguese capital markets) and the innovative share capital increase of Novabase, which allowed the issuance of new shares to shareholders who opted to receive its dividends in kind, are worth highlighting.

Promoting and incentivising the Portuguese capital markets has been a key focus. In addition to other previous initiatives, such as the launch of the Euronext ELITE programme in Portugal in 2023 and the implementation of the Portuguese Securities Market Commission (CMVM) Sandbox, the first semester of 2024 was marked by the first edition of Portugal Capital Markets Day. This event was organised by the Portuguese Issuers Association and Euronext and promoted investment opportunities within the Portuguese economy and listed companies and provided relevant insights and a discussion platform for investors, companies, financial experts, regulators, and government officials, stimulating networking and collaboration.

Furthermore, a new tax regime was published in June 2024 and was aimed at promoting and encouraging Portuguese capital markets.

The effort to improve investment conditions is also apparent in the recent revamp of Portugal's asset management regime and the relevant CMVM regulation. This regulatory update simplified the existing framework and created a more consistent set of rules for Collective Investment Schemes (CIS), enhancing Portugal's appeal as an investment destination and potentially stimulating a new wave of growth in this sector.

The regime also allows CIS that are alternative investment funds to issue bonds, which also increases the financing sources available to these vehicles.

The new legal framework is already showing positive effects, with the simplification of several administrative procedures causing new asset managers and CIS to enter the Portuguese market, particularly in real estate, venture capital, and private equity. These sectors have been the main drivers of Portugal's CIS in recent years and continue to present strong opportunities for both experienced investors and new participants.

Another key change is the recent amendment to the Tax Benefit Statute, which clarifies tax benefits applicable to CIS based in Portugal. This amendment provides legal certainty to the market and investors and is expected to enable the creation and functioning of Portuguese loan funds, a previously untapped market segment, thereby diversifying investment and financing options and fostering market growth.

Keeping up with these changes is essential in the dynamic CIS sector, considering that many asset managers are still in the process of adapting themselves to the new regulatory landscape. Although the full effects of the regulatory and tax amendments will manifest over time, the current direction points to a favourable future for CIS in Portugal. The sector is anticipated to continue as a dynamic and essential part of the Portuguese capital market, offering opportunities to investors and to companies seeking to diversify their sources of funding.

The Portuguese banking and finance sector in 2024 has shown impressive resilience and adaptability despite many challenges. The economic recovery, along with strategic regulatory and tax reforms, has created a strong and dynamic financial environment. As Portugal keeps improving its capital markets and structured finance landscape, the outlook is promising for both investors and financial institutions.