PORTUGAL: An Introduction to Banking & Finance
As we reflect on 2024 and look towards 2025, the resilience and profitability of Portuguese banks remain positive. This optimism is attributed to interest income, robust asset-quality maintenance, and a declining non-performing loan (NPL) ratio. However, challenges persist owing to inflation and interest rate volatility affecting borrowers, particularly given the substantial exposures to residential real estate. The increasing housing prices pose both opportunities and risks for the banks, which may result in losses for Portuguese banks. Corporate indebtedness still relies heavily on bank funding, creating another layer of complexity and risk exposure in the financial landscape.
The NPL market in Portugal has grown significantly and performed admirably since the 2011 financial crisis – during which, Portuguese banks underwent a significant and somewhat abrupt need to sell their riskier exposures and strengthen their balance sheets. Throughout the years, this market has matured considerably and now faces different challenges, mostly due to the lack of available NPL portfolios for sale. This has prompted market participants to focus on other products such as unlikely-to-pay receivables and other asset classes – some of which even originate from the corporate world. The European Central Bank (ECB)’s prolonged accommodative monetary policy has supported this trend, encouraging lending and investments.
Various asset classes – ranging from asset-backed securities and mortgage-backed securities to real estate financing structures from different origination sources – form the backbone of Portugal’s structured finance market. These are inevitably coupled with 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 issuers and investors keen on deploying capital in the rising Portuguese market. They are expected to remain integral to the Portuguese banking and finance sector and be used as relevant financing tools to which market participants have access.
Additionally, the government and regulatory bodies have implemented frameworks to enhance transparency and manage systemic risks, thereby ensuring market stability, while also providing tax benefits to foreign investors. The regulatory landscape has been bolstered by these moves, creating a relatively stable environment conducive to growth and investment.
Capital Market Trends
Capital markets are also registering positive trends. Despite a challenging political and macroeconomic context, 2024 showed that this segment is becoming increasingly relevant. Debt issuance reached record levels, with volumes not seen since the beginning of the 2010s – including a significant number of green and sustainability-linked issuances by issuers in multiple sectors (eg, energy, telecommunications, media, and hospitality). The promotion and development of the Portuguese capital market has become a key focus for market players and the pipeline is prepared for 2025.
This commitment is reflected in the strategic initiatives outlined in the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários, or CMVM)’s Strategic Plan for 2025–28. These initiatives aim to promote regulatory stability and proportionality, strengthen investor confidence, and mobilise efforts towards a more developed capital market. Specifically, the plan includes initiatives to enhance co-operation to invigorate the market, improve understanding of the capital market’s importance, stimulate the production and dissemination of knowledge about Portugal’s capital market, and identify and promote initiatives that favour market-based solutions for national economic challenges. These steps highlight the commitment to creating a more dynamic and inclusive capital market that can support economic growth and innovation.
Developments in Collective Investment Schemes
he effort to improve investment conditions is also evident in the recent revamp of Portugal’s asset management regime and related CMVM regulation. This regulatory update simplified the existing framework and created a more consistent rule set 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 new regime allows CIS that are alternative investment funds to issue bonds, which 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 driver of Portugal’s CIS in recent years and continue to present strong opportunities for experienced investors and new participants alike.
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. By diversifying investment and financing options, this legislative change will foster market growth and attract a broader spectrum of investors. The impact of these changes is likely to be profound, facilitating greater innovation and competitiveness within the Portuguese financial markets.
Outlook for 2025
In summary, the Portuguese banking and finance sector has shown impressive resilience and adaptability in the past year, despite numerous challenges. The economic recovery, along with strategic regulatory and tax reforms, has created a strong and dynamic financial environment. Looking ahead to the rest of 2025, the Portuguese banking and finance sector is poised for continued growth and resilience. The strategic regulatory and tax reforms implemented in recent years are expected to further solidify the sector’s foundation, fostering a more robust and transparent financial environment.
It is anticipated that the ongoing economic recovery, coupled with favourable conditions for investment and lending, will drive increased activity both in capital markets and structured finance. The emphasis on ESG considerations (including through green and sustainability-linked issuances) is expected to grow, reflecting global trends towards sustainable finance. This growing focus on ESG underscores a broader commitment to aligning financial practices with long-term societal values.
Additionally, the enhanced asset management regime and the introduction of new tax benefits for CIS are set to attract more domestic and international investors, diversifying the investment landscape. With these developments, Portugal’s financial sector is likely to see an influx of capital and expertise, which will further drive innovation and growth.
Overall, 2025 promises to be a year of significant opportunities and advancements for the Portuguese banking and finance sector, positioning it as a dynamic and essential player in the European financial market. The combination of robust regulation, strategic economic policies, and an outward-looking investment framework establishes Portugal as a promising hub for financial activities in Europe. With continued focus and resilience, Portugal is well placed to achieve sustainable growth and contribute meaningfully to the broader European economy, while remaining exposed to risks and circumstances that also affect the overall world’s economy.