Portuguese banking has a liquidity excess : 60 billion euros’ margin
Banking is lending more money, but not enough. Balance is falling. And cash deposits surpasses credit, a sign there is a liquidity excess - which weights in on profitability.
“Portuguese banking is capable of lending money”. This statement was made by Nuno Amado, BCP‘s CEO. Banks are granting more credit, but not enough to have a higher amount of granted loans. Contrary to previous years, there is now a liquidity excess: around 60 billion euros in cash continue to be left out of the economy. And that is a problem for a sector which needs to increase its profitability.
Since troika came to Portugal, loans-to-deposits ratios have been decreasing: because of the financial aid programme, banks were forced to reduce this ratio to a percentage below the 120% threshold, in order to deleverage the financial sector (which presented an over 160% average ratio). And they complied: ratio is now 96.4%.
Banking sector loans-to-deposits ratio
The fall in that ratio equals less risk, but not efficiency. “Portuguese banks […] generate their results by attracting deposits and granting credit. This means, generally speaking, 65% to 70% of the results”, states an analyst to ECO. In that sense, “if they have 95% ratios, something is objectively not working well”, he explains. With these ratios, the margin banks have to give loans is close to 58 billion euros, according to ECO’s calculations, assuming the 120% threshold which was troika‘s reference.
Paulo Macedo, CGD‘s CEO, is the first to state that with the bank’s current ratio (88.1%), “we will not generate profitability”. Macedo wants to rise the ratio to close to 100%, knowing it can never have a credit volume higher than clients’ savings (more than 100%) because of the agreement with DGComp withing the bank’s recapitalization process. According to data collected by ECO, considering deposits remain stable, the State bank can still give ten billion euros to the economy until it reaches 100%. Paulo Macedo states there is a “liquidity excess” in banking.
The same goes to BCP. The bank headed by Nuno Amado has room to grant 15 billion, considering a 97% loans-to-deposits ratio. During ECOTalks, the manager stated the Portuguese banking is capable of granting loans and recalled “the banking ratio was 100 euros in deposits to 165 euros in credit; now, the ratio is 100 to 100, which is good news” (in terms of risk and trust, but not for generating results).
An expert in the sector, who preferred to remain unidentified, explains there is no ideal loans-to-deposits ratio, but common sense should be applied: “It makes sense that the ratio is larger than 100% and less than 120%”, adding that anything further from that threshold “starts becoming excessive”. BPI and Santander Totta are within this range: 104% and 115.8%, respectively.
