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September 2014
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Portugal Published in conjunction with:
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Contents
Back on track
Portugal’s ranking in Euromoney’s Country Risk Survey has continued to improve in 2014, reflecting increased confidence among economists in the country’s economic fundamentals
4
Portugal consolidates return to international capital markets
Portugal’s official exit from the Troika financial assistance programme sets the seal on its return to the international debt and equity markets, following a series of successful deals over the past two years Caixa - Banco de Investimento
Portugal: exporting for growth
Portugal’s private sector is leading the way out of a period of economic adjustment and reform, laying the foundations for an export-led growth model Santander Totta
10
2 8
Helping Portugal steer a new course
CGD Group’s return to positive earnings adds impetus on the trajectory to profitability levels commensurate with its position in the financial system Caixa Geral de Depósitos
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Euromoney Country Risk
Back on track Portugal’s ranking in Euromoney’s Country Risk Survey has continued to improve in 2014, reflecting increased confidence among economists in the country’s economic fundamentals In Euromoney’s longstanding survey of country risk, global economists are increasingly buoyant about Portugal’s economy, with rating indicators of political and economic health pointing unanimously to higher growth and better times ahead for the eurozone member state. Lisbon’s ameliorating risk profile was set in train some time ago, according to economists and other country-risk experts taking part in Euromoney’s Country Risk Survey (ECR). The sovereign’s risk score began to improve in Q1 2012, although it only really began to take off at the beginning of this year, when the €78 billion bailout was on course for completion without ongoing creditor support.
Comparable tier-three sovereigns August 2014
H1
Country
change
ECR
Fitch
Moody’s
S&P
score
43 +1 Slovenia
57.96
BBB+
44 -4 Peru
57.91
BBB+
45 +11
Spain
57.46
BBB+
Baa2 (+ve)
BBB
46
Trinidad & Tob 57.36
n.r.
Baa1
A-
-1
47 -5 Iceland
56.85
48
56.43
+3
Uruguay
49 -2 Latvia 50
+5
Italy
55.99
BBB+
54.72 BB+(+ve)
52
54.70
-4
Turkey
Baa3 BBBBaa2 (+ve)
A-
51 +13 Portugal
A-
A3 BBB+
BBB BBB-
56.27
Ba1
BBB-
Baa1 A-(+ve) Baa2 (+ve) BBB(-ve)
BBB-
Ba1 BB(-ve) Baa3 (-ve) BB+(-ve)
Sources: Euromoney Country Risk; IMF; credit ratings agencies
Portugal has climbed 13 places in Euromoney’s global rankings in 2014 to date, reaching 52nd in the global rankings out of 186 countries as of August, with a score of 54.7 out of a maximum of 100. That means Portugal has seen the biggest improvement this year by any sovereign in the global rankings, excluding the very riskiest countries in ECR’s most vulnerable, tier-five category. Euromoney’s country risk rankings can be a useful guide to how macroeconomists perceive the sovereign risk profile of different countries over time. The survey uses a simple methodology to measure political and economic risk, as well as the structural factors that affect a country’s risk profile, applying the same criteria to both advanced and emerging economies. As the survey is compiled on a real-time basis, the ratings often illustrate trends in risk perception earlier than other leading indicators, such as traditional credit ratings.
Vote of confidence Tellingly, Portugal’s ECR score has never fallen below tier three, despite the recession the country experienced and the volatility of its sovereign credit. The resilience of the country’s score is a vote of confidence by global economists in the underlying strength of the economy and its ability to bounce back. Portugal’s trend rise within the tier-three (medium risk) category is commensurate with a return to investment grade based on similarly ranked sovereigns. The credit rating agencies are slowly cottoning on, but have stopped short of such action, even though barely more than a point now separates Portugal from Italy.
Portugal risk trends (ECR scores out of 100) -48
ECR score (LHS) 10 yield bond yield (end period, rhs)
ECR score (out of 100)
-50 -52
Higher risk
14 12 10
-54
8
-56
6
-58
Lower risk
-60
%
4 2
-62
0 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14
Source: Euromoney Country Risk
2
SPECIAL REPORT : PARAGUAY · September 2014
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Portugal’s improving risk indicator scores (points difference H2’13 to H2’14) Bank stability Economic-GNP outlook Mon policy/currency stab Employment/Unemploy Government finances Govt non-payments Corruption Info access/transparency Institutional risk Regulatory & policy enviro Govt stability 0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Source: Euromoney Country Risk
The failure of Banco Espírito Santo (BES) and constitutional court rulings barring several of the government’s proposed fiscal austerity measures had previously cast a cloud over Portugal’s short-term outlook. Yet a turning point was reached earlier this year that these tail risks are unlikely to reverse. In spite of these obstacles, plus a public debt burden rising above 130% of GDP, there is a sense the country has finally got to grips with the problems accentuating its investor risks when the three-year bailout was granted in 2010, and which continued for two more years. That seems clear from the fiscal deficit trend, which in spite of widening two years ago has seen the 10.2% of GDP peak deficit in 2009 reduced to 4.9% last year, including bank recapitalization costs amounting to 0.4% of GDP. It is still on course for further improvement in 2014. With programmed expenditure cuts and pension reform factored in, alongside increased tax revenue, the deficit target of 4% of GDP for 2014 should still be achievable, in spite of the BES crisis subsuming almost €5 billion of state support, before it narrows to 2.5% of GDP in 2015 in response to more structural improvement. Fortunately, Portugal had €6.4 billion-worth of bailout financing set aside in a state fund from its bailout appropriations for just such an eventuality – a figure equivalent to 4.2% of GDP. The central government’s total cash reserves, including this amount, totalled €15 billion – or 9% of GDP – at the end of last year, highlighting its prudence in building up appropriate buffers.
Returning to growth Thankfully, too, with years of structural reform delivering the first current account surplus in two decades, as Portuguese exporters gain market share, the economy is returning to growth faster than the eurozone as a whole, after three years of recession caused real GDP to slump by almost 6% through to 2013. These positive signs have translated into the country receiving an improved assessment from economists participating in Euromoney’s Country Risk Ratings, a development that bodes well for as Portugal attempts to shake off the economic and social challenges of the past three years. The BES crisis is undoubtedly an unwanted constraint on investment financing, while household and corporate debt
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burdens are still high. However, the BES capitalization makes no demands on Portuguese taxpayers, so 1% real GDP growth or thereabouts this year, rising to 2% in 2015, seems plausible, most forecasters believe. A return to moderate inflation from mild deflation these past months is also expected.
Stronger footing As Giada Giani, Citi’s director of European economics, asserts: “The economy is now on a stronger foot than it was a few years ago and it is better able to withstand these shocks. Private savings are at historically high levels, corporate profitability is strengthening, bank deleveraging has made significant progress [with the loan-to-deposit ratio falling to 120% from 167% in 2010] and real GDP is growing again, boosted by improved competitiveness.” Meanwhile, business confidence improved in July for a fifth successive month, according to the European Commission, driven by the services sector. An unemployment rate sliding to 14.1% (harmonized) in June is making the European Commission’s May forecasts redundant, as the jobless rate among the under-25s is poised to slip below 33%. That is unpalatable, perhaps, but some 20 percentage points lower than in Spain, where the national unemployment rate for the entire workforce is also higher at around 25%. The failure of BES provided a jolt to asset prices, including a widening of sovereign spreads, and the eurozone recovery is faltering. However, Portugal’s strengthened fundamentals indicate it is now in better shape to handle such risks. ECR data suggest it should even be reclassified as investment grade. For a picture of the effect that the government’s economic reforms are having on Portugal, look no further than Euromoney’s bank stability indicator, a measure of economists’ faith in the liquidity and creditworthiness of a country’s financial system. Also showing signs of improvement in Portugal’s score are the survey’s employment and economic outlook indicators. These metrics, which measure analysts’ perspective on growth and the ability of the economy to create jobs for its citizens, have improved significantly since the second half of 2013, reflecting confidence that the Portuguese economy is headed in the right direction.
SPECIAL REPORT : PORTUGAL ·September 2014
3
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Portugal consolidates return to international capital markets Portugal’s official exit from the Troika financial assistance programme sets the seal on its return to the international debt and equity markets, following a series of successful deals over the past two years On 17 May, Portugal officially exited the Troika’s financial assistance programme without any credit lines or other financial support from foreign institutions. This marked the country’s full return to the international capital markets, the culmination of a series of decisive steps that began three years earlier with the arrival of the Troika of international lenders: the International Monetary Fund (IMF), European Commission (EC) and the European Central Bank (ECB). The global economic crisis is now abating, with progressive recoveries projected for Europe and the United States. The crisis had its first symptoms in the US in the second half of 2007 with the sub-prime lending and securitization debacle, which gained momentum when Lehman Brothers went bankrupt in September 2008. By May 2010, a new chapter in the crisis, affecting European sovereign debt, could no longer be ignored when Greece asked for financial assistance from the Troika after being unable to raise market funding. A similar request came from Ireland in November 2010 and, by April 2011, Portugal followed suit. Even after the Irish had requested financial assistance, Portuguese issuers continued to benefit from access to international funding markets. As late as February 2011, the Republic of Portugal came out with a €3.5
billion five-year Obrigações do Tesouro (OT), jointly led by Caixa - Banco de Investimento (CaixaBI). This was the last Portuguese institutional issue before intensifying investor aversion to peripheral debt forced Portugal to seek its own financial assistance programme from the Troika, closing international capital markets for Portuguese issuers, a hiatus that lasted nearly two years. As part of the Troika’s involvement, Portugal began an economic adjustment programme aimed at restoring external competitiveness and financial stability and placing public finances on a sustainable path through internal devaluation, institutional and market reform and severe austerity measures.
Portuguese issuers return to markets after summer 2012 It was only in September 2012, 18 months into the adjustment programme, that a dramatic improvement in investor sentiment towards the periphery, coupled with progress made in the programme, allowed a Portuguese corporate, utility EDP, to return to the wholesale debt capital markets. Its €750 million 5.75% five-year transaction attracted an order book 10 times oversubscribed. Within a month, toll-road concessionaire BCR and Portugal Telecom also made their way into the capital markets, with a €300
million 6.875% senior secured deal and a €750 million 5.875% senior transaction respectively, both with a 5.5-year tenor and brought jointly by CaixaBI. In the months that followed, two of the country’s top banks, BES and CGD, also returned to international debt markets with four benchmark issues in the three- to five-year maturity range, of which two were assisted by CaixaBI as joint bookrunner. The Republic succeeded in breaking its almost two-year absence from syndicate issuance in January 2013 with a €2.5 billion tap of the October 2017 OT. Late 2012 thus saw Portuguese issuers beginning to return to international debt capital markets, a remarkable development given the then still uncertain fallout of the rescue programme. Save for a brief blip in the summer of 2013, due to short-lived political tensions at home, this process would only intensify.
“Capitalizing on growing investor participation in Portuguese debt deals, traditional issuers stepped up their return to international debt markets in 2013, some at very low yields”
Regular debt issuance restored during 2013 Positive investor sentiment towards peripheral countries gained momentum during the remainder of 2013, a trend aligned in Portugal with solid programme implementation and continuous fiscal discipline, together with growing signs of economic turnaround. Driven by exceptional export performance, the country posted the first quarterly GDP growth in the second quarter,
the highest in the eurozone at 1.1%, ending a slump that had lasted 10 quarters. Capitalizing on growing investor participation in Portuguese debt deals, traditional issuers stepped up
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their return to international debt markets in 2013, some at very low yields. REN, the electricity and gas transmission grids operator, made two appearances in the international debt markets in 2013, with a €300 million 4.125% five-year transaction in January and, in October, a €400 million 4.75% seven-year issue. CaixaBI was joint bookrunner in both deals, as well as in Portugal Telecom’s €1 billion 4.625% seven-year issue in April. Another utility taking advantage of the favourable conditions twice in 2013 was EDP, going for two sevenyear benchmarks in September and November. Among financial institutions, infrequent issuer ESFG also decided to tap the market in April, while BES captured investors’ appetite for yield pick-up to issue a tier 2 €750 million 7.125% 10NC5 transaction in November. The strong momentum seen in Portuguese risk, combined with the solid performance of Portuguese credit spreads in the secondary market, enabled first issuers Portucel, the pulp and paper producer, and Galp, the flagship oil and gas company, to inaugurate their Eurobond issuance in 2013. The first came to market with a €350 million 5.375% 7NC3 bond in May while Galp, jointly led by CaixaBI, launched a milestone €500 million 4.125% five-year deal in November, the first unrated public institutional bond issued by a Portuguese corporate and one of the largest unrated bonds from Southern Europe that year. During this period of economic adjustment in Portugal, CaixaBI cemented its continuous leadership in debt capital markets in the country with a particular emphasis on the corporate and SSA (supranational/sovereign/ agency and provincial) sectors, where it was bookrunner in two thirds of the issues in the period.
Issuance uninterrupted in 2014 on the back of tightening spreads Entering 2014, Portugal was mostly seen by investors as a successful case of economic adjustment, much compared with Ireland, which had cleanly exited its Troika programme in December 2013. Credit spreads reflected those views by continuing to tighten. Some of the main Portuguese financial institutions, such as CGD, BES, BCP and Santander Totta, took particular advantage of this favourable backdrop by gaining back some issuance ground after a timid 2013. Collectively they issued six new benchmarks in the first half of 2014 for a total of €4.5 billion, evenly split between covered bonds and senior unsecured issues. On the corporate front, EDP, the most frequent Portuguese issuer, kept up its issuance drive by opening the year with a $750 million 5.25% seven-year print in January and following up with a €650 million 2.625% five-year bond in April, jointly led by CaixaBI, which also brought BCR back to the debt markets in March 2014 with a €300 million 3.875% sevenyear deal. In July, Galp decided to follow up on its successful inaugural issue by placing a new €500 million unrated benchmark, this time for a longer 6.5-year maturity and still lowering its cost by more than one percentage point to a yield of 3.125%. In the SSA space, where CaixaBI has led in market share, Parpublica, the state equity holding company, was the first agency to venture back into the debt capital markets with a €600 million 3.75% sevenyear Eurobond in late June, a transaction jointly run by CaixaBI. Besides the increase in the number of investors drawn to Portuguese assets in 2014, their quality and diversity has also been
on the rise, with Portuguese issuers attracting a growing number of buy-and-hold investors from more diverse places of origin.
Preparing for life after adjustment Portuguese credit spreads showed a notable tightening trend during the period 2012- 2014 across all asset classes, rewarding committed investors with solid returns and luring a growing number to increase their exposure. The bund spread in 10-year sovereign bonds touched 326bps (yield of 5.16%) in May 2013 from a peak of 1,322 bps (yield of 15.84%) in January 2012 at the zenith of the crisis. This trend gained further momentum in 2014, with 10-year OT bund spreads reaching minima of 214bps (yield of 3.32%) in June. The Republic used these constructive market conditions to bring out a number of successful issues. After the comeback OT tap issue of January 2013, high investor support allowed the Republic to launch a succession of new syndicated issues: a €3 billion 5.65% 10-year OT in May 2013 and a €3 billion tap of this issue in February 2014 following a second five-year tap in January 2014 of €3.25 billion of the June 2019 OT. Additionally, IGCP, the Portuguese debt agency, took a number of decisive steps to regain full market access. Between December 2013 and May 2014, it conducted liability management exercises and bond repurchases in the secondary market, managing to buy back €2.8 billion and extend €6.6 billion of the 2014 and 2015 maturities (35% of the amount outstanding), smoothing the profile for future debt payments. It also re-launched the OT auction programme in April 2014, complementing its sources of funding and, crucially, built a substantial cash buffer of over
“Besides the increase in the number of investors drawn to Portuguese assets in 2014, their quality and diversity has also been on the rise, with Portuguese issuers attracting a growing number of buy-andhold investors from more diverse places of origin”
€15 billion that covers its funding needs for about one year. These steps, together with successful benchmark issuance resumed in January 2013, have evidently contributed to putting Portugal back in the debt capital markets in a conclusive fashion.
Economy adjusts This debt management process prepared the country for its exit from the Troika’s financial assistance programme, which with the benefit of an outstanding tightening of sovereign spreads, enabled Portugal to opt for a clean exit in May 2014.
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The strongly active role recently played by CaixaBI has reinforced its long-secured pole position as the leading investment bank in Portugal
According to the Troika’s official statement after its twelfth review mission in May 2014, “the programme has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness. During the past three years, the external current account has moved from a substantial deficit into surplus, the budget deficit has been more than halved, and public debt sustainability has been maintained. There have been ambitious reforms across all the main sectors of the economy.” The economy has significantly rebalanced both externally and internally, growth was reignited and aggregate debt is back on a sustainable path. Portugal’s return to the international capital markets is complete.
Equity capital markets during economic adjustment As a result of the global economic crisis and the instability related to the public deficit and sovereign debt in Portugal, which culminated in the request for financial assistance in April 2011, the Portuguese equity capital markets
(ECM) saw limited activity during 2011 and 2012, as international investors showed significant aversion towards Portuguese equities. During this period, only a few transactions were concluded successfully, mainly those related to rights offerings by Portuguese financial institutions that had to comply with the new capital requirements imposed by the Bank of Portugal and the European Banking Authority. Simultaneously, in 2011 the PSI20 index presented high volatility levels and a significant negative performance, with an annual decrease of 27%, maintaining this marked negative trend until the summer of 2012. From this point there was an inversion in this trend, as the ECB announced a series of actions to support the economies of the eurozone. Since then, the PSI20 has been able to maintain a positive performance, except for brief periods in February/March and June 2013, achieving growth of 16% last year and, in the first semester of 2014, of 3.7%. Two additional factors were instrumental in this positive behaviour: the strong signs
of macroeconomic recovery in Portugal, with GDP projections evolving towards more solid growth, and the greater stability at a political level, since Portugal had been able to fulfil the targets set by the Troika and exit the assistance programme. The Portuguese ECM market also benefited from these positive factors and the gradual change in investors’ perception towards domestic assets that began in 2013, which allowed it to reopen to new primary issues with the IPO of CTT in December of 2013, the first in Portugal since 2008. This offer was considered a great success as it was able to generate high interest among international and domestic institutional investors, causing the total demand to exceed significantly the available shares and the final price to be set at the maximum point of the range. CaixaBI was joint global coordinator and bookrunner in this transaction and, by exploiting its significant experience and leading role in ECM, was able to take a crucial part in the reopening of the Portuguese market and the attraction of international investors
For further information please visit www.caixabi.pt or contact the following individuals: Paulo Serpa Pinto Head of DCM
[email protected]
Marco Lourenço Head of M&A
[email protected]
Ana Santos Martins Head of ECM
[email protected]
to Portuguese domestic assets. CTT’s IPO was a significant landmark as, once again, a Portuguese company was able to attract international investors through a primary transaction, paving the way for further equity offerings. In June 2014, it was also possible to conclude the full reprivatization of REN through a fully marketed offer of the Portuguese state’s remaining 11% stake in the company, which included a retail offer in Portugal and an institutional offer for domestic and international investors. The offer was a great success as it reached a pricing that represented a discount of approximately zero and still attracted a large number of institutional investors, with total demand exceeding the shares in the institutional tranche. Furthermore, by capitalizing on the significant improvement in market conditions, several companies have sought to finance themselves or to monetize nonstrategic stakes through ECM transactions. Since the beginning of 2013, there has been an upsurge in the number of accelerated bookbuildings (ABBs) with Portuguese equities, including companies such as EDP, Portugal Telecom, Galp Energia and MotaEngil. CaixaBI has acted as adviser and joint bookrunner in several of these ABBs. It has proved itself a privileged partner of private companies by helping them finance their activity and strategic plans and giving them access to international institutional investors. These transactions benefited from the growing interest of international investors and from very favourable market windows, with share prices reaching maximum values of several months/years. This positive context has allowed the offers to be concluded with great success, reaching levels of demand that
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have significantly exceeded the number of shares offered in each transaction and discount values below the average of similar transactions in Iberia and Europe since the beginning of 2013. The Portuguese government has also taken advantage of the improvement in Portuguese market conditions to fulfil the privatization plan of the assistance programme. Through ECM transactions, it was able to conclude the full privatization of companies such as EDP and REN and the privatization of 70% of CTT’s share capital. CaixaBI has once again been an essential partner of the government in the execution of this privatization plan, acting as joint global coordinator and bookrunner in these transactions.
Privatization levers M&A activity The Portuguese economic context in the past few years has been severely influenced by the global economic crisis and the impact of the request for financial assistance in April 2011, which led international investors to take a much more cautious approach to the Portuguese market. Nonetheless, and despite the downbeat investor sentiment witnessed in 2011-13, Portuguese corporates have managed to attract international investors, which value their strong focus on business and geographical risk diversification as a way to outgrow the somewhat limited internal market. In fact, a significant number of Portuguese companies in sectors such as utilities, renewable energy, oil and gas, construction and retail have been able to create growth strategies and equity stories sustained by the internationalization of their activities, not only to the highergrowth Portuguese-speaking economies like Brazil, Angola and
Mozambique, where historical and cultural affinities play a role, but also to emerging markets in Latin America and Eastern Europe (such as Colombia, Peru and Poland). Although more selective during uncertain times, investors constantly look for companies with attractive equity stories and valuecreation prospects increasingly see investment in Portuguese companies as a preferred way to gain access to emerging markets with a considerable growth potential and also as a means to diversify their investment portfolios. International investors increasingly recognize the growth potential deriving from the exposure of Portuguese companies to highgrowth emerging countries in Latin America and Africa. A good example of this renewed interest from international investors, even in the midst of the demanding macro-economic context in recent years, was the significant success of the privatization programme put in place by the government. One of the measures agreed with the Troika was the establishment of a €5 billion target for privatization proceeds between 2011 and 2014, through the acceleration of the privatization plan already in progress, including companies in the energy, aviation, transport infrastructure, communications, shipbuilding and financial sectors. The privatization programme, which soon became one of the flagships of public debt reduction, as well as of the adjustment programme, has been the catalyst for equity capital markets and M&A deals in Portugal in recent years, beating all initial expectations: since the revitalization of the privatization plan, the Portuguese state has achieved sale proceeds of more than €8 billion. All operations have been regarded by stakeholders as extremely successful, not only in
financial terms but also in terms of transparency, contribution to the companies involved and with a positive impact on the Portuguese economy. The most significant privatizations included the sale of a 21.35% equity stake in EDP to China Three Gorges (€2.69 billion), the sale of 40% of the share capital of REN to State Grid Corporation and Oman Oil Company (€592 million) and the sale of an 80% stake in CGD’s market-leading insurance business to Fosun International (€1.6 billion). These sale processes, in all of which CaixaBI acted as financial adviser to the Portuguese state, attracted widespread attention from the largest international corporates, which were interested in the companies’ strong market positioning in Portugal and/or strong international exposure/ solid internationalization prospects. It is worth noting that these privatizations included the establishment of strategic partnerships aiming to strengthen the investment profile of the target companies, making for a critical contribution to the companies’ growth and internationalization strategy, and allowing for value creation through an increase in competitiveness, synergies and market coverage. The vast array of successfully completed privatizations therefore mitigated the fear that Portuguese companies could no longer attract foreign investors in a difficult economic context. The solid strategies adopted by Portuguese companies during the past few years, together with wellmanaged M&A and capital markets transactions and the recent positive developments in the Portuguese macro-economic environment, were the key ingredients for a successful privatization programme. With the recent improvements
“Portuguese corporates have managed to attract international investors, which value their strong focus on business and geographical risk diversification as a way to outgrow the somewhat limited internal market”
in the overall Portuguese economic outlook, the benefits arising from the structural reforms deployed in recent years, and the positive impacts of the privatization programme, namely the injection of liquidity into the companies, the creation of specific business opportunities ancillary to the core privatization operations and the increase in investor confidence are all factors expected to assist Portuguese corporates in entering a new period of growth in international markets, paving the way for a sustained development in Portuguese M&A activity.
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Portugal: exporting for growth Portugal’s private sector is leading the way out of a period of economic adjustment and reform, laying the foundations for an export-led growth model In this article we will be looking at some of the achievements, especially by the private sector, which we think embody a process that began before the crisis developed, and that is sowing the seeds for a sustained change in the growth model.
In June, Portugal formally concluded the three-year economic and financial adjustment programme agreed with the EU, ECB and IMF, under which it received financial assistance totalling €78 billion, subject to a process of fiscal adjustment, economic reform and financial sector rebalancing. In 2011, Portugal faced massive twin deficits, fiscal and external, of around 10% of GDP. An unbalanced growth model meant Portugal was unable to defend itself against the impacts of the Great Recession, with the subsequent fiscal stimulus resulting in a deterioration of the situation that prevented it from accessing wholesale markets and required financial assistance. While the environment under which the adjustment took place was also far more adverse than initially envisaged, a significant improvement has taken place at all levels. Nevertheless, challenges remain, and the adjustment required needs to continue in the near future.
Restructuring for a globalized world Globalization, with the opening of European markets to Asian and other emerging market products, and the enlargement of the European Union to Central and Eastern Europe, increased competition for traditional Portuguese exports, at the very time Portugal was joining the European Economic and Monetary Union (EMU). Until 2008, Portugal faced a decline in its market share of world exports. The Portuguese corporate sector had to initiate a process of restructuring that was beginning to bear fruit just prior to the start of the Global Financial
Portugal: Fiscal and current account balances (% GDP) 4 2 0 -2 -4 -6 -8 -10
Fiscal balance
-12 -14
Current account
20
00
01
20
02
20
03
20
04
20
05
20
Source: AMECO
Rui Constantino Santander Totta Economic Research
[email protected]
06
20
07
20
08
20
09
20
10
20
11 012 013 2 2 20
Portugal: Balance of goods and services (€bn) 80 60 40 20 0 -20 -40 -60 -80 -100
01
20
02
20
03
20
04
20
05
20
06
20
Balance
07
20
Exports
08
20
09
20
10
20
11 012 20 2
13
20
Imports
Source: INE, Bank of Portugal
Crisis and ensuing recession. The adjustment has been painful, in terms of the closure of less efficient companies and an increase in unemployment, but has also resulted in an improvement in the competitive position of the more efficient companies. Since 2008, the non-financial corporate sector has been improving its profitability conditions: the ratio of gross operating surplus to gross value added has increased from its lowest point in late 2008 and is now back to its early 2000s levels, at just below 40% (an improvement of around five percentage points). Productivity has also improved, as the non-financial corporate sector shed workers, especially in manufacturing (a decline of around 400,000 employees since its peak in the late 1990s). These improvements, which have taken place under very harsh conditions, in the context of the global financial and economic crisis,
have been a major factor explaining the relative ease with which Portuguese companies producing tradables have been able to increase exports and also to expand the range of destination markets. Since 2008, exports of goods and services have increased by a cumulative 20% or an annual average growth of 3.8%. The increase has been fairly balanced between goods (3.9% per annum) and services (2.8% per annum). The increase in exports of goods has also been balanced between the main sectors, with the overall shares of each of the main groups being stable. Two main changes relate to: the increase of the share of agricultural and food items, to over 10%, reflecting investment in these sectors (for example, in olive oil); and the increase in the share of exports of refined oil products, reflecting investment and increased capacity in refining. A significant part of these products is destined
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Portugal: Main export groups: 2008-2013 (% total) 2006
3.6 4.3
5.6
4.8
5.2
4.1 4.5
4.7
7.0
3.5 5.5
8.2
20.2
13.6
3.9
2007
3.9 4.6 4.5
5.2
5.6
4.3 4.5 4.6
6.8
3.5 5.6
8.8
19.6
13.0
4.3
2008
4.6
12.3
4.8
2009
5.2
5.9
5.1
2010
5.3
5.3
6.7
2011
5.3
5.1
7.3
2012
5.3
5.2
8.5
2013
5.5
5.4
10.4
5.0
5.9
Agriculture Leathers, Furs Footwear Optical instr.
4.7
5.8
4.7
4.0 4.4 4.2
6.3
5.0
3.7 5.0
6.9
5.6
3.5
6.8
5.7
New trading partners Although the European Union remains the main trading partner, with Spain still the largest export destination, exports to non-EU countries have increased from around 25% in 2008 to almost 30% in 2013. Angola remains an important partner, but Portuguese exporters have found new destinations in emerging markets, especially in Latin America, which still qualifies for only a small share of total exports. This improvement in exports has contributed to a correction of the external imbalance, with the current account balance moving from a deficit of around 10% of GDP prior the crisis to a surplus of 2.6% of GDP in 2013. This adjustment is also due to the decline in imports, related to the contraction of domestic demand, which we, in part, expect to be a permanent move. Households are becoming more focused on savings, despite the impact that the crisis and the austerity measures have had
5.7
3.5 5.6
6.8
4.0
8.8
5.8
19.0
7.8
16.2
4.1
6.0
3.6 5.5
4.0
5.6
3.7 5.1
8.1
3.2 4.9 3.7 5.4 3.6 4.9
8.2
6.9
Food Wood, Cork Minerals Other
for the US. Exports by traditional sectors, like clothing and footwear, have kept their market share, around 9-10%, but the quality of the exported products has changed significantly (in footwear, the specialization is now on topquality products).
4.3
3.3 5.2
6.8
5.7
6.4
3.2 4.9 3.7 5.3 3.8 4.8
8.0
7.8
Fuels Pulp and Paper Metals
on disposable income. Reforms to the unemployment benefit (implying lower benefits, for shorter periods) in the context of elevated unemployment, and to the pension system (lower transformation ratio between last wage and pension, in the longer run) are forcing households to increase savings for precautionary reasons. This will likely result in a stable, yet more moderate, growth of private consumption in the future, also contributing to a more sustained growth model. For Portuguese exporters to hold and expand their selling capacity, further investment is necessary, both to increase capacity, as domestic demand begins to recover, and to improve production processes, reinforcing competitiveness and the product differentiation in a more competitive environment. Some indicators show that the investment cycle may be turning. On one hand, the most recent survey on investment, by Statistics Portugal, shows that capital expenditure is forecast to grow in 2014, in nominal terms, especially in manufacturing, and more dominantly in exporting sectors. On the other hand, investment has indeed picked up at the level of machinery and other equipment, as well as in transportation equipment. Since the early 2000s, investment as a share
15.0 14.4 15.2 14.8
11.9
6.0
12.3
5.5
13.3
5.7
11.7
6.1
10.5
Chemicals Textiles Machinery
5.5 Plastics Clothing Vehicles
Source: INE
of GDP has fallen from almost 30% to around 16%. At these levels the economy is still reducing its capital base, in net terms.
Access to credit Part of this investment, still characterized by smaller-scale projects, is self-financed, as access to credit, despite a recent improvement, is still tighter and more expensive than before the crisis. But improvements in the credit markets are also being seen. Spreads are narrowing, and the survey on conditions in the credit markets shows that the banking sector is both easing standards on loans and reporting an improvement in demand. Data on new loans to the non-financial corporate sector also show that there has been an improvement, with an increase, to around €4 billion a month, up from roughly €2.5 billion during 2012. This improvement in capital expenditure is also having some impact on the labour market, with the unemployment rate falling to 14.1% in June 2014, down from 17.5% in the same period of 2013. While factors such as emigration may be playing a role, between the first quarter of 2013 and Q1 2014 there has been a decline in the number of unemployed and a similar increase in the number of employed people (around 100,000). Still, the
unemployment rate is almost double the pre-crisis level and three times that of the early 2000s.
Building the growth model Sustained export growth is fundamental. The change in the growth model will likely increase GDP growth potential, from less than 1% in the 2000s to above 1.5% in coming years. This should, in turn, be reflected in a steady decline in unemployment, which is more relevant as unemployment is forecast to remain at doubledigit levels, with all the strains this puts on the economy (fiscal pressure, both from lost revenue and increased expenditure, and the destruction of human capital, as long-term unemployment lingers). Stronger and more resilient growth is also fundamental to ensuring fiscal sustainability. Although reforms are still necessary to generate a primary surplus that contributes to reducing the debtto-GDP ratio from the current elevated levels, growth assists with favourable automatic stabilizers. The ongoing revisions to the tax system will also make important contributions to the changes in the economic structure. The reform of corporate tax aims to bring down the corporate income tax rate from current levels (25%) to 18% in 2018. The government is now analyzing a proposal to reform personal income tax, which has just been made public. It aims to simplify the tax code, and in future the objective will also be to reduce tax rates, starting with the current special solidarity surtax of 3.5%. The new personal tax code could be implemented in 2015. A lesser appropriation of income by general government would add resources for the private sector to continue to invest and reinforce its competitiveness, adding to growth potential, to improve exports and ultimately contributing also to further improvements in the fiscal situation.
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CGD: helping Portugal steer a new course CGD Group’s return to positive earnings adds impetus on the trajectory to profitability levels commensurate with its position in the financial system Caixa Geral de Depósitos (CGD) Group returned to profit in 2014 and continues its path to renewal, responding to the structural changes in the economy and Portuguese society. Caixa continues to afford high priority to funding the best companies and providing households with distinctive value offers to encourage savings, as well as investment solutions based on criteria of rigour and prudence. Posting positive consolidated net income of €130 million in the first half of 2014 is a pivotal step in Caixa Group’s return to profitability. Net income was geared by the improvement in net interest margin along with the good performance of financial operations and improved operational efficiency, which contributed decisively to the increase in operating income. Caixa’s commitment to developing international operations and its strong performance in highly dynamic jurisdictions experiencing high growth levels also made and will continue to make a positive contribution to the trajectory of the return to profit.
Strategic thrusts and main achievements Two main strategic objectives emerge in Caixa’s mission: Caixa is focusing on its core business, building on both its strong franchise as a universal bank and a dominant financial group in Portugal with a leading position in the retail market, and the largest and widest-
ranging international platform among Portuguese banks. Caixa’s strategy for the financing of the corporate sector is being achieved, as is confirmed by the evolution of its market share. CGD’s market share of lending to corporates has increased by 3.6 percentage points over the past five years and now exceeds 18%, maintaining an upward trend. Meanwhile, some important achievements have been successfully completed and several stages are likely to be completed in 2014: • International operations. There is an increasing focus on international operations, whose position within CGD Group’s strategy has been strengthened over the past few years. This is in alignment with the direction of the Portuguese economy, whose revitalization relies on the success of the tradable goods and services sectors. Portuguese exports have increased significantly in the past few years and already represent more than 40% of GDP, compared to less than 30% before 2010. Caixa deploys an extensive platform covering 23 countries in four continents to foster relationships with customers operating internationally. • Covered bonds. After leading Portugal’s return to the covered bond market in January 2013, Caixa made a successful return to capital markets in January 2014, confirming its wide acceptance and prestige as an issuer among the international community. The new €750 million
covered bond issue, with a maturity of five years, coupon rate of 3% and spread of 188 basis points (bp) on the mid-swaps rate, translated into a reduction in the cost of credit of around 100bp over a period of one year (January 2013–January 2014), in line with the continued narrowing of spreads in the secondary market. • Funding. The trajectory of borrowings from the ECB remained sharply down, with a fresh reduction of €1,050 million in the first half of 2014 and another €2,200 million already in the third quarter on the group level of €3,085 million, well below the peak of €10,287 million at the end of 2011. CGD Group had an eligible assets pool of €11,606 million at the end of August 2014, with a total available balance of €8,497 million pertaining to marketable securities and excluding repos. In terms of wholesale market funding, Caixa has a wide and granular distribution of €8,080 million outstanding in funding instruments with a smoothed maturity profile. • Efficiency. The efficiency policy and a returns-based approach are progressing. In 2014 Caixa will continue to optimize its branch network, improving the quality of its services to customers based on a proximity nexus and a complementary deployment of automatic and electronic channels. As a reflection of its rationalization and improved operational efficiency, the trajectory for CGD Group’s operating costs and depreciation
“Caixa continues to afford high priority to funding the best companies and providing Portuguese households with instruments designed to encourage savings, as well as investment solutions based on criteria of rigour and prudence”
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has continued to move downwards over the past few years. • Capital. There has been an improvement in the capital ratios of Caixa on a consolidated basis with the common equity tier 1 (CET 1), calculated under CRD IV/CRR on a fully implemented Basel III scenario at 10.8% in June 2014, well above the minimum of 7%, which comprises a CET 1 marker of 4.5% and a buffer of 2.5%. This is a reflection of Caixa’s healthy capital base, which is also comfortably above national and EBA regulatory requirements. • Risk management. Finally, notwithstanding the fact that Caixa pursues a prudent risk management policy alongside the effect of deleveraging across the sectors of the Portuguese economy, the return to profitability levels in 2014 is already a result of the restructuring process that Caixa is implementing for the 2013-15 period. The group continues to improve its corporate and governance model. In addition to an increase in the size of its board of directors in 2013, to seven executive and seven non-executive board members, a risk committee was formed with the remit of defining various areas of the bank’s risk profile (whose management had already been centralized), strengthening the involvement of the board of directors in this area.
Distinctive features Caixa’s distinctive features relate to its positioning and most of all to its values and principles. Caixa is the sole Portuguese bank wholly owned by the Portuguese state, since its inception in 1876. Caixa is the leading financial institution in Portugal. More than 60% of its total funding comes from retail deposits, which are the backbone of the funding strategy. Its international footprint is unique for a Portuguese bank, in terms of geographical diversification and global reach.
Caixa is fully oriented to customers and strives to support the Portuguese economy, creating value for stakeholders. It adopts the highest ethical standards and is a socially responsible group, geared to global sustainability and investing in the future. The promotion of human talent and teamwork go hand in hand and play a strong role. Last but not least, Caixa is proud of advancing knowledge and promoting the best practices in the industry, building on innovation in the products and services it offers to customers. CGD’s sustainability programme is in line with the best social, environmental and corporate responsibility practices, catering to local, national and international communities. Caixa’s reference role and merit has been recognized with several prizes and distinctions: ‘CGD Banking Brands with the Best Reputation’, awarded in 2013 by the Reputation Institute; ‘CGD the Most Valuable Banking Brand’ awarded by Brand Finance; ‘Prime Status’ in the Corporate Rating of OEKOM, a German sustainability rating agency; and ‘Carbon Disclosure Project Leadership’ for CGD’s contribution to a low-carbon economy.
Tighter focus on banking There are compelling reasons for Caixa to focus on banking. Its leading position in the Portuguese retail market, extensive network of universal branches and specialized points of sale for corporates, and its tight but diversified financial operations organization, from traditional banking to specialized credit and asset management, brokerage and venture capital, all enable it to cater more closely to existing customer segments and vie for the best clients, both individual and corporate. The major stages of CGD Group’s trajectory of concentrating on its core activity have already
been completed. They include the disposal of the group’s healthcare unit, which was negotiated in 2012 and completed in early 2013, and the sale of 80% of the share capital of the group’s insurance companies earlier this year. Caixa will continue to provide bancassurance services in its large branch network, both in Portugal and abroad. Reference should be made to the disinvestment of non-strategic assets and equity stakes in different sectors of economic activity in which CGD used to have a position, in fulfilment of the group’s strategy.
Helping turn the country around Caixa continues to afford high priority to funding the best companies and providing Portuguese households with instruments designed to encourage savings, as well as investment solutions based on criteria of rigour and prudence. In a context of economic and social revival, Caixa continues to transform, recreate and position itself as the bank that is helping the economy and the Portuguese to steer a new course. Several important stages of this strategy are completed or well under way. Two particular aspects stand out. First, retail deposits represent more than 60% of Caixa’s funding and remained stable even during the recent financial turmoil. This distinctive feature among its European peers builds on the confidence that its large base of more than 4 million customers has in Caixa. The bank has in recent years been ever more active in promoting savings, deploying a comprehensive set of products and services in successful campaigns across business segments, tailored to clients’ life cycles, disposal income and latent needs. Caixa remains the undisputed leader in terms of its market share of customer deposits, with a robust 32% share
“International operations are a significant contributor to the group’s consolidated net income”
of the individual customers segment in Portugal. It adopts a proactive stance in deposit-taking activities in cross-border jurisdictions, ranging from a natural and nearby market like Spain to geographically more distant jurisdictions, such as Macao or Mozambique. Second, Caixa is committed to fostering the growth and supporting the structural transformation of the Portuguese economy, catering more closely to the tradable sector, as the evolution of its market share in corporate loans suggests. It is thus achieving an increasing focus on loans to small and medium-sized
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enterprises (SMEs), particularly those in more dynamic sectors, at the crux of the strategic objective of continuing to contribute actively to funding the economy. The SME segment benefits from CGD’s specialized Caixa Empresas network, which is oriented to companies and to providing tailor-made value offers aligned with customers’ needs for sustained business development and current operations. Exportdriven SMEs benefit from the seamless international network of CGD Group, connecting mature and developing markets in four continents and 23 countries.
‘Directions of travel’ for internationalization Caixa is poised to operate across borders through an extensive network of banks, branches and representative offices, with a distinctive global reach among its peers. This international network links the developed markets in
Europe and North America with regions of the globe witnessing the most rapid development - as shown by GDP percentage growth trends for 2011-19, according to the IMF - developing Asia (6.8%), sub-Saharan Africa (5.4%) and Latin America (3.5%). Caixa affords high priority to conducting profitable operations in jurisdictions experiencing different levels of development. Caixa’s entry into cross-border markets spans a long period: its presence in China dates back over 100 years. The promotion of new geographies such as India, Canada and Algeria is still in its infancy. The motives for Caixa’s internationalization process are diverse. It has been attracted by the gravitational force of migrant flows – Portuguese going abroad in search of a job or better opportunities. This is often called the ‘follow-yourcustomer’ view, in this instance ‘follow-the-retail-customer’. This
explains why banks establish retail facilities in foreign locations where there is a concentration of nationals from their own country. Caixa’s presence in France is an example. The volume of bilateral trade between Portugal and other countries is also an indicator for the ‘follow-the-corporate-customer’ hypothesis, and a pull factor for establishing foreign operations. Caixa’s Spanish operations are another example, since Spain represents close to a quarter of Portuguese exports and Portugal is the third-largest destination for Spanish exports by volume. Historic motives have also driven Caixa’s presence in, for instance, Angola, Mozambique or East Timor. There are push factors and hindrances as well, namely differences or dissimilarities – often termed ‘relative friction’ – between Portugal and host countries. These asymmetries encompass geographical distance, socio-cultural
distance and even the perceived distance - often called psychic distance – between Portugal and the foreign countries where Caixa is present. The presences in Portuguese-speaking countries in sub-Saharan Africa, Macao, East Timor and Brazil are the best examples of Caixa’s operations benefiting from proximity in terms of language, perceived distance and similarities in rule of law, to cite a few. Caixa aims to be profitable in each operational unit and obtain the best contribution to its consolidated results, creating value for its stakeholders, both in the home country and in the destination markets. These objectives brought about the reshuffling of its Spanish operations. Caixa’s subsidiary Banco Caixa Geral (BCG) Spain has been restructured over the past two years, reorienting it towards retail business and adapting its business model to an evolving environment. Progress is being made in
Figure 1. CGD covered bonds issue €750million, 5-year (primary market) Breakdown by type of investor:
Geographic breakdown:
Other
Investment Funds
16%
63%
Insurance
8%
€750million
Banks
13%
Source: CGD
For further information please visit www.cgd.pt or contact the Investor Relations Office: Email:
[email protected] Tel: +351 217 953 000 Fax: +351 217 953 479
Germany and Austria
26%
UK
25%
Spain
12%
France
10%
Portugal
9%
Other
5%
Benelux/ Switzerland
4%
Italy
4%
USA
2%
Middle East /Asia
2%
Africa
0.3%
Issuer: Caixa Geral de Depósitos SA Format: 5 Year Covered Bond 2019 Announcement: 8th Jan 2014 Issue size: €750 million Coupon: 3% Reoffer yield: Mid-swaps + 188bps Bookrunners: CaixaBI / HSBC / CAL / COBA / JPMorgan
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fostering Iberian business, taking advantage of the opportunities presented in the two neighbouring countries. Intense cross-border business - Spain is Portugal’s leading trading partner and foreign direct investment has been increasing on both sides of the border - as well as a major confluence in Caixa’s corporate customers’ ventures in both markets, explain why Spain is a natural expansion of CGD’s domestic market. The first half of 2014 has already seen an improvement in the profitability of the BCG branch and the Spanish operations as a whole, since these operations include a branch harbouring non-core assets managed in a run-off mode. International operations are a significant contributor to the group’s consolidated net income.
Pivotal step into normalcy Looking at the quality of the order books for Caixa’s successful taps of the capital markets in 2013 and 2014 is a compelling exercise. The diversified investor base draws attention, with a significant improvement in the covered bond issue in January 2014. More traditional players came back on the scene, as compared to the same type of issuance in January 2013. A striking element is the economically significant tightening of the spread, 100bp in one year, from January 2013 to January 2014. The fact that more than 90% of the issue was placed across borders is no surprise, confirming the appetite of more than 200 institutional investors for Caixa’s paper as was the case in the past, before the markets closed to southern countries, Ireland and Greece for almost three years in the peak of the financial turmoil. Buyand-hold investors, investment funds, banks, including those hailing from more traditional markets – such as Germany, Austria and the UK – were all very interested in posting orders
Figure 2. Dashboard - Caixa’s key figures
23
4
COUNTRIES
MILLION CUSTOMERS
4
CONTINENTS
1,232
BRANCHES
Trading and Sales
Central Banks, Credit Institutions
8%
9%
Retail
Other
61%
Off-balance Sheet
28%
23%
Retail Banking
Funding Structure June 2014
Corporate Finance
Business Mix June 2014
46%
3% Institutional (incl. CoCo bonds)
8%
Asset Management
5%
Commercial Banking
9% Source: CGD
as soon as the books opened. The offer closed two hours later more than five times oversubscribed. Beyond this success story, it goes without saying that Caixa is proud of once more paving the way for other issuers and even more of having done so in the midst of the adjustment programme supported by the EU, IMF and ECB, which was successfully completed in May. The evolution of Caixa’s covered bond issuances in the secondary market with a continuous tightening of spreads is evidence of the confidence and the perception of investors in Caixa’s sustainability - the latter not yet reflected in the ratings but to some extent already recognized by the leading agencies. It is recognized that Caixa has made material progress in its restructuring process, shunning potential risks for the bank’s business position.
Concluding remarks Caixa is furthering the strategy already being implemented at the CGD Group level, based on its main operating thrusts, optimizing the group’s balance sheet, improving operational efficiency and redirecting CGD’s activity to focus on banking as its core segment, keeping in mind the fundamental objective of resuming the global profitability trajectory of each of its business units. The restructuring plan spanning the period 2013-17 further consolidated this strategy already being implemented within CGD Group. Portugal exited the adjustment programme without any further financial assistance on its three pillars: fiscal consolidation, putting fiscal policy on a sustainable path; deleveraging and financial stability, reducing debt and financing needs; and structural transformation,
implementing structural reforms to promote consistent growth. Although Portugal was recognized by the OECD in its July 2014 report as a top reformer in recent years, and the reforms are bearing fruit, there is still scope for further ameliorations to circumvent distortions in the economy. On the other hand, notwithstanding a slowdown in asset quality deterioration, banks are still faced with historically low euribor rates. Caixa is aware of these challenges. Its commitment to the Portuguese economy, supporting both families, by catering more closely to individual customers, and companies, particularly export-driven SMEs, is a cornerstone in its revitalization and path to renewal and transformation, providing the best responses to the shift in the economy’s orientation towards the tradable sector and a new global, economic paradigm.
