Consolidation and cost-cutting on the agenda for Portuguese banks

28 May 2021 Consultancy.eu 2 min. read

Portugal’s banking sector needs to consolidate and cut its physical branch presence to gear up for a post-Covid-19 world. This is according to a study by strategic consultancy Roland Berger. 

It has been a tough year and a half for banking. An economic crisis and all its repercussions – low consumer spend, subdued investment activity, high credit default rates – have all dented banking revenues, with experts expecting trillions of losses worldwide in the near future. 

Roland Berger conducted a deep dive into Portugal banking scene – for insights into the country’s readiness for a post-pandemic world. The findings suggest that there is much work to be done. “Portuguese banking needs a strong disruptive transformation,” noted António Bernardo, president of Roland Berger in Portugal.

Consolidation and cost-cutting on the agenda for Portuguese banks

He explained how the country’s banking sector has “excessive weight of default on its credit portfolio, an insufficient efficiency ratio and deterioration of the sector's profitability to levels below the cost of capital, which creates major challenges to the capitalisation of banks.” Two main strategic responses are required to climb out of this hole: consolidation and cost-cutting.

Consolidation

As it stands, Portugese banks tend to be smaller than other European counterparts – denting their competitiveness and their profitability as a result. The solution here is consolidation – across all banking classes. 

Per the experts, large banks such as Caixa Geral (CGD) de Depósitos, Millennium bcp and Novo Banco could consider merging into a single mega Portugese bank – with assets in excess of €200 billion. CEO of CGD Paulo Macedo already hinted at a similar merger in November last year, speaking at a panel discussion. 

Medium and small banks should consider merging resources too. Medium operations such as Montepio or EuroBIC could consolidate under Crédito Agrícola – suggested Roland Berger in one scenario – to form an asset pool between €80 to €120 billion. And smaller players – the backbone of the country’s banking sector – could come together and form healthy operations of up to €20 billion.

Cutting costs

Next on the list is cost reduction. Portugal’s physical banking presence is 58% higher than the European average – a ratio that is far from sustainable considering the continental and global push towards digital banking. Topping this off, many of these physical branches fail to add value – operating with limited employee productivity.

The researchers suggests cutting this physical presence, and the headcount – a strategy described by Bernardo as “disruptive cost reduction.” A 30% cut to brick & mortar banking – roughly 1,500 branches – plus a “strong reduction of employee” and changes to operational structures could deliver a 20% cost saving to Portugese banks – freeing up much-needed liquidity for transformation.