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Banking Finance 2015 This paper examines three of the biggest Portuguese Commercial banks through 6 financial ratios during a three-year period: from 2011 to 2013.
Professor Kiki Kosmidou
30th January
Adriana Ravara
2
1-TABLE OF CONTENTS
2 - INTRODUCTION ........................................................................................................................ 4
3 - INTRODUCTORY NOTE FOR THE EXPLANATION OF THE USED FINANCIAL RATIOS ................. 5
3.1 - Return on Assets (ROA) ..................................................................................................... 5
3.2 - Return on Equity (ROE) ..................................................................................................... 5
3.3 - Net Interest Margin ........................................................................................................... 5
3.4 - Loan-to-Deposit Ratio ....................................................................................................... 5
3.5 - Shareholders Equity Ratio ................................................................................................ 5
3.6 - Provisions-To-Total-Assets Ratio ....................................................................................... 6
4 - MILLENIUM BCP ....................................................................................................................... 7
4.1 - SINOPSIS OF THE HISTORY OF THE BANK .......................................................................... 7
4.2 - MILLENIUMS DATA TABLE ................................................................................................ 8
TABLE 1 Results for all ratios for the three year period for Millenium. ............................. 8
4.3 - TABLE OF ALL RATIOS RESULTS OF MILLENIUM .............................................................. 8
TABLE 2- Indicators for the three year period for Millenium................................................ 8
4.5 - MILLENIUMS RATIOS EVALUATION .................................................................................. 9
CHART 1 - ROE and ROA of BCP. ............................................................................................ 9
CHART 2 Net Interest Margin of BCP. ............................................................................... 10
CHART 3 -Equity-To-Total-Assets Ratio of BCP. .................................................................. 10
CHART 4- Provisions-To-Total -Assets ratio of BCP. ............................................................ 11
CHART 5 -Loan-to-Deposit-Ratio of BCP. ............................................................................ 12
4.6 - SUMMARY OF RESULTS ................................................................................................... 12
5 - BANCO PORTUGUS DE INVESTIMENTO ............................................................................... 13
5.1 - SINOPSIS OF THE HISTORY OF THE BANK ........................................................................ 13
5.2 - BPIS DATA TABLE ............................................................................................................ 14
TABLE 3 Results for all ratios for the three year period for BPI. ....................................... 14
5.3 - TABLE OF ALL RATIOS RESULTS OF BPI........................................................................... 14
TABLE 4 - Indicators for the three year period for BPI. ....................................................... 14
5.4 - BPIS RATIOS EVALUATION .............................................................................................. 15
CHART 6- ROA and ROA of BPI from 2011 to 1013. ............................................................ 15
CHART 7 Net Interest Margin of BPI. ................................................................................. 16
CHART 8- Equity-to-Total-Assets Ratio of BPI. ................................................................... 16
CHART 9 -Provisions-to-Total-Assets Ratio of BPI. .............................................................. 17
3
CHART 10 Loan-To-Deposit Ratio from BPI. ...................................................................... 17
5.5 - SUMMARY OF RESULTS ................................................................................................... 18
6 - CAIXA GERAL DE DEPSITOS .................................................................................................. 19
6.1 - SINOPSIS OF THE HISTORY OF THE BANK ........................................................................ 19
6.2 - CGDS DATA TABLE .......................................................................................................... 20
TABLE 5- Indicators for the three year period for CGD. ...................................................... 20
6.3 - TABLE OF ALL RATIOS RESULTS OF BPI........................................................................... 20
TABLE 6 - Results for all ratios for the three-year period for CGD. ..................................... 20
6.4 - CGDS RATIOS EVALUATION ............................................................................................ 21
CHART 11 - ROE and ROE of CGD. ....................................................................................... 21
CHART 12 Net Interest Margin of CGD. ............................................................................ 22
CHART 13 - Shareholders Equity Ratio of CGD. .................................................................. 22
CHART 14 - Provisions-to-Total-Assets Ratio of CGD. ......................................................... 23
CHART 15 - Loan-to-Deposit Ratio of CGD. ........................................................................ 24
6.5 - SUMMARY OF RESULTS ................................................................................................... 24
7 - CONCLUSION .......................................................................................................................... 28
4
2 INTRODUCTION
This paper aims to analyse the financial evolution of three banks of the same sector for
the past three years. For this purpose, three Portuguese commercial banks were
chosen: Banco Comercial Portugus, more commonly known as Millenium BCP, Banco
Portugus de Investimento (BPI) and Caixa Geral de Depsitos (CGD).
Millenium BCP is the biggest bank of the private sector in the country, whereas BPI is
the third one. As for CGD, it is the only Government owned bank of the country.
Before analysing, it should be taken into account that after the crisis of 2008, the
banking sector in almost all countries was the most prejudiced. Portuguese banks were
no exception to this shock. This paper analyses the three-year period from 2011 to
2013 and therefore the main question that holds is the following: Were these banks
capable of coping with the damages caused by the crisis, or are they slowly recovering,
or if, on the contrary, they are dragging themselves down in these following years, and
if there is a tendency of this persistence.
It is very important to bear in mind that all banks borrow money from each other that
is why that if one declares bankruptcy, it will almost inevitably drag down many others.
Since nowadays the means of technology are so widely spread, these shocks become
ever more international. Moreover, Portuguese banks were a target of negative
speculation attacks of rating agencies such as Moodys or Standard and Poors, where
they classified some banks as junk, which aggravated the untrusting environment in
this financial market. In order to come around this problem, the Government created a
law that it will loan money to banks if they need to, to a lower rate than the market,
with the limit of 12000 millions. This gave more credibility to the ability of self-
financing for banks, so the speculation attacks were over.
This paper will provide a small caption of each banks history until the present, as well
as their collected data, illustrated with tables and charts s for each measurement.
Furthermore, with the intention of making the paper understandable for the average
reader, before presenting all the ratios and individual conclusions, there is an
introductory note with all the basic knowledge about the ratios used in this paper.
5
3 - INTRODUCTORY NOTE FOR THE EXPLANATION OF
THE USED FINANCIAL RATIOS
3.1 - Return on Assets (ROA)
Net profit after tax/Total assets.
This ratio provides a percentage of the returns generated from the assets financed by
the bank.
3.2 - Return on Equity (ROE)
Net profit after/Shareholders equity.
This ratio allows investors to evaluate their return on their investments
3.3 - Net Interest Margin
(Interest paid by the bank interest earned by the bank)/Loans to the clients
It measures the profitability of the bank in its main activity: borrowing money to its
clients.
If the non-performing assets are high, their NIM will go down as the interest earning
assets are that much reduced by non-performing assets.
3.4 - Loan-to-Deposit Ratio
Loans/Deposits
This ratio expresses the extent up to which the bank has lent its deposits. If the value
provided by the ratio is high it means that the liquidity of the bank is limited.
3.5 - Shareholders Equity Ratio Shareholders Equity/Total assets
This ratio indicates the proportion of total assets financed by the banks capital. In he
event of liquidation, shareholders would receive the result of the ratio times the total
of assets.
6
3.6 - Provisions-To-Total-Assets Ratio
Provisions/Total Assets
If the loan loss provisions are high it shows the probability of non-performing ratios. It
is used to evaluate the banks assets quality. This ratio shows the proportion of a
company's assets which are financed through debt.
4 - MILLENIUM BCP
4.1 - SINOPSIS OF THE HISTORY OF THE BANK
Banco Comercial Portugus, or simply Millenium BCP, i tis the biggest Portuguese
private bank. It was founded in 1985, following the liberalisation on the banking
market in Portugal, after a decade where only the State owned the banking sector. It is
part of Euronext 100, STOXX 600, and of the prestigious Ethibel Vigeo Excelence.
It owns many other banks throughout not only Europe but also the rest of the world. In
the rea of Private Banking, for instance, Millennium BCP has operations in the USA
(BCP
Bank), Netherlands (BCPInvestment),Luxemburg (BanqueBCP), Suia (MillenniumBanq
uePrive), Macau (Millennium Macau e Banco Comercial de Macau), and Caiman
Islands (BCP Finance Bank e Millennium Bank & Trust).
It is positioned by Forbes list as the 1250th biggest company in the world.
8
4.2 - MILLENIUMS DATA TABLE
TABLE 1 Results for all ratios for the three year period for Millenium.
4.3 - TABLE OF ALL RATIOS RESULTS OF MILLENIUM
TABLE 2- Indicators for the three year period for Millenium.
9
4.5 - MILLENIUMS RATIOS EVALUATION
Return on Assets and Return on Equity
CHART 1 - ROE and ROA of BCP.
Beginning with the ROE ratio, it can be seen that investors have been having negative
returns throughout the years and that each year it gets worth. -10% is quite an
alarming number, but is more alarming the fact that the number has consistently been
decreasing each year, without any type of some small recovery. What is more, it
decreased almost 10% since in a mere three-year gap.
As for ROA, it has remained almost constant, just with a slight decrease throughout the
years but it remained very close to zero. This means that the assets financed by the
bank are having negative returns, even though with a very low percentage.
Both these two indicators do not show sign of profitability of the bank itself and
therefore do not make it attractable for potential investors.
-1,2
-1
-0,8
-0,6
-0,4
-0,2
0
2013 2012 2011
Return on assets
Return on equity
10
2012
3
2013
CHART 2 Net Interest Margin of BCP.
From this chart we can see that the main source of profitability of the bank remains
highly profitable, the difference between the interest rate they pay and the one they
get from loans, for instance, and other operations. From 2011 to 2012 this dropped
almost three times its value. Analysing ROA, it can be seen that the assets actually
became more profitable, so this is not due to a sudden inefficiency from assets, but
most likely for asking more loans themselves than to borrowing.
CHART 3 -Equity-To-Total-Assets Ratio of BCP.
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2011 2012 2013
Net Interest Margin
Net Interest Margin
0,94
0,945
0,95
0,955
0,96
0,965
0,97
0,975
0,98
1 2 3
Equity To Total Assets
Equity/Total Assets
2012
3
2013
2011
3
2013
2013
3
2013
11
This ratio shows to which extent the assets are financed by the shareholders. As it can
be seen, almost the totality of them is financed by the shareholders. This means that in
a scenario of liquidation of the bank, they would get almost the totality of their value
back.
Another point to be mentioned, this value has grown slightly, which means that the
bank is becoming more dependent shareholders to finance its assets. This is never a
good case scenario, the more diverse the sources of financing the better.
CHART 4- Provisions-To-Total -Assets ratio of BCP.
This indicator is meant to be low, for the banks financial strengths sake, as it means
how much debt is financing its assets. The values presented by BCP are extremely low,
almost insignificant. However, a slight increase is noticeable in the chart. Nevertheless,
it is still not relevant.
0
0,001
0,002
0,003
0,004
0,005
0,006
1 2 3
Provisions to Total Assets
Provisions/Total Assets
2013
3
2013
2012
3
2013
2011
3
2013
12
CHART 5 -Loan-to-Deposit-Ratio of BCP.
This ratio indicates what percentage of clients deposits is then borrowed again. In
2011 BCP borrowed more than the deposits it owned, however not in a significant
number. This number has been decreasing, which is good for BCP, since this way does
not run the risk of illiquidity. It diminished around 15% 9in three years.
4.6 - SUMMARY OF RESULTS
After all ratios analysed it is fair to conclude that BCP is not a very profitable bank for
the last years. In fact, its financial condition has been getting worse through the years,
not too much, but enough to make investors wonder whether that will be a persistent
path, or whether BCP will make a sound recovery, reversing all indicators, in order to
be attractive for external potential investors.
0,75
0,8
0,85
0,9
0,95
1
1,05
2013 2012 2011
Loan-to-Deposit Ratio
Loan-to-Deposit Ratio
5 - BANCO PORTUGUS DE INVESTIMENTO
5.1 - SINOPSIS OF THE HISTORY OF THE BANK
Banco Portugus de Investimento belongs to Grupo BPI a financial centred in banking.
It takes part in stock markets such as PSI-20 and Euronext Lisboa and is currently the
third biggest bank in the country.
It started in 1981 as Sociedade Portuguesa de Investimentos (SPI) with the intent of
financing investing projects for the private sector, contributing for the launching of
new capital markets and to modernise the structure of business of Portuguese
companies.
Since then, it has suffered multiple fusions with other banks, being the last one in
1998. In 2007 it proposed to Millenium BCP one fusion, however the board of BCP
rejected that offer.
14
5.2 - BPIS DATA TABLE
TABLE 3 Results for all ratios for the three year period for BPI.
5.3 - TABLE OF ALL RATIOS RESULTS OF BPI
TABLE 4 - Indicators for the three year period for BPI.
15
5.4 - BPIS RATIOS EVALUATION
Return on Assets and Return on Equity
CHART 6- ROA and ROA of BPI from 2011 to 1013.
As the figure illustrates, both indicators were negative in 2011. For the ROE ratio it
means that shareholders were losing money and for ROA it means that the bank was
having negative returns by the assets it financed. However, even though negative, the
its percentage it is not alarming. Both recovered very similarly for the next years,
slightly decreasing in 2013 where both values come very close to 0, the breakeven
point.
-0,07
-0,06
-0,05
-0,04
-0,03
-0,02
-0,01
0
0,01
Return on assets
Return on equity
0
100000
200000
300000
400000
500000
600000
2011 2012 2013
Net Profit Margin
Net profit margin
2013 2012
16
CHART 7 Net Interest Margin of BPI.
The net interest margin for BPI is quite high and shows a relatively position. From the
previous ROA chart it can be seen that the small difference in these values may be
connected to assets profitability. In 2011 this last indicator was negative and we can
verify that in this chart 2011 is where they have their lowest value. In the same way,
2012 was the year where the ROA was the highest and it can be seen it is also the year
where net profit margin was also the highest. ROA dropped a bit in 2013 as well in net
profit margin. For these reasons, it is possible to claim that in BPIs case there is a
strong linkage between assets profitability and its net profit margin.
CHART 8- Equity-to-Total-Assets Ratio of BPI.
For this indicator it is noticeable that has been a very small change throughout the
years, about 0,04%. The indicator of this ratio means that almost all assets are
financed by shareholders, which in return means that in case of liquidation they would
have the value of the assets almost all back.
0,92
0,93
0,94
0,95
0,96
0,97
0,98
0,99
1 2 3
Equity to Total Assets
Equity/Total Assets
17
CHART 9 -Provisions-to-Total-Assets Ratio of BPI.
This indicator, as it is desirable, is extremely low. This means that very little assets are
financed through debt. It should be highlighted that 2013 was the year where the
result was the lowest.
CHART 10 Loan-To-Deposit Ratio from BPI.
This ratio is extremely high, particularly in 2011 where it almost reached the
maximum. This means that the bank borrows almost all its deposits. From 2011 to
2013 this value dropped almost 10%, because both loans dropped and deposits from
clients augmented.
0,00275
0,0028
0,00285
0,0029
0,00295
0,003
0,00305
0,0031
0,00315
1 2 3
Provisions to Total Assets
Provisions/Total Assets
0,88
0,9
0,92
0,94
0,96
0,98
1
1,02
Loans/Deposits
2011
2012
2013
Loans to Deposits
18
5.5 - SUMMARY OF RESULTS
For potential investors BPI is not a very appealing bank, since it has been having
returns very close to zero for the last three years, even negatives in 2011. What is
more, it is assets did not present themselves as profitable neither. A curios situation,
since almost all assets are financed by the bank, in case of the banks liquidation,
investors would have almost their value back. Another very important indicator shows
that luckily the bank does not finance its assets through debt, which gives the bank
much more financial stability. However, it borrows almost all its deposits, which
indicates a lack of financing variety, even though it decreased almost 10% in two years.
Overall the bank improved all these indicators from 2011 to 2013, meaning it is on its
way to a more profitable path for the years to come. The question to ask is if this signs
of recovery will be enough for a prosperous growth in the foreseeable future.
6 - CAIXA GERAL DE DEPSITOS
6.1 - SINOPSIS OF THE HISTORY OF THE BANK
Caixa Geral de Depsitos (CGD) was first created by a new law in 10th of April of 1876,
under D.Lus kingdom, with the intent of collecting mandatory deposits either existent
by law or by courts imposition.
The bank gets its autonomy relatively to the local power for the first time in 1896,
where Caixa Geral de Aposentaes is created for the workers, when they retire.
For the following century, the country was under a severe dictatorship, which turned is
bank a holder of many companies that then become public, through a severe
nationalisation process.
After 25th April of 1974, the date that put the dictatorship into an end, the
reprivatisation of the companies began, and CGD started operating as a bank again.
In modern times, it holds also many other bank and insurance companies of the same
branch throughout the world, particularly with countries with some kind o socio-
cultural bond with Portugal. It also holds some shares in some of the most important
companies of the country.
20
6.2 - CGDS DATA TABLE
TABLE 5- Indicators for the three year period for CGD.
6.3 - TABLE OF ALL RATIOS RESULTS OF BPI
TABLE 6 - Results for all ratios for the three-year period for CGD.
21
6.4 - CGDS RATIOS EVALUATION
Return on Assets and Return on Equity
CHART 11 - ROE and ROE of CGD.
This chart is very similar to the one presented by BCP. ROE is negative and decreasing
constantly. From 2011 to 2012 dropped almost 5% and from 2012 to 2013 dropped
around 10%. In 2013 it stood at -22,15%, which is an alarming number. Since it is
owned by the Government, there are no potential investors to be discouraged by this
number, notwithstanding this means that the Government needs to reinvest its money
so as for the bank continues its activity, instead of profiting with it.
As for ROA, they are all negative and also decreasing, but they stand very close to zero,
so it is not that alarming. This means that the assets financed by the bank are having
negative returns.
-0,25
-0,2
-0,15
-0,1
-0,05
0
2013 2012 2011
Return on assets
Return on equity
22
CHART 12 Net Interest Margin of CGD.
The net profit margin in CGDs case suffered a tremendous drop from 2011 to the
following years. If analysing the ROA, it is observable it diminished, even though not
greatly. This can indicate that the most probable cause is due to an increase of
borrowings from CGD and therefore the amount of interest rate they have to pay is
higher or its loans to clients diminished, or even both at the same. Notwithstanding
these drops, the net interest margin is still a high number, so this is not a major
concern for the bank, however it is an alert to improve one of the aforementioned
situations, perhaps with an aggressive marketing campaign in loans terms.
CHART 13 - Shareholders Equity Ratio of CGD.
410.000.000
420.000.000
430.000.000
440.000.000
450.000.000
460.000.000
470.000.000
480.000.000
490.000.000
500.000.000
510.000.000
2011 2012 2013
Net Interest Margin
Net Interest Margin
0,91
0,92
0,93
0,94
0,95
0,96
0,97
0,98
0,99
1 2 3
Shareholders Equity Ratio
Shareholders Equity Ratio
2013 2012 2011
23
In all years the assets are financed by the Government. This means that in case of
liquidation the Government would get almost all their value back. This value dropped a
bit in 2013, but with no relevance.
CHART 14 - Provisions-to-Total-Assets Ratio of CGD.
Less than 1% of CGDs assets are financed through debt. This is a great indicator for
CGD, even because it dropped from 2012 to 2013. This shows the financial stability of
the bank.
0,008
0,0082
0,0084
0,0086
0,0088
0,009
0,0092
0,0094
0,0096
0,0098
0,01
1 2 3
Provisions-to-Total-Assets Ratio
Provisions-to-Total-Assets Ratio
2013 2012 2011
CHART 15 - Loan-to-Deposit Ratio of CGD.
It is observable that loans have grown far greater than the number of deposits. It has
been a consistent growth among this year-gap, were in 2013 loans are 10% more than
deposits. Usually this is not a good indication, as the bank requires other financing
sources, either through the Interbank Money Market (IMM), or in this case, since it is
owned by the Government, the emission of liabilities. Both these alternatives come
with a cost that will reflect itself on the interest rate that the bank proposes to loan
clients. This will have evidently to augment and therefore it runs the risk of being no
longer competitive. This way, the bank is potentially losing loan clients that are the
main source of profit of the banks activity.
6.5 - SUMMARY OF RESULTS
The three main indicators that are worrying about CGDs stability and capacity for
future growth are ROE, the Loan-to-Deposit ratio and ROA, in this order. What is more
worrying about these indicators is that throughout the years their results have been
aggravating.
ROE shows that CGD is having negative returns, which forces the Government to invest
more money. Loan-to-Deposit ratio also leads this way, if CGD wants to have a
competitive interest rate in the market. And ROA shows that the assets financed by
the Government are also having negative returns. Even though they stand close to
zero, the fact that they are negative and decreasing forces the Government to think
whether it should strategy on the type of assets to invest, or the amount of the
investment.
0,92
0,94
0,96
0,98
1
1,02
1,04
1,06
1,08
1,1
1,12
1 2 3
Loan-to-Deposit Ratio
Loan-to-Deposit Ratio
25
So far, even though these ratios present negative results, they are not negative enough
to make the Government considering stronger measures, such as privatisation,
nevertheless are strong enough to force the Government to reconsider its overall
strategy, if it wants these results reversed, instead of being injecting money to cover
debts that continue increasing.
7 - CONCLUSION
After analysing all these three banks, it is fair to conclude that any of these banks is a
star-preforming bank at the moment.
BPI must be distinguished from all three banks presented, as it is the only one showing
growing signals in this three-year analysis. If in 2011 its overall values were not that
good, in 2013, they are ok. It is not a star-performing bank, however, in the near future
it shows promises of improvement. If the investor has the Keynesian spirit and would
like to invest in something that shows potential to grow, even though it is not that
good at that moment, when it is cheaper, BPI is a good bank to do it.
A for BCP and CGD, their story is the opposite. Their overall indicators show a
decreasing rate, with 10% and 20%, respectively, of negative ROE in 2013. CGDs
situation is worth because the Government has been forced to intervene through CGD,
buying shares of other companies and even banks, to revitalise the economy. For this
reason, if the investments now made, despite not being profitable at the moment,
nothing can tell that in the near future they will be. Until then, CGD should revise its
whole structure and performance, otherwise for the foreseeable future its situation
will worsen quite a great deal, only unless the shares it bought now increase
drastically, which is never a safe assumption in economic terms.
BCP, likewise CGD, should revise its whole strategy. The most concerning fact is that is
has been presenting decreasing results year after year, being some negative in 2013.
On the contrary of BPIs situation, any shareholder would start to think of selling these
banks shares, being afraid of the result going down yet another year. Whether the
bank would like to reverse this situation, being of afraid of losing even more money if
all the shareholders start selling their part, it should announce a drastic measure or
event that would leave them more hopeful.