Impact of the COVID-19 crisis on the Portuguese banking system. Linear ordering method/Impacto de la crisis del COVID-19 en el sistema bancario portugues. Enfoque de ordenamiento lineal/Impacto da crise do COVID-19 no sistema bancario portugues. Abordagem de ordenacao linear.
| Autor | Korzeb, Zbigniew |
| Cargo | Research article |
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Introduction
In 2019, the Portuguese financial system comprised 152 credit institutions out of which 62 were banks. The five largest banks in Portugal account for 80-85% of the assets of the whole banking sector. Employment in credit institutions located in Portugal is over 46 000 people (Banco de Portugal, 2020). After some troubled years (2010-2017), the condition of the Portuguese banking sector has improved significantly (Association of Portuguese Banks--APB, 2019). It is evidenced, among others, by:
* Increase in Return on Equity (ROE) from (-)0.8% in December 2017 to 5.3% at the end of June 2019, compared to 6.4% for the euro area at that time,
* Decrease in Non-Performing-Loans (NPL) share in the portfolio from 17.5% in 2015 to 8.1% at the end of June 2019 (however, it is still 2.5 times the average for the euro area), and decrease in cost of credit risk in the audited period from 1.2% to 0.4%,
* Improvement in solvency (increase in Tier 1 ratio from 12.4% at the end of 2015 to 13.9% at the end of June 2019, although it is still below the euro area average),
* Improvement in liquidity (decrease in Loan-to-Deposit ratio from 96% in December 2015 to 88% in June 2019).
Meanwhile in 2020, the COVID-19 pandemic put an end to this recovery, it even reached Portugal relatively late compared to other Western European countries. In fact, pandemic-sensitive sectors such as tourism, hospitality, transportation and construction, for which a relatively early lockdown occurred, represent large shares of Portuguese banks portfolios (between 5% and 15% for the largest banks) and as a result of the COVID-19 escalation in Portugal in the second half of March 2020, some industries (bakeries, restaurants) recorded a drop in revenues over 70%, as well as traffic which decreased by 75%.
Then, as a consequence of the pandemic, the Portuguese economy has seen a sharp deterioration in macroeconomic parameters with several implications for the banking sector. Recent forecasts indicate a fall in GDP in 2020 by 3.4% (in February 2020 a rise of 1.7% was forecasted), an increase in unemployment rate up to 8.2% in 2020 (in February 2020, a 6.4% increase was indicated), a growth of the public debt-to-GDP ratio to 124.9% in 2020 (while in February 2020 it was estimated at 114.6%), and a fall in inflation rate as well as recession on the real estate market. Meanwhile, the economic support programme of the government amounts to [euro]12.5 billion, i.e. approx. 6.2% of GDP. This scheme covers inter alia: investments in the national health system, subsidies for households (e.g. temporary suspension of labour contracts), measures focused on tackling the liquidity problems of companies, deferring tax payments and credit lines for companies channelled through the banking system (with lower interest rates, grace periods, and longer maturities) as well as reduction of charges on electronic payments or deferral of loan repayment schemes (Gonçalves, Belo & Pinheiro, 2020). Moreover, during this time, banks also adopted measures to support both families and companies, either on its own initiative or within government programmes. Anyway, the managers of Portuguese banks estimate that the number of increasing write-downs will mean that banks will not make profits in 2020 and 2021, and will become the most affected group of entities by the pandemic (Winterbrun, 2020).
Given these gloomy predictions for Portuguese banks, in general, it is very important to assess the implications for each of them, trying to identify the most vulnerable ones and then help them with special politics. To the authors knowledge, no study has yet been produced to analyse the impact of COVID-19 on the Portuguese banking sector and so this is the main contribution we hope to make with this research; in brief, the main purpose of this paper is to assess the Portuguese banks in terms of their resilience to the consequences of the COVID-19 pandemic, and then addressing the aforementioned research gap.
In order to do so, we employ linear ordering methods in the sequence of previous analyses, as in the case of the assessment of impact of the pandemic on the 13 largest commercial banks in Poland (Korzeb & Niedziólka, 2020). However, the aforementioned study was based on only two linear ordering methods, i.e. TOPSIS method and Hellwig's approach. Although the linear ordering methods have been used by some authors, e.g. Hellwig (1968), Hwang and Yoon (1981), Strahl (1978), Nowak (1977) or Kukula and Luty (2015), they focused on specific individual linear ordering methods with limited procedure of double checking the results (which can be performed by the wide use of alternative approaches or by applying multi-method procedure), and those studies were not applied to the banking sector either. Meanwhile, our study is focused inter alia on the impact of the structure of bank industry portfolio on the resistance to COVID-19, since it may be decisive for NPL dynamics. In fact, Ari, Chen and Ratnovski (2020) also emphasised that the way of managing NPL portfolios seems to be crucial to the economic recovery during the COVID-19 crisis and thereafter.
The conclusions of the study presented in this article may be used in supervisory and regulatory policies and may be one of the premises that investors--who engage their funds in the purchase of bank shares--could take into account. Another contribution is related to the sensitivity of banks to the effects of the COVID-19 pandemic being important information for bank managers in the context of risk management process and in positioning banks against the peer competitors. The worked out measures may also be used in the structuring of financial stability indices or in rating methodologies.
The remainder of this article is structured as follows: section 2 reviews the most significant literature; section 3 describes the data and methodology employed in the empirical research; section 4 presents the results obtained; section 5 is dedicated to the discussion of results; whereas section 6 summarises and presents the main conclusions.
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Literature review
After several months of the pandemic spreading and the unpredictability of its future scale, it is difficult to draw clear conclusions about the impact of COVID-19 on the economy and consumer behaviour. The sources of the present literature review were both publications relating to the impact of the COVID-19 crisis on the real economy and the banking sector. The above approach results from the assumption of strong and two-way links between the real economy and the financial system.
At the outset, it is worth noting that unlike the subprime crisis, COVID-19 found the banking sector in good condition in terms of regulatory capital and liquidity levels. Taking this into account and also the results of analysing the substance of government programmes, it can be concluded that the banking sector could be part of the system designed to absorb the effects of the pandemic crisis (Demirguc-Kunt, Pedraza & Ruiz--Ortega, 2020; Borio, 2020).
Kohlscheen, Mojon and Rees (2020) simulated the spread of the pandemic and the recession caused by it. The authors pointed out that uncoordinated confinement generate the risk of another wave of epidemics, affecting individual economies sequentially. The second challenge is to coordinate, internationally, the efforts of governments to limit the effects of the recession. The authors do not believe that an uncoordinated policy to mitigate the effects of the recession will be effective. The scale of the recession in a given economy depends not only on the fiscal and monetary policy instruments used by the government of that country, but also on the policies pursued by other governments.
As we all know, a pandemic may become a permanent state. This makes necessary to have a plan in case the economy has to be locked down so as not to do so violently and recklessly. The lockdown should be sequential and the whole process is compared to the closure of a nuclear power plant. It is also important to design economic support activities in such a way that they do not trigger moral hazard.
A separate stream of research is dedicated to the prediction of measurable effects of the crisis. Boissay and Rungcharoenkitkul (2020) estimate that the global GDP decline as a result of the COVID-19 pandemic could amount to 4-4.5% approx., with a relatively higher output reduction in the largest economies (particularly in the United States, where a reduction of up to 9% is estimated). De Santis and Van der Veken (2020) assume that financial variables allow for earlier prediction of a recession than macroeconomic variables. These authors refer to the recession in 2008 and to the COVID-19 crisis, where the same financial variables (e.g. the change in the FED reference rate, determined solely by information from the financial markets) indicated a high probability of a sharp fall in GDP and an increase in macroeconomic risk earlier than macroeconomic variables. Leiva-Leon, Perez-Quiros and Rots (2020) proposed the concept of the Global Weakness Index (GWI), which was used to assess the repercussions of the COVID-19 crisis. Based on certain soft indicators on March 2, 2020, the GWI increased significantly and was sharper than it was in the 2008 crisis.
Aldasoro, Fender, Hardy and Tarashev (2020) indicate that the COVID-19 crisis is relatively milder for well capitalised and highly profitable banks. Schmieder, Sobrun, Takáts and Lewrick (2020) remark that banks have reached the COVID-19 crisis with excess of own funds over the Pillar 1 requirement. The above mentioned authors estimate that in the negative scenario, this surplus creates space for granting new financing, crucial for the recovery process, at the level of USD 5 billion approx. Meanwhile, Borio and Restoy (2020) indicate that recommendations to banks on the use of capital and liquidity buffers should be accompanied by...
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