Banco de Portugal releases today the Annual Report – Activities and Financial Statements 2018 (in Portuguese only).

I. Activities

Banco de Portugal took part in the monetary policy decisions of the Governing Council of the European Central Bank and ensured their implementation among the resident credit institutions, along with the purchase of financial assets under the Eurosystem's asset purchase programmes.

In 2018 the Governing Council of the European Central Bank (ECB), of which the Governor of Banco de Portugal is a member, maintained its accommodative monetary policy, keeping favourable financing conditions for the euro area economy. In December it decided to end monthly net purchases under the asset purchase programme, but announced that it will continue to reinvest the principal payments from maturing securities for an extended period of time after it starts raising the key ECB interest rates.

During the year, Banco de Portugal implemented monetary policy operations with resident credit institutions and purchased financial assets under the Eurosystem's asset purchase programmes. On Banco de Portugal's balance sheet, the average balance of the monetary policy portfolios and the purchases made under the programme increased 23% in 2018 to €49,319 million. The securities bought under the public sector purchase programme had an average share of around 88% of the total portfolios volume.

Banco de Portugal went ahead with the launch of instant transfers, a payment solution that may change consumers’ habits.

In 2018, the revised Payments Service Directive (PSD2) was transposed into Portuguese law. The new Decree-Law acknowledges and regulates two new payment services, establishing more demanding security conditions for electronic payments. Banco de Portugal encouraged payment service providers to adopt the new requirements in good time, which required, inter alia, renewal of the authorisations to carry out the activity granted to payment institutions and electronic money institutions.

Instant transfers can now be made through SICOI, the interbank clearing system managed by Banco de Portugal, which processes most payment operations placed by individuals and enterprises. With instant transfers, funds are provided to the beneficiaries in seconds, irrespective of the date or time in which the transaction takes place. Banco de Portugal also joined the Eurosystem's instant payments service, enabling Portuguese banks to offer their customers instant transfers to other European countries.

With a view to safeguarding financial stability, Banco de Portugal took part in the work to strengthen the legal framework applying to credit institutions and investment firms. It introduced limits on the criteria used by the institutions in granting new credit and addressed the sustainability challenges in the Portuguese banking system, namely the developments in non-performing loans.

In 2018 Banco de Portugal participated in the development of new legislation and regulations in prudential, banking conduct and resolution areas, and also in regard to money laundering and terrorist financing prevention. It took part in the work to complete the Banking Union and revise the functioning of the European System of Financial Supervision. It drew up several documents, including a preliminary draft of a Banking Activity Code, already presented to Government.

With the purpose of ensuring that credit institutions and financial companies apply prudent criteria when granting new credit, Banco de Portugal adopted a macroprudential measure in the form of a recommendation, introducing limits to some of the criteria used in consumers’ creditworthiness assessment within the scope of housing loans, credit secured by a mortgage or equivalent guarantee, and consumer credit.

It checked, bank by bank, the governance and internal control mechanisms implemented and encouraged the reinforcement of capital and liquidity positions, the strengthening of the business models and the reduction of non-performing loans and other problem assets. The capital position, liquidity ratios and profitability indicators reached record highs since the financial crisis, at levels comparable to the average for euro area institutions. The asset quality indicators continued to develop positively. 

At the end of 2018, the non-performing loan stock came to €25.9 billion, around half the maximum of €50.5 billion of June 2016.

In money laundering and terrorist financing prevention, Banco de Portugal carried out 20 inspections and issued 198 supervision measures. 

It analysed 10 cases of potential withdrawal of authorisation of credit institutions, financial companies and payment institutions, and 31 cases of potential re-evaluation of the suitability of members of the management and supervisory bodies of institutions supervised.

Banco de Portugal took part in the national and international debate on innovation in the financial sector.

Banco de Portugal hosted meetings with fintechs, created a dedicated contact channel (Fintech+) and, jointly with the Insurance and Pension Funds Supervisory Authority (Autoridade de Supervisão de Seguros e Fundos de Pensões), the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) and Portugal Fintech, launched Portugal FinLab, a communication platform linking financial sector innovators to Portuguese regulators. It also undertook experimental work on new technology platforms and participated in the Eurochain project, promoted by the ECB, looking into the creation of a digital central bank currency.

New powers were taken up in relation to retail banking market supervision. To ensure the transparency of the information supplied to bank customers, a Fees Comparator was launched on the Bank Customer Website.

Banco de Portugal took on functions of authorisation, registration and supervision of the activity of credit intermediaries, as well as the certification and monitoring of training entities of credit intermediaries and of employees of the institutions involved in offering loans for house purchase.

The Bank oversaw the conduct of the supervised entities offering retail banking products and services, monitoring the entry into force of new regulations on mortgage credit, payment accounts, structured deposits and payment services. With retail banking products and services increasingly being offered through digital channels, the Bank sought to ensure that supervised institutions comply with the duties of information and assistance also in these channels. 

It was decided to initiate 113 administrative offence proceedings and 195 were concluded.

Following the supervisory work carried out on several fronts, the Bank initiated 113 administrative offence proceedings and concluded 195. To prevent and repress illicit financial activity, it conducted inquiries in 218 proceedings.

Banco de Portugal reinforced the quality of the information it provides to the public and to firms on the credit they are responsible for.

In 2018, Banco de Portugal researchers completed 47 studies on the Portuguese economy, the euro area and the financial system. At the end of the year, 113 were in progress or in a final phase of revision. These 160 studies involved the participation of 135 external co-authors. Banco de Portugal’s Microdata Research Laboratory (BPLim), located at the Porto Branch, hosted 34 scientific projects.

In statistics, the year was marked by the launch of the new Central Credit Register, the database on loans granted by institutions in Portugal. This redesign allowed the Bank to enhance the information that it works with and provides to the public and to firms, through credit liabilities reports, on the credit in their names. 

As a complement to the knowledge produced in its core business, Banco de Portugal organised several national and international conferences.

The internal rules on ethics and business conduct were strengthened.

Banco de Portugal put in place systematic internal procedures to prevent conflicts of interest and to monitor the limits to private financial transactions. Following the ECB’s approval of the Single Code of Conduct, the members of the Board of Directors became subject to a set of requirements and control mechanisms that are standardised across Europe.

The Data Protection Office conducted a comprehensive diagnostic exercise into the handling of personal data and adopted an action plan to ensure compliance with the new General Data Protection Regulation, which came into force in May 2018.

II. Accounts

The balance sheet of Banco de Portugal totalled €158 billion at the end of 2018.

The balance sheet of Banco de Portugal totalled €158 billion at the end of 2018, a €5 billion increase from 2017. Drivers of this included: 

1. Increased participation in the public sector purchase programme (PSPP), in the Portuguese government debt securities component, which grew to €31 billion (a €4,900 million increase). This increase was partly offset by the maturing of targeted longer-term refinancing operations of the first series (TLTRO I) and the early repayment of TLTROs of the second series (TLTRO II), totalling €3,298 million;
2. The €1,407 million reduction in net foreign reserves and euro assets arising from the decision to reduce exposure to foreign exchange risk, offset by a decrease in intra-Eurosystem liabilities. This decrease reflects Banco de Portugal's investment decisions, within the limits set by the agreements established at Eurosystem level;¹  
3. The €481 million increase in the value of gold on the balance sheet, due to the positive evolution in its euro price. The quantity of gold remained unchanged at 382.5 tonnes, valued at €13,786 million at the end of 2018; and
4. The €1,377 million growth in banknotes in circulation, reaching €28,051 million, a reflection of the increase in circulation at Eurosystem level.

Net profit for 2018 came to €806 million.

The main components of Banco de Portugal’s net profit include: 

1. Net interest income, which came to €1,065 million, a year-on-year increase of €55 million; 
2. Gains/losses arising from financial operations, at €68 million;
3. Net result of pooling of monetary income, at €73 million, down €54 million from 2017. 

The decrease in the general risk provision in 2018 was primarily the result of the structural reduction of the exposure to foreign exchange risk, pursuant to the aforementioned decision to change long-term investment policies, leading to the reduction in the amount of foreign currency assets in the asset management portfolios.

Total administrative expenses came to €206 million, a €2 million fall year-on-year (-0.8%). This reduction results from the €4 million decrease in Supplies and services from third parties (-7.7%), largely due to lower advisory expenses relating to the sale of Novo Banco (-€6 million), which were partly offset by a €2 million increase in staff costs (+1.8%).

The net profit enabled the distribution of dividends to the State to the amount of €645 million (€525 million in 2017). Total dividends and income tax (recorder in the Profit and loss account) for 2018 amounted to €1,003 million.