How has the banking sector in Portugal evolved over the last 25 years?

2000 to 2007: Credit expansion and reliance on external financing

Between 2000 and 2007, the Portuguese banking sector experienced a strong credit expansion. This growth was driven by the reduction in interest rates following Portugal’s accession to the euro area, and by increasing reliance on external financing.

Portugal’s integration into the single currency marked the beginning of a convergence period with the euro area, reflected in declining interest rates. Lower interest rates created favorable conditions for increased credit demand and, consequently, greater indebtedness of households and non-financial corporations.

Between 2000 and 2007, the amount of loans granted by banks to households increased by €58.5 billion, reaching €127.3 billion at the end of 2007. This corresponds to an increase of about €8.4 billion per year. Over that period, loans to households accounted for an increasing share of the banking sector’s total assets, rising from 25% to 29%.

From 2003 onward, the total amount of loans granted to households exceeded the value of their deposits, something that continued until 2013. In fact, this was the only period in the historical series (which began in December 1979) in which households, as a whole, were financed by banks rather than the opposite.

Between 2000 and 2007, loans granted by banks to corporations increased by €40.3 billion, reaching €101.6 billion. This corresponds to an annual increase of approximately €5.8 billion. The proportion of these loans within total banking sector assets increased marginally, from 22% in 2000 to 23% in 2007.

The combined evolution of these aggregates led to an increase in the loan-to-deposit ratio ? For example: A loan-to-deposit ratio of 123% means that, for every €100 deposited by customers in banks, the banks lent €123 to their customers. We define customers as households and corporations resident in Portugal. reflecting a period of significant credit expansion that was not matched by proportional deposit growth.

In this context, credit growth was largely financed through increased reliance on external funding. The creation of the euro area promoted greater financial market integration and facilitated Portuguese banks’ access to international interbank markets ? The interbank market is the mechanism through which banks, in the process of managing their liquidity, obtain loans from other banks. . Between 2000 and 2007, funding obtained from non-resident banks more than doubled, reaching €138.9 billion at the end of the period. This altered the Portuguese banking system’s funding structure: household deposits, which represented 30% of the total balance sheet at the end of 2000, ceased to be the main source of funding. By 2007, this position was held by international interbank funding, which accounted for 32% of banks’ total assets.

The access to external financing enabled Portuguese banks to sustain credit growth at a time when deposit growth was insufficient to meet the credit demand. However, this strategy made the banking system more vulnerable to external shocks.

2008 to 2010: The impact of the international financial crisis

Between 2008 and 2010, the international financial crisis significantly reduced Portuguese banks’ access to external funding. In response, the sector relied more heavily on debt issuance and liquidity from the European Central Bank (ECB). Despite this adverse environment, credit continued to grow, although at a more moderate pace.

This period was marked by the international financial crisis triggered by the collapse of the subprime mortgage market in the United States and worsened by the bankruptcy of Lehman Brothers in September 2008. The subsequent disruption in international financial markets caused a sharp contraction in global liquidity and substantially hindered access to interbank markets.

In Portugal, credit growth slowed. Loans granted to households increased by about €4.6 billion per year, totaling €141.2 billion at the end of 2010 (25% of total assets). Loans granted to corporations grew by approximately €4.3 billion per year, reaching €114.6 billion at the end of 2010 (21% of total assets).

It was during this period that the loan-to-deposit ratio reached its peak (169% in 2009), highlighting the increased exposure of the Portuguese banking sector to adverse shocks amid heavy reliance on non-deposit funding.

There was also an increase in investment in Portuguese government debt securities. The outstanding amount of Portuguese public debt held rose by €19.1 billion, reaching €22.9 billion at the end of 2010 (rising from 1% of total assets in 2007 to 4% in 2010).

At the first signs of the international financial crisis, Portuguese banks lost access to international interbank funding, one of their main pre-crisis liquidity sources. By the end of 2010 funding from non-resident banks represented 20% of banks’ total assets, significantly below the 32% recorded in 2007.

The constraints imposed by the crisis led Portuguese banks to diversify their funding sources, notably through debt issuance and recourse to ECB liquidity.

Between 2007 and 2010, total debt issued by the banking sector more than doubled, increasing from 8% of the total balance sheet in 2007 to 15% in 2010. This reflected the need to replace scarce external interbank funding.

To mitigate financial market disruptions and ensure banking system stability, the ECB adopted unprecedented monetary policy measures, significantly expanding liquidity-providing operations. This source of funding became increasingly important for Portuguese banks: their share of total assets rose from 1% at the end of 2007 to 7% at the end of 2010.

2011 to 2014: The impact of the sovereign debt crisis

Between 2011 and 2014, the euro area sovereign debt crisis led to a sharp contraction in credit, increased defaults, and the shift from external funding sources to deposit-based funding, so as to safeguard the liquidity of the banking system.

The crisis particularly affected peripheral economies, including Portugal, where the banking sector faced significant liquidity pressures.

During this period, loans granted to households and corporations declined. Household loans decreased around €4.5 billion per year, while their share of total assets remained broadly unchanged (26%). Loans granted to corporations fell by nearly €7.0 billion per year, reducing their share to 18% of assets by the end of 2014.

Recession, rising unemployment, and increased economic uncertainty led households and firms to reduce credit demand. Default levels rose, and banks tightened lending standards.

In 2014, overdue loan ratios reached historic highs in household lending. By year-end, 13.3% of all consumer and other purposes loans and 2.5% of all house purchase loans were overdue. Concerning loans granted to corporations, 14.2% were overdue at the end of 2014.

During this period, access to international interbank markets remained limited. Funding from non-resident banks declined by €58.3 billion compared with 2010 (around €14.6 billion per year) and accounted for only 11% of total assets.

As an alternative funding source, Portuguese banks strengthened deposit mobilization, particularly from households. Between 2011 and 2014, interest rates on household deposits with agreed maturity remained consistently above the euro area average.

In 2012, the average interest rate on deposits with agreed maturity even exceeded the average interest rate on household loans, highlighting the banking sector’s efforts to attract savings.

Between 2010 and 2014, household deposits increased by €13.8 billion (about €3.5 billion per year), rising to 28% of total assets. This growth, combined with strong credit contraction, led household deposits once again to exceed household loans, restoring the status of households as net financiers of the Portuguese banking sector.

2015 to 2021: The reduction of overdue loans and increasing liquidity

Between 2015 and 2021, following years of crisis, Portuguese banks entered a phase of balance sheet consolidation. In a context of historically low interest rates, overdue loans declined, and liquidity increased.

During this period, banks strengthened their financial soundness, particularly through reducing overdue loan amounts. Many of these loans were deemed unrecoverable, recognized as losses, and removed from banks’ balance sheets.

Between 2015 and 2021, cumulative write-offs ? Loans that the bank considers uncollectible, abandons any attempt to recover, and therefore recognizes as a loss and removes from its balance sheet. amounted to €24.3 billion, averaging €3.5 billion per year. As a result, the overdue loan ratios fell significantly, gradually approaching pre-crisis levels.

Loans granted to corporations decreased by €10.8 billion (about €1.5 billion per year), representing 16% of total assets. Household loans increased moderately by €1.9 billion, maintaining a 26% share of assets.

The Portuguese economy experienced modest growth during this period, marked by a still fragile post-crisis recovery. In this context, the ECB adopted a highly expansionary monetary policy, lowering the key ECB interest rates to historically low levels — including zero and negative values — with the goal to stimulate economic activity by reducing borrowing costs.

The average interest rates applied by Portuguese banks followed this trend: between 2015 and 2021, the average interest rate on household loans fell by 0.59 percentage points to 1.96%, while the average interest rate on deposits with agreed maturity dropped by 1.95 percentage points to 0.08%, the lowest year-end value in the historical series.

Between 2015 and 2021, household deposits increased by €40.1 billion (about €5.7 billion per year). This growth occurred in an environment of low remuneration on deposits with agreed maturity, resulting in a strong increase in overnight deposits (an increase of €51.1 billion) and a decrease in deposits with agreed maturity (a decrease of €11.9 billion).

Household deposits became, once again, the main source of funding for Portuguese banks, accounting for 37% of total assets by the end of 2021. This increase also restored liquidity to the banking system. During this period, the loan-to-deposit ratio fell below the 100% mark.

2022 to 2025: Strengthened liquidity and the return to positive interest rates

Between 2022 and 2025, in a context of post-pandemic economic recovery and the beginning of an interest rate hiking cycle, Portuguese banks increased their investment in securities. Deposits continued to grow and reached historic highs, consolidating their position as the sector’s main funding source.

The post-pandemic recovery was accompanied by inflation rates persistently above 2%. In response, the ECB began the process of normalizing its monetary policy, raising the key interest rates after a prolonged period of negative rates.

The excess liquidity accumulated during the previous period was largely channeled into securities investment. In December 2025, Portuguese banks’ securities portfolio amounted to €166.3 billion, €38.6 billion more than in December 2021. The sector’s exposure to foreign public debt more than doubled, accounting for 38% of the total debt securities portfolio. By the end of 2025, debt securities represented about one-third of total assets — the highest share in the historical series.

During this period, household deposits continued to rise, reaching a historic high of €200.7 billion in December 2025. With an annual increase of around €7.0 billion, household deposits consolidated their position as the main funding source of the banking sector. As a result, the loan-to-deposit ratio fell to a historic low of 78% in December 2025.

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