Portugal's Banking Advantage

Includes: EWG, EWP
by: Global Investing Editor

Q2 German economic recovery hit 2.2% growth year over year, the best level since the country was reunified. Germany now looks like it will be leading the European Union (EU) out of the global economic crisis if it learns to work and play and share with others.

The German economic growth spurt also saw the Germany statistical office, Destatis, revising upward its earlier Q1 2010 growth from 0.2% sequentially to 0.5%. After a slowdown related to bad weather at the start of the year, Nouriel Roubini asserts:

The German economic upswing gained substantial momentum in H1 2010, leading the recovery in the eurozone.

However, not so fast. Germany is of course the export dynamo of Europe and was well positioned to gain from the low euro exchange rate earlier this year along with demand for its technology from the BRIC countries. But apart from a bit of spillover to Holland and Austria, its neighbors, German growth tends to stay in Germany. It does not work as a locomotive for the rest of Europe.

Another country doing surprisingly well on exports, if not on growth, is Portugal, where I now am. The government now expects 2010 to see growth at a level of 0.7%, not exactly stunning but much better than EU experts and others had predicted. Moody's in its latest report figures that Portugal's growth in 2010 will be 0.5%, not as optimistic, but still ahead of the European Union executive forecast which was 0.3%.

For Portugal, 2010 still shows an economic crisis due to the government deficit, which is equal to 7.3% according to Lisbon and 7.5% according to Moody's. Portuguese exports have been on a roll, and account for most of the growth being booked, with H1 exports growing 11.3% in nominal terms, and even higher at 12.3% in Q2.

These figures come from a speech Premier Jose Socrates delivered last night. Giving a hostage to fortune, he concluded:

These encouraging signals that we are on the right path show that the Portuguese economy is recovering.

Portugal, with under 8 million people, is not exactly a well-watched economy. If Germany is the locomotive, then Portugal is the caboose.

Portuguese exports range from food and wine to cork, cars to the many spare parts for them, cheap textiles to pulp and paper, natural gas to renewable (windmill) electricity, and upmarket footware to stripped down elementary school computers. But their financial services sector is the surprising winner.

Portuguese banks are cashing in without any stress (or stress tests), thanks to a huge boost in riskless commission income from operations, up 12.6% in H1. We are not talking about investment banks, but the deposit-taking, loan-making commercial banking business. The top 5 here earned 7.7 million euros per day in commissions during H1.

Of course, low interest rates help since bank charges tend to be sticky. But there is another factor: Portuguese banks are winning business from abroad, and not just the classic tourism-linked foreign exchange operations for British and Scandinavian visitors (whose numbers are off this year from the crisis.)

Portugal is developing a new service market, for its only near-land-neighbor, Spain. Worried about their own real-estate-loan-strapped banks and caixas, Spanish savers and businesses are moving money into Portugal, incurring foreign exchange fees which are profitable for the Big 5 banks, plus Santander (STD) and Barclays (NYSE:BCS), which also are active in Portugal.

While euros operate as a single currency all over the EU, banks still charge for cross-border transfers. According to an Algarve banker source, the main inflows are from corporate accounts and the commissions and fees are negotiated, but still very profitable for the Portuguese banks.

He denies that Portugal is peddling to other Europeans access to its own unique offshore banking center, in Madeira, which belongs to Portugal. But he would say that, right? Today, two top-level Spanish bankers have been charged with insider trading over the BHP Billiton (NYSE:BHP) bid for Potash (NYSE:POT).

Portugal's and Germany's economies seem to be gaining from the troubles of others.

Disclosure: No positions