Portuguese Banks Close 2025 as the Eurozone's Most Profitable — A Turnaround Decade in the Making

A decade ago, Portuguese banking was synonymous with crisis. The collapse of Banco Espírito Santo in 2014, the costly restructuring of Novo Banco, and a state-owned Caixa Geral de Depósitos weighed down by political lending -- these were the defining stories. In 2025, the narrative has completely inverted. Portugal's three largest banks posted record profits, making the country's banking sector the most profitable in the entire eurozone.

Público reported this week that CGD, Banco Comercial Português (Millennium BCP), and Novo Banco all closed 2025 with their best-ever results, pushing Portugal to the top of the eurozone profitability rankings. BCP alone crossed the one billion euro mark in net income for the first time, with a return on equity of 14.1 percent.

How Did We Get Here?

The answer is a confluence of factors that Portuguese banks were uniquely positioned to exploit. The European Central Bank's aggressive rate-hiking cycle from 2022 to 2024 was the primary catalyst. Portuguese banks, with their heavy reliance on variable-rate mortgage lending, saw net interest margins expand dramatically as Euribor climbed -- while deposit rates remained stubbornly low.

But the rate environment was only part of the story. All three banks had undergone painful restructuring in the years prior. CGD completed a major recapitalisation and management overhaul. BCP slashed its non-performing loan ratio from above 10 percent to under 3 percent. Novo Banco, once the "bad bank" offspring of the BES collapse, had been transformed under private equity management into a lean, profitable institution.

The cost-cutting was severe. As The Portugal Brief reported earlier this week, Portugal's banks spent nearly one billion euros on early retirements while collective layoffs hit a five-year high. The profitability at the top came at a real human cost at the branch level.

The Interest Rate Tailwind Is Shifting

The irony is that the very factor driving these record profits is now beginning to work in reverse -- and then reversing again. The ECB had been cutting rates through late 2024 and into early 2025, which should have compressed margins. But the Middle East conflict has pushed Euribor sharply higher in recent weeks, creating a new wave of uncertainty.

For the banks, the short-term effect of rising Euribor is actually positive for margins. But the medium-term picture is more complex. Higher rates increase credit risk, push some borrowers toward default, and -- as Portugal has already seen -- trigger political pressure for consumer protections. The Bank of Portugal's downgraded growth forecast of 1.8 percent for 2026 suggests the broader economy is cooling, which eventually feeds through into loan demand and asset quality.

What This Means for Residents and Expats

For those banking in Portugal, the record profits raise an obvious question: where are those gains going? Deposit rates in Portugal remain among the lowest in the eurozone, even as banks earn record spreads. Term deposit rates only recently ticked upward for the first time since October 2025, and they remain well below what banks in Germany, France, or the Netherlands offer.

The competitive dynamic is partly structural. Portugal's banking market is highly concentrated, with three institutions controlling the vast majority of deposits. Without a credible threat from digital challengers or foreign entrants, there is limited pressure to offer better rates. For expats used to higher-yielding savings products in their home countries, the gap can be jarring.

On the lending side, the picture is equally mixed. Mortgage approvals have remained robust, but total mortgage debt hit a record 112.4 billion euros in March. With April payment reviews now reflecting the war-driven Euribor spike, many homeowners are about to see their monthly costs jump for the first time in over a year.

A Story of Transformation -- With Caveats

The turnaround of Portuguese banking from eurozone basket case to eurozone leader is genuine and impressive. But it rests on foundations that are not entirely within the banks' control: interest rate differentials, a concentrated market, and a period of unusually low credit losses. Whether these record profits translate into investment, innovation, and better services for customers -- or simply into dividends and buybacks -- will determine whether the transformation is durable or merely cyclical.

For now, Portugal's banks are riding high. The question is how they navigate what comes next, with geopolitical uncertainty, rising energy costs, and a slowing economy all bearing down on the horizon.

Related reading: Mario Centeno Retired at 72% of Final Salary While Still Sitting on Bank of Portugal Council