The rating agency says the Portuguese financial sector faces two major challenges: on the one hand, non-performing loans, and on the other, the risk low interests represent for capital ratios.
The DBRS looks favorably at the solution found by Caixa Geral de Depósitos (CGD), one that contributes to the elimination of some uncertainty in the Portuguese financial sector. However, the rating agency keeping Portugal eligible for the ECB purchase programme says there are still two major challenges faced by the national banking. On the one hand, non-performing loans; on the other hand, the risk low interest rates represent for capital ratios.
"In DBRS’s view the recent measures taken by the Portuguese government to promote banking stability could partly remove some of the uncertainties and concerns that have been surrounding the Portuguese banking sector since the resolution of Banco Espírito Santo S.A. (BES).”
Among other actions, the agency highlights the recapitalization of CGD, “although the timing and final terms of the recapitalization still remain uncertain”. But banking continues to face many challenges.
DBRS considers “Portuguese banks have a high stock of NPL’s”, but underlines the weight of the level of credit at risk has not deteriorated substantially since the end of 2014. The total amount of NPL is of around 21 billion euros. According to the European Banking Authority, the Portuguese banks had a 19.7% NPL ratio at end-June and the coverage was 41.7%.
National banking has one of the highest NPL ratios
In light of this, DBRS says “additional legislative reforms are needed to accelerate the clean-up of the bank’s balance sheets and to facilitate the proactive management of problem assets by the banks”, highlighting the process is, in Portugal, “very lengthy”. Therefore, “the creation of a vehicle for bad loans could help to accelerate the banks’ balance clean-up.”
Banking has a high stock of non-performing loans and low capital levels, being this the second challenge the sector faces, according to DBRS, in a universe of negative interests. “The combination of low profitability prospects and the fact that Portuguese banks’ regulatory capital levels are below most European peers is a major credit concerns.”
“DBRS expects organic capital generation to remain limited for most Portuguese banks during the remainder of 2016 and in 2017, as most banks remained loss making in 2016”, pointing out the major struggle the sector has to face would be the negative interest rates that influence businesses margins.
The official comments brought forward by DBRS also mentions: “Portuguese banks need to increase capital levels to fully remove investors’ concerns about the banking system’s asset quality adequacy”. In this sense, the Canadian agency recalls BCP is negotiating the entry of a new investor, Fosun, and BPI with CaixaBank’s takeover bid.
DBRS, that kept Portugal’s rating above junk status, left the national banks’ assessments unchanged, in spite of all concerns. CGD, Santander Totta and Popular de Portugal are all banks with a BBB rating, investment level, as for BCP and Montepio, they are at BB. Novo Banco, however, is at CCC.