Are Portuguese banks worse than the European? Yes.

Capital ratios far from European averages and many non-performing loans (NPL) with low risk of recovery compared to potential losses: the issues of sustainability and resilience of the European financial system have been discussed in the balance sheets of banks. In the last portrait painted by the European Banking Authority (EBA), Portugal did not exactly cut a dash. Even so, there are some Portuguese banks not as worse as others. How does the Portuguese financial system relate to the European reality?

Capital sin

In the last painting of the European banking system – with data up to July 30, 2016 –, the Portuguese banks were more fragile in terms of capital than the European average: the Common Equity Tier 1 ratio (CET 1) for Portugal was an average of 11.18%, while in Europe, it was 13.64%.

These are the ratios authorities look into in order to assess the strength of an institution against an economic adversities’ scenario. The lower the ratio, the more unsafe the bank is. As for Portugal, Caixa Geral de Depósitos (CGD) and Montepio had ratios slightly over 10%.

Basel III regulates that all banks must have a minimum 4.5% ratio until 2019 in any economic scenario. CGD failed the test: it would not be able to do so if the worst case scenario were to happen.

As an alternative, banks can improve their financial position through reducing the riskier assets – for example, selling their non-performing loans. The government aims to find a vehicle to help solve this problem.

How are loans performing?

The main problem banks have to face has been identified: non-performing loans. If the economic situation worsens, NPL increase, which means more companies will close down, leading to unemployment and to having, therefore, companies and families unable to pay their debts.

In the Portuguese banking, there are 40 billion euros of non-performing loans – a little over 20% of the overall credit granted, while the European average was 5.4%.

BPI was, among other Portuguese banks, the closest to the European average: it ‘only’ had at risk 8.16% of credit. Novo Banco was at 36% – no wonder his CEO, António Ramalho, is keen on finding a joint solution for NPL. CGD had the second lowest percentage of non-performing loans, although that number should increase in the second quarter of this year.

Impair, impair, impair

The Portuguese banks are also worse off than the European average concerning accumulated impairments on NPL. However, it is not fair to make such comparison given the fact that the effort made by the Portuguese institutions was much greater due to the amount of non-performing loans.

According to the information given to the EBA, the Portuguese banks had over 17 billion in impairments by the end of June 2016. This amount covered 41.2% of the overall amount of NPL; in Europe, the accumulated impairments on NPL was 43.8%.

Novo Banco and CGD were the Portuguese financial institutions which have clearly made the best effort to prevent those types of credits: the public bank (CGD) will set aside 5.1 billion euros to cover non-performing loans as they come.