IMF salutes Portugal’s solution for NPL

  • ECO News
  • 30 June 2017

Banking is in a better shape, but NPL continues to be a problem. IMF states the platform to solve non-performing loans may be good, but business models need to be reinforced.

Portuguese banking is in a better shape. Capital increases reinforced the sector, the deleverage process continues, but the International Monetary Fund (IMF) warns against the NPL problem. Creating a platform to better solve those loans is “important”, but it doesn’t make all problems disappear.  IMF believes the sector should reinforce its business model, namely by cutting back on costs.

Portuguese banks are liquid and continue to make progress on deleveraging”, is one of IMF’s conclusions from their Article IV Mission during June 19 to 29. “Nevertheless, they face numerous challenges, including low asset quality, weak profitability and limited capital buffers“, the IMF states.

The outstanding stock of non-performing loans (NPLs) declined by 0.3 percentage points in 2016 to 17.2 percent of total loans […] with the weakness in asset quality particularly concentrated in the corporate sector”, the IMF states, highlighting that there has to be “a comprehensive cleanup of banks’ balance sheets” and a “reduction in corporate debt”.

IMF also believes this cleanup of banks’ balance, with special focus on companies’ NPL, “should include a credible and time-bound plan for efforts across banks to write-off, restructure or sell non-performing assets“. “The NPL enhanced coordination platform being developed by banks with the support of the authorities is an important initiative that could facilitate banks’ efforts in this regard”, the IMF states. The Government has already presented their plan to banks.

According to the Fund headed by Christine Lagarde, “these efforts will need to be supported by strengthening banks’ business models and improving profitability, including through further cost-cutting. Banks will also need to implement the new
provisioning standards and build additional buffers”.