Moody’s: GDP grows, but NPL is still a threat for the Portuguese banking

  • ECO News
  • 19 October 2017

The rating agency Moody’s maintained their "stable" outlook for the ratings of Portuguese banking, unlike what is happening with Portugal. This is justified by the weak quality of assets.

Moody’s continues rating Portugal as “junk”, but has made an upwards revision of the country’s outlook to “positive”. However, the Portuguese banking’s outlook remains “stable”, because in spite of the growth of the Portuguese economy, the quality of the assets in the financial sector is still weak. Non performing loans (NPL) still weights in the country’s banking.

“The stable outlook on Portugal’s banking system reflects our view that while sustained economic growth will lead to a mild decline in banks’ problem loans, their stock of non-performing assets will remain high”, stated Maria Vinuela, Assistant Vice President at Moody’s, in a note disclosed this Thursday.

As highlighted in September, the rating agency foresees that the context in which national banks operate will be more positive, considering the perspective that investment will increase in Portugal, exports will help GDP and the unemployment rate continues decreasing.

In spite of this, and although Moody’s believes in a relief of the NPL problem, those loans will continue being a large “burden” in the European context. “At end-June 2017, the banking system’s nonperforming loan (NPL) ratio, as defined by the European Banking Authority (EBA), stood at 17.5%, down from 20.1% a year earlier, but well above the European Union (EU) average of 4.5%”, Moody’s states.

Simultaneously to having a high level of NPL, the capital ratios of the Portuguese banking (11.5%, on average, in the end of June) will remain far from the EU (14%), “held back by low internal capital generation and high dependence on deferred tax assets”, emphasizes the agency that considers the evolution of the sector’s liquidity to be positive.

“More positively, Portuguese lenders have improved their funding and liquidity positions in recent years, helped by bank deleveraging, a resilient deposit base, and weaker loan demand. Moody’s foresees no pick-up in demand for new credit in 2018, and expects continued deleveraging to deliver further improvements in banks’ funding positions”.

Lastly, when it comes to profitability, Moody’s believes it will remain stable. “Although banks’ cost of risk will decline as more favourable economic conditions reduce new problem loan formation, this will be largely offset by weaker top-line earnings due to subdued business volumes and low interest rates”.