Moody’s is optimistic about the Portuguese banking system. Outlook changed to “positive”

Moody’s is far more optimistic about the Portuguese banking system at the moment. The fall back in bad debt, or non-performing loans, has led the rating agency to improve the outlook of the Portuguese banks.

According to the rating agency’s official note, “the main drivers are the ongoing reduction of the stock of troubled assets, while capital and profitability improve and funding conditions remain stable”. The rating agency believes this is due to improve the banks’ profitability.

“Banks’ stock of problematic assets will continue to decline, although it will remain high by European standards,” said Maria Vinuela, an analyst at Moody’s. “Enhanced coverage levels [of non-performing loans] at some banks will enable them to perform portfolio sales in the coming months, which will help ease the problem of loan burden.”

With these upcoming portfolio sales, the agency anticipates that there will be a considerable reduction in NPL ratio, which stood at 12.4% at the end of 2018, in comparison to the 17.5% registered the year before (as defined by the European Banking Authority).

With the reduction of NPL, even though there is a prospective slowdown coming ahead for the Portuguese economy — with Moody’s expecting a 2.1% growth for 2018, slowing to 1.7% in 2019 — the agency foresees several improvements in the Portuguese banks’ creditworthiness over the next 12 to 18 months.

Portuguese banks’ profitability will improve “as the lower cost of risk and cost of cutting offset revenue pressure due to subdued lending and low interest rates”.

In terms of capital levels, these should remain “relatively weak” but banks will have a “greater capacity to absorb credit costs following deleveraging”, and the rating agency warns that “a large volume of deferred tax assets overstates Portuguese banks’ capital, which remains weaker than that of other European banking systems”.