Fitch: Cost efficiency of portuguese banks requires more investment in technology

Fitch issued a note about the progress made by national banks in the first half of the year. the agency underlines the improvement in the level of asset quality and profitability, but also calls for more investment in technology as a way for banks to increase their cost efficiency.

In a note released this Monday, the financial rating agency began by highlighting the fact that Portuguese banks have continued to reduce the high levels of problematic assets in the first half of the year. In this context, it estimates that the average loan impairment ratio of the six main domestic banks (Caixa Geral de Depósitos, BCP, Santander Totta, Novo Banco, BPI and Banco Montepio) was reduced to around 9.6% at the end of June, compared to 11% at the end of 2018, highlighting the high sales of assets, cures and recognition in impairment accounts.

The agency also highlights the recovery of operational profitability as a result of a more adequate control of costs, lower financing costs and lower impairment costs. But it anticipates that, due to the prospects of low interest rates, weak demand for credit and strong competition, the margins of most banks should be tighter.

Regarding capital buffers, the agency explains that they improved in the first half of the year due to the generation of results, the issuance of subordinated instruments and the reduction of risks.

Despite this positive balance, Fitch points to three areas in which it considers necessary to pay attention. One of them is related to the need for banks to mitigate the pressure on results. “With pressure on the quality of assets being reduced, banks are increasingly focusing on improving efficiency costs”, says Fitch, who considers that the sector’s cost-to-income ratio of 55% “is acceptable”, but at the same time highlights the need to improve this indicator in view of “the structural challenges in achieving revenue growth in Portugal”. They say that banks need to make greater efforts in terms of investment in technology and systems, considering it as “crucial to increase cost efficiency”.

Another of the areas that Fitch considers will mark the banks’ map relates to the issuance of debt under the so-called MREL (Minimum Requirement for own funds and Eligible Liabilities), which obliges European banks with systemic importance to provide an additional financial cushion to face possible difficulties.

The agency estimates that the six main Portuguese banks will need to issue between seven and nine billion euros – Caixa has already announced that it will have to issue 2,000 million by the end of 2022.

Ultimately, with regard to the new legal framework for NPLs (non-performing loans), after the European Central Bank (ECB) recently revised the rules, Ficth considers that banks are accelerating the reduction in stocks of non-performing loans in order to mitigate the impact on the requirements of SREP (Supervisory Review and Evaluation Process), “which remain difficult to calculate”.