Moody’s upgrades outlook on banks from negative to stable

The rating agency Moody’s on Thursday revised the outlook for national banking from “negative” to “stable”, anticipating, however, an increase in problems with loans due to disruptions related to the pandemic Covid-19.

In a statement released on Thursday, Moody’s said it had changed its outlook for the Portuguese banking system from “negative” to “stable”, stating that although the Portuguese economy is expected to return to growth in 2021, after a contraction in 2020, Moody’s is counting on an increase in loan defaults during the period to which this outlook refers due to persistent economic disruptions related to the pandemic.

Besides, Moody’s said, banks will continue to face continued revenue pressure as well as reduced demand for credit, low-interest rates and high provisions.

The rating agency estimated that national gross domestic product (GDP) will increase by 3.7% and 4% in 2021 and 2022, respectively, after a 7.6% contraction in 2020 due to the pandemic, but will not return to pre-pandemic levels until 2023.

Even so, the entity believes that credit conditions should benefit from a stronger private sector that has reduced debt over the years and an increase in savings by companies and families during the health crisis.

On the other hand, Moody’s said asset quality would deteriorate, anticipating an increase in defaults on Portuguese banking loans as the government’s measures that protected asset quality in 2020 begins to be reduced.

Furthermore, the organisation does not believe that the provisions made by banks in 2020 to protect future credit losses will be sufficient to cover the deterioration of these assets.

Moody’s also said that the capital position of banks should hold up, noting that most banks would be able to avoid losses that could affect capital.

The agency’s analysis also pointed to profitability remaining stable, adding that, after several years of cutting costs, national banks have limited room for further efficiency gains.

In parallel, the Portuguese financial institutions have stable funding and liquidity conditions, the agency said, pointing to the increase in the deposit base due to the contraction in consumption.

Moody’s also noted the government’s support, stating that it continued to believe in the possibility of state support for the two largest Portuguese banks.