Ratings agency Fitch warned today the Portugal’s ‘slow operating environment’ is hampering the country’s banks in their effort to make adequate profits and bolster their capital ratios.
In a note based on a report on the risks of Portuguese banks, the agency notes that the country has emerged from a deep recession in 2013 and predicts a modest GDP growth of 1.2% in 2016, rising to 1.4% in 2017.
Santander Totta, according to Fitch, is the banks best positioned in terms of capital, while the other Portuguese banks "are pressed to increase their capitalisation."
Caixa Geral de Depósitos (CGD) and the Portuguese Commercial Bank (BCP) are in the process of strengthening capital while Montepio is implementing a divestment plan, says the agency.
"But the quality of assets is currently the biggest weakness of the banking sector and, in our opinion, makes them vulnerable to the recession risks in a highly indebted Portuguese economy," said Fitch.
For the agency, material improvement in asset quality will depend largely on the positive evolution of the economy in Portugal, as well as a recovery in property prices, "none of which look promising for now."
Fitch also notes that the Portuguese regulator defines ‘credit risk’ as exposures to loans overdue by 90 days or more, 12.2% at the last count.
According to the more demanding definition of credit risk by the European Banking Authority, Portugal’s six largest banks reached have 19% of their debts categorised as ‘as risk.’
The International Monetary Funds says that the public should pay for failed banking systems and Portugal’s Novo Banco, soon to be sold at a massive loss, should be propped up by the public even after it has been sold.
"The recapitalisation needs of the largest bank, Caixa Geral de Depósitos (CGD), and possible losses from the sale of Novo Banco may require further injections of public money consistent with the application of EU rules for State aid and the policy for Bank Resolution and Recovery," reads the IMF report from the evaluation carried out in June.
The IMF argues that further consolidation in the banking system, staff cuts and cost reductions are needed but that the problem is broader with a need to "restructure the troubled loan portfolio supported by an increase in capital cushions of banks, provisions and impairment charges."
The thought of a bank closing down, like any other badly run business, seems far from the IMF’s thinking.
