Dagong Europe, “Why we are not catching the Greek cold: Portuguese banking system”

Dagong Europe has published a commentary entitled Portuguese Banks – Trends and Outlook for 2016, now available to read at www.dagongeurope.com. The report discusses the current and future trends of the Portuguese banking system based on the core elements of the Dagong Europe Criteria for Rating Financial Institutions.

 “We believe that following the expected recovery of the Portuguese economy in 2015 and 2016, its banking system will reverse the weak performance triggered by the accelerated deterioration of asset quality since 2011”, says Carola Saldias, Senior Director and Sector Head of the Financial Institutions Analytical Team.

“The Portuguese banking system has continued its focus on de-leveraging mainly through the disposal of non-performing exposures and reducing lending towards sectors significantly affected by the economic crisis. However, for 2016 we expect asset quality to continue to be its key weakness. The concentration of non-performing loans from exposure to corporates will continue to challenge a faster recovery in asset quality in a scenario of still limited GDP growth.”

“We value the fact that Portuguese banks have significantly strengthened their capital base, reaching an aggregate CET1 ratio of 11.3% at YE14. But due to the still lagged effects on asset quality and weak profitability, we expect capital ratios to be strengthened mostly through the management of risk-weighted assets, and continued de-leveraging initiatives. We also expect Portuguese banks to start tapping the market in 2016 with AT1 debt issuances to further strengthen their capitalisation levels, in the light of still limited internal capital generation”, adds Christina Sterr, Director of the Financial Institutions Analytical Team.

Funding and liquidity conditions have improved significantly, due partly to Portugal’s relatively high savings rate (gross national savings at 15.5% at YE14), and the sustained reduction in loans-to-deposits to 107% at YE14, following the Bank of Portugal’s recommendation of 120%. The substitution of capital markets funding and increase in customer deposits has benefited the Portuguese banking system by maintaining a relatively low funding cost, in a scenario where banks are still de-leveraging. Furthermore, the funding structure has been normalised towards more stable sources, as shown by the significant reduction in ECB funding from its peak in 2012.


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