Portugal’s banking association (APB) is calling on the government and the European Union to stimulate the economy to prevent a sharp rise in bad loans as a result of the coronavirus crisis.

The country’s banking sector is still scarred from a debt crisis and spike in non-performing loans (NPLs) after a 2010-13 recession which led to the collapse of banks like Banif in 2015.

Portuguese banks have since battled to reduce NPLs, bringing them down to a total of €17.2 billion in December 2019, from a peak of €50 billion in June 2016.

«It is crucial to adopt measures to mitigate the effects of this public health situation on the ability of companies and families to continue to be able to guarantee the payment of their (credit) responsibilities,» Portuguese Banking Association head Fernando Faria de Oliveira told Reuters.

Portugal’s tourism-dependent, export-driven economy is wilting from the sudden drop in global demand, with more than 30,000 firms applying for government support to pay half a million workers as activities grind to a halt.     

Although the NPL ratio for Portugal’s banks dropped to 6.1% of total credit in December, from 17.9% in mid-2016, it is still about twice the European average.

«It is already widely recognised that we will have a recession in the economy, which will probably be quite severe,» Faria de Oliveira said, adding it was «premature» to give estimates on NPLs resulting from the coronavirus crisis.

The Bank of Portugal has forecast that the country’s economy will shrink between 3.7% and 5.7% in 2020, against growth of 2.2% in 2019, as the coronavirus pandemic hits private consumption and investment and exports collapse.    

Faria de Oliveira said the «response of the European Union (EU) will be absolutely critical to fight this pandemic, in the short term, and to relaunch economies afterwards».

«Much deeper, even radical, action is expected from the EU,» he added, in order to avoid serious damage to companies and high unemployment.

Portugal will boost its credit lines for businesses struggling with the coronavirus outbreak to €4.2 billion, after a state aid package from the European Commission helped shore up the country’s finances.

Portugal’s banking sector was committed to supporting the economy in line with government decisions, as long as it does not jeopardise financial stability, Faria de Oliveira said.

The Portuguese government has approved a 6-month moratorium on the payment of instalments by households and companies.

Lisbon also gave state guarantees to €3 billion of credit lines to support companies, with a further €10 billion in the pipeline.    

Portugal’s banks have lifted their average common equity Tier 1 solvency ratio to 14.1% in 2019, from 7.8% in 2011, Faria de Oliveira said.

But although they are stronger to face «adverse shocks», their profitability is below the cost of capital, he added.

Original Story: Market Screener | Sérgio Gonçalves (Reuters
Photo: CGD headquarters
Edition: Prime Yield