Portuguese banks will keep reducing their large stock of bad loans in 2020, as nonperforming loan (NPL) portfolios continue to interest investors seeking yield in a low interest rate environment, lenders write off loans and Portugal’s economic growth continues to outpace that of many of its European neighbors, S&P Global Market Intelligence analyists say.
However, the pace of decline will slow over the coming years as the size of the Portuguese market makes large ticket deals more complicated going forward, analysts said.
Portugal was bailed out to the tune of €78 Bn during the financial crisis, and while the banking sector was rescued through state intervention, it was burdened with one of the biggest bad debt piles in Europe. Despite banks’ combined gross NPL stock declining by about €9 Bn, or 32%, to €19 Bn in the first nine months of the year, according to DBRS Morningstar, Portugal still had one of the highest NPL ratios among European banks in the European Banking Authority’s latest transparency exercise.
S&P Global Market Intelligence data shows that NPL ratios at individual banks have been trending down over the past two years. Between the first half of 2017 and the first half of 2019, Millennium BCP’s almost halved to 5.74% from 11.02%, while that of Novo Banco, created from the “good bank” of the troubled Banco Espírito Santo group, fell to 24.96% from 39.86%. Caixa Geral de Depósitos, for which data was spottier, saw its ratio fall to 8.76% in the first half of 2019 from 13.19% in the second half of 2017. And Santander Totta was 5.60% in the second half of 2018, down from 8.18% in the same period of 2017. Banco BPI end-June 2019 ratio fell year over year to 4.52%, although it is up from the first half of 2017.
«In our view, NPLs will continue to fall in 2020,» DBRS Morningstar analyst Nicola de Caro said in an email. «Reducing NPLs and non-core assets remains a key priority for Portuguese banks, as the sector’s asset quality is still weaker compared to the European average.»
Banks such as Novo Banco have been selling off bad loan portfolios to foreign funds, who are seeking returns in the low interest rate environment.
«It is one of the positive impacts of the negative rate scenario that everyone is hunting for yield,» Tom Kinmonth, fixed-income strategist at ABN AMRO, said in an interview. «It is one of the few areas where we are seeing good returns,»he said.
One Portuguese analyst who declined to be named for compliance reasons said NPL deals had picked up «significantly» in 2018 and that demand was continuing in 2019 amid «growing appetite for these kind of assets.»
Rafael Quina, analyst at Fitch Ratings, said he expected the NPL ratio for the Portuguese banking sector to fall to about 7% by end-2020 from about 9% at the end of June, helped by NPL sales, recoveries and write-offs. In the next two to three years, the ratio will decline further to 5% to 6%, he said.
According to this specialist, Fitch is expecting some improvement in terms of asset quality, but a gradual slowdown in the pace of improvement compared to 2018 and 2019, which were years of «quite significant» progress, he said. The potential for large deals on the Portuguese market is limited, with most lenders selling off small to medium sized portfolios to foreign funds, he said.
In addition, banks are not keen on selling their bad residential mortgages to distressed debt investors because of reputational or litigation risk, limiting the amount of loans they can sell, he said.
Economic growth remains strong in Portugal, despite concerns of a slowdown in eurozone economies, and that should help support NPL sales going forward, analysts said. The Portuguese central bank expects the economy to grow by 1.7% in 2020, down from a projected 2% in 2019 and 2.4% in 2018.
«That is still pretty good on a European basis,» ABN AMRO’s Kinmonth said. «The banks have been restructured very well, lending is still deleveraging … and even just a benign year would be pretty positive for NPL development,» he said.
Portuguese companies are managing their debt positions in a more conservative way than in the past, the legal process for recovering loans has improved, and regulators are pushing for NPL declines, factors which should support Portuguese banks in reducing NPLs, Quina said.
Original Story: S&P Global Market Intelligence | Jennifer Laidlaw and Mohammad Taqui
Photo: Photo by Alfonso Romero for FreeImages.com
Edition: Prime Yield