DBRS: NPL will increase, but how much is still uncertain

The impact of the withdrawal of advanced measures due to the pandemic is not certain, but it should lead to an increase in non-performing loans. The deterioration will depend on the economic recovery of countries, says DBRS.

Portuguese banks managed to reduce non-performing loans (NPLs) during the pandemic, and this, along with the provisions made, improved the banks’ coverage ratio, according to rating agency DBRS. Still, it is necessary to wait and see the effects of the reversal of the support measures. In addition, DBRS also notes that Portugal still has several moratoria pending and the effect on credit is still uncertain.

According to the data from EBA, the NPLs of Portuguese banks “declined significantly between Q4 2019 and Q2 2021 (-42%), also leading to an improvement in the NPL ratio to 4.2% at the end of Q2 2021 from 6.5% at the end of Q4 2019″, DBRS signals in a commentary where it analysed the situation in Italy, Greece, Spain, Portugal, Ireland and Cyprus.

In addition, Portuguese banks have also increased provisions since the end of Q4 2019, which, together with the reduction in NPL, “resulted in the banks’ coverage ratio improving to 58.4% at the end of the second quarter of 2021 from 50.1% at the end of the fourth quarter of 2019”, they add.

The rating agency also notes that while Spain, Ireland, Greece and Cyprus “evenly distributed NPLs between households and non-financial companies”, in the remaining NPLs in Italy and Portugal non-financial companies have more weight. This suggests a pipeline skewed towards small and medium-sized enterprises and corporate loans, rather than individual borrowers, in Italy and Portugal.

Already looking at moratoria granted, EBA-covered banks in Portugal had 73% still outstanding at the end of Q2 2021, followed by EBA banks in Italy (23% of total moratoria granted) and Spain (13% of total moratoria granted) at the end of Q2 2021.

To do this analysis, DBRS also looked at the evolution of key metrics, forecasting that unemployment in Portugal will have a slight drop in 2022. Growth in the Portuguese economy will also be higher next year, unlike the other countries analysed. In terms of property prices, Portugal is well above the other countries, having shown a very sharp upward trend

DBRS thus concludes that the “comprehensive response from European governments and the EC has so far been effective in preventing an increase in NPLs” in these jurisdictions in the short term. Unemployment and residential property “have performed better than expected in these jurisdictions, with Portuguese property price increases outperforming other jurisdictions”, they stress.

The agency also notes that the effects of the reversal of the relief measures have yet to be assessed, with NPLs expected to increase, but “deterioration will depend on several factors, including the country’s full economic recovery.

Original Story: ECO | Mariana Espírito Santo 
Photo: Big Stock Photo
Translation & Edition: Prime Yield