Portuguese banks will continue to reduce their large stock of bad debt in 2020 as nonperforming loan portfolios continue to attract yield-seeking investors in a low interest rate environment, lenders write off loans and grow Portugal’s economy continues to outpace that of many of its European neighbors.
But the pace of the decline will slow over the next few years, as the size of the Portuguese market will complicate large-note transactions in the future, analysts said.
Portugal was bailed out to the tune of 78 billion euros during the financial crisis, and while the banking sector was saved thanks to state intervention, it was burdened with one of the biggest piles of debt irrecoverable from Europe. Although banks‘ combined gross NPL stock declined by around € 9 billion, or 32%, to € 19 billion 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.
Data from S&P Global Market Intelligence shows that NPL ratios at individual banks have trended downward over the past two years.
Between the first semester of 2017 and the first semester of 2019, Millennium BCPis almost halved to 5.74% against 11.02%, while that of Novo Banco SA, created from the “good bank” of the ailing group Banco Espírito Santo, fell to 24.96% from 39.86%.
Caixa Geral de Depósitos SA, for which the data was more punctual, saw its ratio fell to 8.76% in the first half of 2019 against 13.19% in the second half of 2017. And Santander Totta SGPS SAwas 5.60% in the second half of 2018, compared to 8.18% during the same period in 2017. Banco BPI SA’s ratio at the end of June 2019 fell year on year to 4.52%, although it was up compared to the first half of 2017.
“In our view, NPLs will continue to decline in 2020,” Nicola de Caro, analyst at DBRS Morningstar, said in an email. “Reducing non-performing loans and non-core assets remains a key priority for Portuguese banks, as the sector’s asset quality is consistently lower compared to the European average. ”
Banks such as Novo Banco have sold bad debt portfolios to foreign funds, which seek returns in a low interest rate environment.
“This is one of the positive impacts of the negative rate scenario that everyone is looking for yield,” Tom Kinmonth, bond strategist at ABN AMRO, said in an interview. “This is one of the few areas where we are performing well,” he said.
A Portuguese analyst who declined to be named for compliance reasons said NPL’s deals picked up “significantly” in 2018 and demand continued in 2019 amid a “growing appetite for this guy” of assets “.
Rafael Quina, analyst at Fitch Ratings, said he expected the NPL ratio for the Portuguese banking sector to fall to around 7% by the end of 2020, from around 9% at the end of June, helped by sales of NPL, recoveries and write-offs. Over the next two or three years, the ratio will decline further to 5-6%, he said.
Small ticket sales
He said Fitch expects some improvement in asset quality, but a gradual slowdown in the pace of improvement from 2018 and 2019, which were years of “fairly significant” progress, he said. The potential for large transactions in the Portuguese market is limited, with most lenders selling small and medium-sized portfolios to foreign funds, he said.
Additionally, banks are unwilling to sell their bad residential mortgages to distressed investors due to reputational or litigation risk, which limits the amount of loans they can sell, he said. .
Economic growth remains strong in Portugal, despite fears of a slowdown in eurozone economies, and this should help support NPL sales going forward, analysts say. The Portuguese central bank expects the economy to grow 1.7% in 2020, up from 2% in 2019 and 2.4% in 2018.
“It’s still pretty good on a European basis,” said ABN AMRO’s Kinmonth. “The banks have been very well restructured, the loans are still deleveraging … and even a benign year would be rather positive for the development of the NPLs,” he said.
Portuguese companies are managing their debt positions more cautiously than in the past, the legal loan collection process has improved and regulators are pushing for lower NPLs, factors that should help Portuguese banks reduce debt. NPL, Quina said.