OREANDA-NEWS. Finding a way to shift the large stock of non-performing loans and impaired assets off Portuguese banks' balance sheets is likely to take time and could be fraught with difficulties, says Fitch Ratings.
We estimate that the stock of NPLs held by the banking sector at end-2015 was EUR33.7bn, equivalent to 12% of gross loans.

Most problems are in the corporate sector, where NPL ratios have reached 20%, but unsecured consumer lending is also troubled, with a 14% NPL ratio. Even retail housing loans report a 6% impairment ratio. Unlike in Spain, where the trend has reversed, the stock of NPLs in Portugal continues to rise and improvements in the operating environment are not yet producing a slowdown in delinquency rates.

Portugal's corporates are heavily indebted and household indebtedness levels are also high, at 141% of disposable income, according to data provided by the OECD, above the 120% eurozone average.

Loan loss cover ratios across corporate (65%), consumer (75%) and housing loan (25%) portfolios mean some NPLs are unreserved, exposing banks' capital to collateral valuations and recovery procedures, which can be complex and time-consuming. Portuguese banks are also exposed to real-estate assets and investments in loan recovery funds. We estimate that these exposures reached EUR12.5bn at the six largest banks, equivalent to 3.6% of their assets at end-June 2015, though the exposures vary significantly by bank.

The IMF's third post-programme monitoring report, published earlier this month, says that further efforts to strengthen bank balance sheets are needed. It recommends a more comprehensive strategy to address NPLs and a fresh approach to corporate debt workouts.

On 11 April, Portugal's prime minister, Antonio Costa, announced that a "bad bank" solution was being explored. Plans are at a preliminary stage and details of what shape the NPL solution might take, the anticipated size of the scheme and how it might be funded have not been provided.

Portugal's ability to fund a "bad bank" solution is limited. Public debt levels are high, reaching 128.8% of GDP at end-2015, and problems uncovered in the banking sector - including the failures of Banco Espirito Santo (August 2014) and Banif (finalised in December 2015) and a still vulnerable capital position at state-owned Caixa Geral de Depositos - have required large amounts of state aid over the past five years.

Solutions for improving banking sector asset quality are shaping up in different ways across the EU. Ireland's National Asset Management Agency and Spain's Fondo de Reestructuracion Ordenada Bancaria, government-funded vehicles established in the wake of the last financial crisis, have proved effective in shifting NPLs out of the banking sector. Recent schemes launched by Italy and Hungary received European Commission approval in February 2016.

The Italian scheme aims for EUR70bn of NPL securitisations, while Hungary's MARK scheme focuses on shifting troubled commercial real-estate portfolios out of the banks and into a EUR1bn government-funded asset management company.

In March, we revised the Outlook on Portugal's sovereign rating to Stable from Positive due to weaker fiscal and debt performance, modest growth expectations and a more difficult political environment, which could increase macroeconomic risks.