LISBON--Portuguese banks have strengthened their liquidity and
capital levels since the country requested a bailout in 2011, but
bad debts continue to rise amid a deep recession, the Bank of
Portugal said in a report Tuesday.
Portugal's main banks have been reporting an increase in bad
debts since the government started implementing austerity under a
78 billion euro ($100 billion) bailout requested in early 2011. In
exchange for the loan from European Union peers and the
International Monetary Fund, the country has increased taxes, cut
public-sector wages and reduced spending on infrastructure, health
and education.
As a result, two of the country's largest banks said earlier
this year that over 10% of all loans were at risk of default. Both
Banco Espirito Santo SA (BES.LB) and Banco Comercial Portugues SA
(BCP.LB) reported losses for the first quarter.
"In an environment where economic activity is expected to fall
again in 2013--with a contraction in demand and deterioration of
the job market--credit risk will continue high and banks will need
to keep a prudent write-down policy," the central bank said in its
semiannual Financial Stability Report.
In contrast to bailed-out peers Ireland and Spain, housing loans
in Portugal aren't the main issue, since many contracts have
borrowing costs based on current interest rates, which are low.
While that makes many mortgages less lucrative for banks, it also
makes them less likely to fall into arrears. Instead, consumer
credit and corporate loans--particularly related to
construction--are showing big signs of strain.
According to the Bank of Portugal, while the construction sector
represents less than 20% of the total loans made by lenders, it
accounts for 40% of those that are currently nonperforming.
Nonetheless, the Bank of Portugal said domestic banks, which
have a Core Tier 1 capital ratio above the 9% required by the
European Banking Authority, do have enough capital to weather the
increase in bad debt. And if an emergency arises, they can still
tap about EUR6 billion left from EUR12 billion set aside for them
under the bailout.
"After two years since the beginning of the economic and
financial assistance program, an adjustment of the banking system's
balance sheet was observed, with a significant improvement of the
liquidity situation, a strengthening of solvency and a reduction of
leverage, although there are still major challenges regarding the
prospective evolution of profitability," it said.
Since 2011, Portuguese banks have been forced under the bailout
to lower their loan-to-deposit ratios from a high of 160% in 2010
to about 120% currently, to make then less reliant on outside
funding. The dependence of the Portuguese banking system on the
European Central Bank, while still high at close to EUR50 billion,
has fallen since mid-2012.
Lending is currently falling as banks take a more careful
approach: according to ECB data, lending to the private sector was
down 6.3% on the year through March. But individual deposits have
actually risen in the first quarter of the year, the Bank of
Portugal said.
Portuguese bank officials have repeatedly said depositors are
safe, and banks face no danger of a Cyprus-style rescue, where
account holders of more than EUR100,000 suffered losses.
"The best guarantee we can give to depositors is a solid banking
system" that is well-capitalized and properly overseen, Bank of
Portugal Governor Carlos Costa said earlier this month.
Write to Patricia Kowsmann at patricia.kowsmann@dowjones.com
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