APB Close to Solution to Banks’ Bad Debts

15 September 2017

Next Monday, the Portuguese Banking Association will discuss the structure designed by the Portuguese government and the three largest banks to solve the high level of bad debts on their balance sheets. But the association clarifies that it was “not informed” about the terms of the solution.

The Portuguese Banking Association, the group that defends the banking sector’s interests, will debate next Monday the general outlines of the structure designed by the Government and the three largest banks, CGD, BCP and Novo Banco, to resolve the problem of the distressed debts of economically viable but financially degraded companies (which cannot pay off debts) and are at risk of liquidation.

“APB is not, nor was involved, in designing the solution, and has not yet been informed about its contours,” Faria de Oliveira assured Público. The president of the APB will submit the proposal to a discussion by the association’s members during the next management meeting, scheduled for Monday, September 18. Faria de Oliveira had once stated that a European solution to Portugal’s problems with distressed debt was the best solution to the problem.

This Thursday, Faria de Oliveira met with those responsible for the (less relevant) banks that are not represented on APB’s board, to take stock of the sector, though no talk related to non-performing loans were included in the official agenda.

The final design was negotiated between CGD, BCP and Novo Banco, and articulated with the Portuguese government, and provides for the creation of a platform to manage the bad debt of companies in a degraded financial situation, with levels of unsustainable debt, but which, for whatever reason, the banks consider to be economically viable.

The scheme, classified behind the scenes by its proponents as “a possible solution”, is open to other banks and membership is voluntary. CGD, BCP and Novo Banco, which are founding partners in the new structure, and CEMG, are the banks facing the greatest pressure to solve the problem of non-performing loans whose repayment or payment of interest is in arrears (by more than 90 days).

Despite being jointly managed, the NPLs will remain on each bank’s balance sheet, avoiding the need to revalue the loans, which could result in lower prices than those accounted for and would have an adverse impact on the banks’ accounts.

The platform will have the legal status of a complementary grouping/agreement of companies and according to the digital newspaper Eco, already has a “boss”: the auditor José Correia, who has experience in corporate restructuring.

In addition to analysing and evaluating assets in default, the vehicle will align incentives and decision processes. This is to prevent a company with financing from the three banks (each of which required different guarantees and conditions) to receive different guidelines, such as one bank requesting that the company be liquidated while another believes that that company could be helped.

It is within this framework that the Development Finance will be called upon to be involved to recapitalise financially degraded companies that are still considered economically recoverable but, due to regulatory constraints (such as overexposure), cannot continue to be supported by banks.

By providing funds, in the context of the recovery program proposed by the complementary group of companies, the Development Finance Institution helps businesses, but also banks, as they will begin to repay their debts. As soon as the credits are no longer in default, they will also leave NPL status, reducing the strain on the banks’ accounts.

The problem of the high levels of non-performing loans in the sector is a matter to which the current governor of the Bank of Portugal Carlos Costa has always paid close attention. It is also important to the government. When Prime Minister António Costa took office at the end of 2015, he identified it as a priority resolution, being central to an improvement in the financing conditions for the economy.

Banks operating in Portugal are estimated to have 30 billion euros of credit at risk, less than half of which is provisioned, and which includes financing to individuals, companies and the public sector. In the first six months of 2017, the largest banks operating in Portugal had a total of 16.8 billion euros in loans in arrears by more than 90 days, a reduction of around €1.7 billion compared to 2016.

This year in the IMF’s assessment of financial systems, for the third quarter of 2016, experts highlighted the Irish, Spanish, Portuguese and Italian sectors as the most problematic, with poorer credit ratios.

Original Story: Público – Cristina Ferreira

Translation: Richard Turner