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Fitch: Credit Platform Helps, But There’s “No Magic Bullet” for NPLs

18 January 2018

Fitch director Josu Fabo says that Portuguese banks’ initiatives to reduce bad debt “are on the right track”, but they will not magically solve the banks’ problems.

Josu Fabo, director at Fitch for financial institutions, acknowledges that Portuguese banking has made progress but warns that there are still significant challenges ahead. One of the principal obstacles is the still high level of bad debts on the banks’ balance sheets. Financial institutions have been trying to reduce the burden of NPLs with various initiatives. However, the rating agency does not believe that the measures seen to date will solve the problem. More needs to be done.

“These initiatives are a step in the right direction, but they will not magically solve the problems [with bad debts] in the short term,” Mr Fabo stated at Fitch’s Credit Lisbon Seminar. This includes the platform that was explicitly created to reduce defaulted loans, which Caixa Geral de Depósitos (CGD), BCP and Novo Banco jointly run. However, the initiative should begin to bear fruit by the end of the first quarter of 2018.

Fitch’s Director of Rating for Financial Institutions believes that “banks have reduced the volume of Non-Performing Loans, but it is still high.” The analyst says profitability is still weak. “But the prospect of the end of the [European Central Bank’s] debt-buying program and a rise in interest rates leads to an improvement in margins.”

While acknowledging that progress has been made in the Portuguese banking sector, Mr Fabo notes that there are still obstacles that must be overcome. “We have to highlight that there are still challenges for the banking sector. These have to be resolved so that the banks can improve their ratings and risk profiles, “he says.

Those statements were made as Fitch upgraded Montepio and Santander Totta, shortly after removing Portugal from a junk rating. The rating agency reaffirmed the ratings of BCP, BPI and CGD while upgrading the outlook of the bank led by Pablo Forero and the financial institution led by Paulo Macedo to positive.

The first progress report on the fight against non-productive credits was also released on Thursday. The European Commission “welcomed the progress made in combating” NPLs, “resulting from a continuous effort at both the national and European level to reduce the risks affecting part of the European banking sector.”

In the first report on the Action Plan to reduce non-performing loans, the European Commission noted a further decline in NPL ratios and also referred to planned measures to reduce such credits further, including the sale of portfolios of non-performing loans.

Original Story: Economia Online – Rita Atalaia

Translation: Richard Turner