IMF Applauds as Bad Debts Fall by €13 Billion in Two Years

29 May 2018

The institution led by Christine Lagarde acknowledged significant improvements to Portugal’s financial stability. This is largely due to the banks’ efforts to reduce their stock of bad debts.

The International Monetary Fund (IMF) applauded the banking sector’s recovery in Portugal. The turnaround is due to the efforts of financial institutions to significantly reduce their exposure to bad debts, or non-performing loans (NPLs), which has fallen by more than 13 billion euros since mid-2016. For the IMF, which is helmed led by Christine Lagarde, the current pace at which the banks are “cleaning” the toxic assets will allow Portugal’s financial institutions to meet or even exceed their targets for reduction. However, the institution insisted that the banks must continue the current pace to manage a return to profitability.

“Capital ratios have risen, while the NPL stock has fallen by more than 13 billion euros from its peak in mid-2016,” the IMF said on Tuesday in its Article IV report. This rhythm, the entity announced, will allow the “banks to meet or exceed their NPL reduction targets.”

“Capital ratios have risen, while the NPL stock has fallen by more than 13 billion euros from its peak in mid-2016.”

International Monetary Fund

Despite praise for the banks’ efforts, the institution said that more needs to be done. “While the results are encouraging, more progress needs to be made to strengthen banks’ profitability. This will help them absorb any additional costs that may arise from the European requirements known as MREL, and to support the economy, “the statement said.

Also, “supervisors should continue to encourage banks to strengthen their governance and risk management while maintaining plans to cut costs and reduce NPL so that they can generate capital.”

Housing prices must be monitored

The need for banks to continue to reduce their stock of bad debt is not the only warning left by the IMF. The IMF believes that the rise in housing prices must be monitored, noting that the Bank of Portugal has recommended limits on the banks’ concession of loans. For the moment they are just recommendations, but Portugal’s regulator is expected to impose requirements should the banks not adhere to the recommendations.

These recommendations are being made at a time when the average value of new housing loans to households is nearing an unprecedented 100,000 euros. The rise in property prices is largely the cause of the phenomenon, in addition to the banks’ increased appetite to extend credit during the current period of greater confidence in the Portuguese economy.

Original Story: Economia Online – Rita Atalaia

Translation: Richard Turner