Banks’ NPLs Decrease Sharply. €9.3 Billion Drop in One Year

5 April 2018

The banks continue to clean up the bad debts on their balance sheets. Last year, the level of non-performing loans fell by 9.3 billion euros, as well as delivering the biggest quarterly decline ever at the end of 2017.

Non-performing loans have been a heavy burden for Portugal’s banking industry, and they continue to be. However, the banks are accelerating their resolution of the problem, wiping off bad debts from their balance sheets at a faster rate. The reduction in the fourth quarter was the most significant ever, on a quarterly basis, with a total of 9.3 billion euros of distressed debts eliminated last year.

“The stock of non-performing loans (NPL) continued to decline in the fourth quarter of 2017. The 2.9-billion-euro drop was the largest quarterly reduction since the launch of the European Banking Authority’s (EBA) data series in December 2015,” the Bank of Portugal’s (BdP) reported.

“The stock of NPLs fell by €9.3 billion compared to December 2016 and by €13.5 billion euros compared to the high of June 2016,” it added. Despite the progress in all sectors, the Bank of Portugal highlighted that distressed corporate debt decreased by €5.9 billion compared to December 2016.

“Thus, the NPL ratio decreased by 1.3% in the quarter, to 13.3%, corresponding to a reduction of 3.9% compared to the end of 2016 and 4.6% compared to June 2016. In turn, the non-financial private sector’s NPL ratio decreased by 0.6% compared to September 2017. ”

At the same time as the ratio of NPLs is falling, the banks are increasing their provisioning for bad debts. That is, banks are being more proactive. “In December 2017, the NPL coverage ratio for impairments was 49.3%, up 2.8 percentage points from the previous quarter.” “This was due to a 3.4% increase in the coverage ratio of non-financial corporations,” the Bank of Portugal reported.

Despite losses, banks reported a net profit

There was an acceleration in the pace of the banks’ recognition of impairments, and Novo Banco was the institution that contributed the most to this achievement. The financial institution led by Antonio Ramalho reported a record loss of €1.39 billion. In 2016, it was CGD that managed to decrease the amount of NPLs on their balance sheet by the highest amount.

While, as a whole, the Portuguese national banking system suffered losses, particularly regarding Novo Banco, the Bank of Portugal revealed that the ” the banking system’s profitability in 2017 was positive, contrasting with the losses seen in 2016.” “Return on equity increased by 10.8%, while profitability increased by 0.9%,” the BdP reported.

“The increase in profitability in 2017 reflects, mainly, a significant reduction in the flow of impairments due to the significant increase in credit impairment at the end of 2016, as well as an increase in banking income through the activation of the contingent capitalisation mechanism provided for in the contracts that were signed with the sale of Novo Banco),” the report stated.

“In 2017, the contribution of net interest income to ROA increased slightly compared to the previous year, due not only to a higher reduction in interest charges than in paid interest but mainly due to the reduction of assets relative to 2016 (denominator effect),” the Bank of Portugal added, noting that costs were almost unchanged. There was an “increase in personnel costs and a decrease in general and administrative expenses of the same order of magnitude.”

Ratios rise, but only through capital increases

Within the context of the improvements in the sector, the Bank of Portugal highlighted the banking system’s equity ratios that “increased in the fourth quarter of 2017 as a result of the increase in shareholders’ equity.” The ratio of total equity stood at 15.2% in December 2017, increasing by 0.5% compared to September 2017,” the report said. Compared to the end of the previous year, the increase is more significant, at 12.3%.

“The Common Equity Tier 1 (CET 1) ratio stood at 13.9%, an increase of 0.4% compared to the previous quarter,” the regulator noted. The increase, 11.4%, was even larger when compared to the year before. “The upward trend in these ratios exclusively reflects stronger capital positions,” the Bdp concluded.

Original Story: Economia Online – Paulo Moutinho

Translation: Richard Turner