Banks Will Need at Least Another Four Years to Resolve Their Problems with Bad Debts, DBRS Says

10 April 2018

Portugal’s banks will need at least another four years for the level of bad debts to align with European criteria, DBRS stated. Therefore, further measures must be adopted.

Bad debts will continue to weigh heavily on European banks. In Portugal, financial institutions will need at least another four years to attain NPL ratios that are in line with the European Banking Authority’s (EBA) criteria, DBRS stated in a note. The Canadian rating agency says that the process of clearing the banks’ balance sheets should be speeded up and new measures must be taken, notably by the European Central Bank (ECB).

“DBRS predicts that NPL levels will remain high for some European banks for some years,” the rating agency stated. DBRS believes that “the current pace of reduction [alongside the elevated stock of NPLs] suggests that some banks will take a long time to clear their balance sheets up.” Considering the current pace that Portugal’s banks are reducing their exposure to NPLs, they will need at least another four years for NPL ratios to fall below 5%, in line with the estimate for the rest of Europe.

“European banks will need about four years, on average, for NPL ratios to fall below 5% at the current rate of decline in non-performing loans,” the Canadian rating agency said. However, “there are some countries, such as Greece and Cyprus, where the pace of reduction along with the high NPL stock suggests that it will take a very long time to clean up their balance sheets.”

Bad debts continue to weigh heavily on the banking system. NPL levels are still high, despite extensive efforts by banks to address the problem. However, last year bad debts shrank by 9.3 billion euros, while also registering the biggest ever quarterly decline at the end of 2017.

ECB has to take additional measures

In addition to the need to speed up the process of cleaning up these toxic assets, DBRS believes that additional measures must be taken, notably by the central bank. “DBRS believes that the ECB is holding back from adopting new measures to resolve the NPL,” the rating agency noted.

DBRS believes that this may be due to the “intense debate and controversy” surrounding a new central bank proposal for non-performing loans. The ECB wants banks to put more money aside to cover bad debts. The regulator is proposing that the banks will have a limit of two years to set aside the equivalent of 100% of new bad debts. Within seven years, they will have to be able to cover all outstanding bad debts (old and new).

“The ECB recognises the problem and has made it clear that reducing the NPL stock is a priority. However, it is not expected to put forth new measures to solve the problem. DBRS predicts that without any new measures, banks with high levels of NPL will continue to exist for some time in Europe,” it concluded.

Original Story: Economia Online – Rita Atalaia

Graph: DBRS, EBA

Translation: Richard Turner