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NPLs: Progress is Being Made, But IMF Still Thinks Portugal’s Banks Are Too Exposed to Real Estate

30 November 2018

The IMF praised efforts by Portugal’s banks to reduce their exposure to bad debts but added that the efforts must continue apace. The international financial organisation is also concerned about the banks’ continuing exposure to the real estate sector.

The burden of NPLs still weighs heavily on Portugal’s banks, but less so. In recent years, those banks have made strenuous efforts to reduce the burden of non-performing loans, something the International Monetary Fund (IMF) duly recognised. Nevertheless, the IMF argued that the efforts to reduce the level of NPLs must continue. The international financial organisation also demonstrated concern about the banks’ significant exposure to the real estate sector, at a time of rising house prices.

“Relevant progress has been made in the banks’ balance sheets,” with regards to a reduction in the current levels of NPLs, the IMF reported in its 7th post-program evaluation, noting that “NPL ratios shrank from 13.3% at the end of 2017 to 11.7% % in June of this year, at the same time as capital ratios remained stable, above 15%.”

“But efforts to reduce the [sector’s] vulnerabilities must be maintained,” the fund added. The IMF stated that Portugal’s banks are still negatively affected by high levels of NPLs and low profitability, noting that they will “experience additional cost pressures” as soon as banks need to start complying with new requirements regarding capital and eligible assets under the new regulatory framework, MREL.

However, the vulnerabilities of Portugal’s banks do not end here. The IMF also sees continued exposure to the real estate sector as a risk. “Another vulnerability is the significant concentration of real estate exposure,” accounting for 38% of total assets at the end of 2017, with residential real estate accounting for 28% of total assets.

The IMF argued that supervisors should “ensure that banks are pursuing NPL reduction plans” but also that they “continue to monitor real estate price developments, as prices have increased at a rapid pace in recent years, as well as monitoring that banks have enough cushion to deal with adverse shocks to their balance sheets.”

Original Story: Economia Online – Paulo Moutinho

Translation: Richard Turner