Portugal will probably need to tap a bailout fund for its banks a second time because lenders’ asset quality is deteriorating, Moody’s Investors Service said.
“Despite the effort that has been made to improving the capital for banks, amid the deterioration of the economic environment, asset quality and profitability are going to continue to suffer.” Pepa Mori, an analyst at Moody’s, said in an interview in Lisbon today. “This adverse scenario has become our central scenario for Portuguese banks.”
In a January report, Moody’s estimated Portuguese banks needed about 8 billion euros ($10.5 billion) in capital, according to stress tests. Portugal has already granted 5.6 billion euros to lenders that aren’t state-owned from a 12 billion-euro fund available under the country’s bailout plan, agreed with the European Union and International Monetary Fund in 2011.
In absolute numbers, capital has improved but looking at the “overall risk absorption capacity for banks” Moody’s sees “higher losses materializing and the deterioration of asset quality,” Mori said. According to regulatory requirements, Portuguese banks were forced to raise their core Tier 1 capital ratios above 10 percent.
Even banks that have tapped state-aid may be at risk of needing more capital as they are more vulnerable, Mori said. Banco Comercial Portugues SA, Portugal’s biggest non-state bank by assets, Banco BPI SA, and Banif - Banco International do Funchal SA have resorted to state aid.
Moody’s rates Banco Comercial Portugues B1, Banco BPI SA as Ba3 and Banif as B2. State-owned Caixa Geral de Depositos is rated Ba3 as is Banco Espirito Santo SA, which didn’t resort to state money.
Moody’s expects the bulk of the identified capital shortfall to be covered by the state-aid facility. The remainder will have to be provided by other means so deleveraging must continue, Mori said.
Banks need to shrink loans and attract more money. The five biggest lenders had a combined average loan-to-deposit ratio of about 123 percent at the end of 2012. The combined median ratio was about 140 percent at the end of 2011.
Still, the country and its banks are constrained by the weakening economy. Prime Minister Pedro Passos Coelho is battling rising joblessness and lower exports to his European trading partners as he raises taxes to meet the terms of the aid plan.
The Portuguese government’s ability to comply with the plan suffered a setback last week as a high court blocked cuts to state workers and pensioners’ salaries.
That’s limited the government’s room to maneuver, Moody’s analyst Kathrin Muehlbronner said today and may delay a decision by the European Union granting Portugal an extension of its rescue-loan maturities.
“Clearly the troika and the other governments will want to have some assurances and want to see what the government will do instead of those measures,” she said, adding it’s too early to say if that will also delay Portugal’s return to the bond market.