Portuguese Banks: Key Factors to Consider as Impact of COVID Reduces

The commentary analyses the key factors relevant to large Portuguese banks rated by DBRS Morningstar.

Summary highlights:

• At the onset of COVID-19, DBRS Morningstar took rating actions on certain Portuguese banks. The Trend was changed to Negative to reflect the downside risks for profitability and asset quality as a result of the lockdown and other restrictions on business activities.

• Market and economic conditions have improved since then. In 2021, profitability returned to levels above those seen before the COVID-19 crisis and NPLs have declined further.

• The withdrawal of most of the moratoria by September 2021 has not resulted in a spike of new NPLs for the time being. Nonetheless, we have seen an increase in the portion of Stage 2 loans. Certain sectors, such as accommodation and parts of manufacturing, have not yet fully recovered.

• Direct risks from Russia and Ukraine seem contained but a full impact assessment of the implications remains unclear at this stage.

“The recent results support our view that Portuguese banks have proved to be largely resilient through the pandemic. The stronger financial position of banks and borrowers coupled with unprecedented support measures helped to withstand the shock. We will continue to assess the post COVID-19 implications, including the potential of higher interest rates, but also the downside risks to economic growth from rising energy prices, supply chain bottlenecks as well as rising geopolitical risks “said Nicola De Caro from DBRS Morningstar’s Global Financial Institutions team.