In a statement issued this week, the ratings agency said the outlook expresses its expectation of how bank creditworthiness will evolve in Portugal over the next 12-18 months.
“Portugal’s banking system is still quite fragile, but the modest economic recovery will continue to support the stabilisation of the banks’ credit fundamentals, albeit at very weak levels,” explained Maria Vinuela, Assistant Vice President and Analyst at Moody’s.
Moody’s forecasts GDP growth for Portugal of 1.1 percent in 2016 and 1.3 percent in 2017, as noted in September 2016. The ratings agency notes that the economy’s main weakness remains the high indebtedness of the state, companies and households, which continues to weigh on economic activity and demand for credit. Unemployment continues to come down steadily and fell to 10.8 percent in the second quarter.
Asset risk indicators for Portuguese banks have stabilised, with nonperforming loans at just above 12 percent, but Moody’s expects the stock of problematic assets to remain high, given the modest economic growth prospects.
Modest economic recovery has also not been strong enough to push the Portuguese banking sector onto a path of sustainable profitability. The rating agency believes that the lower cost of risk from the slowdown in the formation of problem loans may be offset by lower top-line earnings.
Furthermore, Portuguese banks are among the most poorly capitalised institutions in the euro area, partly owing to a large volume of Deferred Tax Assets (DTAs), which make up about 30 percent of the system’s regulatory core capital and which the rating agency considers to be a low-quality form of capital.
More positively, however, the deleveraging of the banking system, coupled with a stable deposit base, has allowed Portuguese banks to continue to reduce their loan-to-deposit ratio to 111 percent in 2015. This, in turn, has supported a reduction in the use of wholesale and central bank funding, although the latter remains high at 5.2 percent of total assets.