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Some fiscal leeway to support the recovery 10/1/2020
Despite managing well the epidemic, Portugal has experienced a severe economic shock in Q2. Real GDP plunged by 13.9%, pulled down by sharp falls in goods and services exports (-36.1% q/q) and private sector consumption (-14.0% q/q). Investment dropped (8.9% q/q). The country has been heavily impacted by the collapse in tourism inflows and foreign activity, particularly in Spain. External factors could also hamper the recovery, particularly given the surge in new Covid-19 cases in Spain. Nevertheless, the improvement in public finances operated in recent years should translate into a government deficit for 2020 smaller than in other European countries – around 7.0% of GDP according to government estimates. This provides relatively more leeway to support the recovery.
Caught up by the crisis 4/8/2020
After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019. The Covid-19 pandemic will surely erase the country’s enviable performances as whole segments of the economy come to a standstill and the country sinks into a major recession in the weeks ahead. Similarly to its European counterparts, the Costa government is steadily implementing a series of measures to preserve the economic system during the crisis and safeguard the country’s capacity to recover.
Portugal: Towards a compression of interest margin on outstanding amounts of transactions with customers? 1/29/2020
In a period of declining interest rates, the interest margin on transactions with customers has widened due to greater inertia on the downside of yields on bank assets compared to that of the cost of resources. Portuguese banks, however, hold a large share of variable rate loans which tends to accelerate the downward adjustment of the yield on the loan portfolio. In a context of durably low interest rates and close to zero cost of resources from customers, the sustainability of the interest margin will depend essentially on the ability of Portuguese banks to maintain the current rates applied on new loans[1]. A further decrease in interest rates on new loans would drive the margin on new transactions well below the margin on outstanding amounts. This would put an end to the widening of the latter, as observed since 2013. [1] In Portugal, circular 33/2009/DBS prevents banks from applying negative interest rates on deposits from non-financial corporations and households.
Banking in a low interest rate environment: the case of Portugal 12/23/2019
For the first time since 2010, the five major Portuguese banks returned to profitability in 2018. The main factors behind this swing into profits were a faster decline in interest expense than in interest income, and tight control over operating expenses and the cost of risk. The widening of the net interest margin offset the decline in the outstanding amount of bank loans, increasing net interest income. Other things being equal, the decrease of the interest rates also contributed to the reduction in the cost of risk and the clean-up of bank balance sheets. Although the non-performing loan ratio and outstanding amount were halved, they remain at high levels. Recent trends on the profit and loss account of the major Portuguese banks show, amongst other things, how low interest rates are having a certain impact on a banking system that is primarily geared towards retail activities and variable-rate loans.
Renewed confidence 10/10/2019
The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
International activities allow Portuguese banks to return to profitability 9/11/2019
For the first time since 2014, aggregated net income of the five largest Portuguese banking groups[1], which account for about 80% of the banking system’s consolidated total assets, was positive in 2018 (EUR 375 millions). Losses recorded in Portugal (EUR -14 millions) were more than offset by profits from international activities (EUR 389 millions). The assets located abroad of Portuguese banks have, on average since 2014, represented 13% of their total assets. In 2017, the simultaneous decreases in this proportion and the net income from international activities are, amongst other things, due to a valuation effect of assets accounted at their fair value. The international activities of Portuguese banks are mainly located in Spain, France and Portuguese-speaking countries (Angola and Mozambique). They mostly consist of credit lending, accounted at amortized cost.   [1] Banco BPI, Caixa Geral de Depósitos, Santander Totta SGPS (no significant international activities but its position as 3rd largest Portuguese banking group justifies its inclusion in the sample), Millennium BCP and Novo Banco
Portugal: Two thirds of loans for house purchase are over 30 years 5/22/2019
An increasing share of the outstanding amount of loans granted to Portuguese households for house purchase consists of loans with an original maturity over 30 years. Between 2009 Q1 and 2018 Q4, the proportion of loans with the longest original maturities have increased from 51% to 71% of the total outstanding amount. The change has been caused by the outstanding amount of loans over 30 years remaining stable, while the outstanding amount of shorter-term loans has fallen by 45%. Hence, the average maturity of new loans for house purchase has increased from 30.8 years to 33.3 years between 2014 and 2017 according to the Bank of Portugal’s latest figures1. Since 1 July 2018, the Bank of Portugal has made a recommendation2 to the entities under its supervision to limit the original maturity of new loans for house purchase granted to households to 40 years. However, that measure is unlikely to achieve the objective of bringing their average maturity down to 30 years by the end of 2022. 1 As a comparison, only 0.6% of the new loans for house purchase granted to households in France are over 30 years (source: Crédit Logement/CSA). 2 A recommendation is not legally binding. However, credit institutions must comply with it or justify their position, otherwise the Bank of Portugal could take prudential measures against them.
Portugal: Write-offs are the main tool for the cleaning up of bank balance sheets 3/20/2019
The Portuguese banking system’s non-performing loan ratio continued to decline, to 11.7% as of Q2 2018 (and 11.3% as of Q3 2018), after peaking at 17.9% as of Q2 2016. This 6.2 percentage points contraction in the NPL ratio is mainly due to a nearly 40% reduction in non-performing loans outstanding amount, compared to a 2.1% decline in total loans outstanding amount. According to the Bank of Portugal’s data, 42% of the decline in the NPL ratio is due to write-offs. Sales and securitisations accounted for 23% of the ratio’s decline. Nearly two thirds of the cleaning up of Portuguese bank balance sheets occurred via the removal of non-performing loans from the banking system. Moreover, the reclassification of NPL as “performing loans” more than offset the flow of loans that turn non-performing. The net flow of non-performing loans contributed to a 24% reduction in the NPL ratio.
On track 7/11/2018
The economic upturn continues even though growth peaked in 2017 at the highest level in 15 years. Growth is still higher than its long-term potential, and is expected to hold above 2% in 2018. The labour market is very dynamic, although the size of job creations also reflects weak productivity gains. The banking and public finance situations are improving steadily. Under this environment, Portugal gradually regains favour with the main rating agencies. Compared to the first months of 2017, the easing of sovereign rates has been spectacular.

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