Central Banks

Tuesday, March 27, 2012 - 12:23

Fitch: Portuguese Banks Still On "Shaky Ground"

PARIS (MNI) - Fitch ratings said today that Portuguese banks are still on "shaky ground," with liquidity pressures that make them highly dependent on funding from the European Central Bank.

Their financial performance will depend on how deep the Portuguese recession is and on broader developments in the Eurozone sovereign debt crisis, Fitch said. Portugal's banks are on "negative outlook," in line with Portugal's sovereign rating, and would be downgraded if the government in Lisbon suffers a further downgrade, the agency said.

The full text of Fitch's press release follows:

"Fitch Ratings says that the major Portuguese banks' capital, risk profile and financial performance will be largely influenced by the severity of the economic recession and developments of the sovereign crisis in Portugal and ultimately in the eurozone.

Fitch believes that government and international (IMF/EU/ECB) support, for both capital and liquidity, will continue to be made available to Portuguese banks. This constitutes the main driver of Caixa Geral de Depositos' (CGD), Banco Comercial Portugues' (Millenium bcp) and Banco BPI's Long-term Issuer Default Rating (IDR) of 'BB+' which is currently on its Support Rating Floor. The Long-term IDR of Santander Totta SGPS (Santander Totta) and its bank subsidiary of 'BBB' reflect a high probability of support from its Spanish parent bank, Banco Santander ('A'/Negative).

However, all banks Long-term IDRs are on Negative Outlook in line with the sovereign. Any further downgrade of Portugal's sovereign rating will be mirrored by the Long-term IDRs of these banks. At the same time, Fitch sees downside rating risk on banks' stand alone financial strength as expressed by their Viability Ratings as they face a challenging 2012.

Fitch recognises Portuguese banks' progress in 2011 in improving capital and their retail funding structure with a greater proportion of loans funded by deposits. However, liquidity pressures remained due to continued restricted access to wholesale funding, resulting in sustained high reliance on ECB funding. Also, banks' asset quality deteriorated further due to the country's economic recession and sovereign exposure to Portugal and Greece at some banks.

Portuguese banks will need to further improve capital in 2012 to meet higher regulatory requirements and take account of their deteriorating credit risk profiles and limited internal capital generation. In the event banks fail to improve capital by private means, they could recourse the EUR12bn capital backstop facility under the IMF/EU support package, a possibility that cannot be disregarded at some banks.

Portuguese banks also continue to face sizeable debt refinancing needs in the next two years and this could prevent banks from reducing their significant ECB exposure. However, liquidity pressures should be manageable as long as deposits remain stable, as evidenced to date, and the ECB continues to provide liquidity to the system.

Fitch expects banks to accelerate loan deleverage in 2012 in comparison to 2011 to further improve their net loans/deposits ratio to meet with the 120% regulatory requirement imposed by the Bank of Portugal and the IMF/EU. While this should help banks' retail funding profiles, this will lead to lower business volumes, hence lower revenues. This combined with continued margin pressure due to elevated funding costs and sustained high loan impairment charges will weigh on banks' 2012 performance. Further loan repricing, cost control and some non-recurrent gains could partly ease earnings pressure.

Finally, probably the greatest unknown factor in the equation is the speed at which the banks' asset quality will deteriorate in 2012, as this will largely depend on the severity of the economic recession in Portugal as well as banks' loan mixes and risk management."

--Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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