Pointing out that the sector "has come a long way since the 2008-2009 financial crisis", it nevertheless notes that "it underperforms its European peers on several key indicators".
The European Commission on Wednesday noted that the Portuguese banking sector has improved since the financial crisis, but has underperformed its European peers on several indicators, hampering its ability to support economic growth.
In the specific report on Portugal linked to the communication released today as part of the spring package of the European Semester, Brussels paints a picture of the evolution of the banking sector in Portugal, which it notes is relatively small compared to the European Union (EU) average, concentrated and with a prevalence of foreign institutions.
Pointing out that the sector “has come a long way since the 2008-2009 financial crisis”, it nevertheless notes that “it underperforms its European peers on several key indicators”.
The Commission’s experts note that with the financial assistance granted to Portugal in 2011, the Portuguese financial sector has “considerably” improved capital positions and non-performing loan (NPL) ratios in recent years, and most banks have also made “great progress” in digitalisation and cost efficiency.
Although it indicates that Portuguese banks have also strengthened capital ratios, it highlights that the sector average is still below the EU average, also noting that there are large differences in capital ratios between Portuguese banks.
At the same time, “despite the remarkable efforts of Portuguese banks to continue reducing their NPL stock”, the non-performing loans ratio “remains one of the highest in the EU (3.2% in Q3 2022 against an EU average of 1.8%)”.
“Moreover, these weaknesses hamper banks’ ability to effectively support economic growth and allocate capital to the economy efficiently,” it reads.
Brussels also notes that rising interest rates are boosting banks’ revenues and considers that banks appear “reasonably well prepared (through provisions) to address most of the potential vulnerabilities arising from inflation and the normalisation of monetary policy”.
As the EC had already warned, it states that “the housing market and its implications for financial stability remain an area of concern”, as 90% of mortgages in Portugal are variable rate, so the rise in Euribor could substantially increase monthly loan instalments.
“Families under financial stress could end up defaulting on their mortgage loans,” it warns, considering that, on the other hand, there are some mitigating factors, such as the proportion of disposable income needed to cover the average monthly mortgage payment in Portugal is still bearable for most families and “well below the level observed a decade ago” or the recent support measures in this area implemented by the government.