Banco de Portugal publishes today the June 2017 Financial Stability Report.

Vulnerability and risks

The nature of risks to financial stability has remained virtually unchanged from the November issue of the Financial Stability Report. 

Although prospects for the Portuguese economy have improved and there seems to be a more favourable perception among foreign investors of the fiscal and economic situation and the banking sector in Portugal, the high public and private sector indebtedness and the low potential growth continue to pose risks to financial stability.

In a framework of increasing interest rates, the credit quality of national financial institutions may be negatively affected, chiefly if the economic recovery in Portugal does not follow the euro area performance.

It is important to persist in the sustained reduction of public debt based on a fiscal consolidation trend, to pursue the deleveraging of companies and households and, simultaneously, to favour policies that stimulate competitiveness and potential growth of the economy.

The national financial sector also continues to show vulnerabilities, notwithstanding important progress attained over recent years in reducing the loan-to-deposit ratio, strengthening solvency and promoting operational efficiency. 

The high stock of non-productive assets, weak profitability and exposure to the sovereign and emerging market economies with a slump in activity tend to worsen investors’ perception of the quality of credit institutions’ assets and therefore restrict access to international financial markets.

The protracted low interest rate environment puts additional pressure on net income and the profitability of the national banking sector, given the importance in credit portfolios of loans granted at indexed interest rates and long maturities.

Nonetheless, there have been positive developments registered recently in solvency and the shareholder base of some systemically important institutions, which have strengthened the resilience of the banking system in Portugal, in view of the risks identified.

Macroprudential policy

Within a protracted low interest rate environment and in view of more demanding accounting and regulatory requirements, incentives to greater risk-taking by financial institutions may be observed. It is essential that financial institutions correctly and prospectively assess the risk inherent in new credit flows, chiefly borrowers’ creditworthiness in addition to the collateral pledged, ensure strict compliance with the plans to reduce non-productive credit stocks, and carry on the adjustment of the business model and cost structure. 

Given that credit to the non-financial private sector in Portugal continued to show negative rates of change, Banco de Portugal has decided to maintain the countercyclical capital buffer unchanged at 0% of risk-weighted assets.

According to the phased introduction provided for in European banking regulation, the capital conservation buffer increased in 2017 to 1.250% of the total amount of risk exposures (0.625% in 2016).

Articles and special issues

The Financial Stability Report presents three special issues relevant in the field of financial stability: 

• ‘Profitability of the Portuguese banking system – determinants and prospects’;
• ‘IFRS 9 - Main changes and impacts anticipated for the banking system and financial stability’;
• ‘Banking sector’s exposure to housing loans: analysis of LTV and LTI/DSTI and implications for financial stability’. 

It also includes three boxes:

• ‘Changes to the macroprudential policy framework in the European Union: main priorities from Banco de Portugal’s perspective’;
• ‘Recent developments in the exposure of resident credit institutions to non-financial corporations’;
• ‘Banking supervision within the scope of a comprehensive strategy to address the high stock of NPL’.