As Portugal nears the end of loan moratoriums granted to tackle the economic effects of COVID-19, the threat of worsening asset quality looms over the country's banks.

Loans under moratorium in the country as a proportion of total loans account for a weighted average of 15%, "well above" the European level, according to a DBRS Morningstar report published in August. The expiry of moratoriums at the end of the third quarter of 2021 could lead to an uptick in nonperforming loans, the rating agency said.

Novo Banco SA stands to be the most affected among Portugal's biggest banks in relative terms, as more than 22% of its loans were under moratorium as of June 30, amounting to €5.60 billion.

Banco Comercial Português SA, also known as Millennium BCP, had more than 18% of its domestic loan book under moratorium, totaling €7.34 billion, while Caixa Geral de Depósitos SA had just over 12% of its domestic loan book under moratorium, equating to €5.47 billion.

DBRS Morningstar noted that the majority of these exposures are to small and medium-sized enterprise clients.

More than half of Novo Banco's corporate loans under moratorium were underperforming or nonperforming as of the end of the second quarter. Just 46% of loans were under stage 1 classification — loans that have not had a significant increase in credit risk since issuance. Some 41% of its loans were deemed stage 2, or underperforming, while 13% were classified as stage 3, or nonperforming.

Meanwhile, 63.1% of Millennium BCP's loans under moratorium were classified as stage 1. The figure was 67.5% for Caixa Geral de Depósitos.

Nonperforming loan ratios at the three banks have fallen significantly in recent years and continued to decline in the first half of 2021, S&P Global Market Intelligence data shows. However, nonperforming assets as a proportion of all assets in the country are projected to rise from 6.9% at the end of 2020 to 8.3% in 2021 and 9.7% in 2022, S&P Global Ratings said in a July report.