Key Takeaways
- Portuguese banks will likely preserve the healthy profitability levels reached in 2023, with an aggregate return on equity for the system nearing 9% in 2024. Stronger net interest margins may remain elusive, but solid efficiency will support banks' bottom lines despite a modest rise in credit losses to about 60-65 basis points (bps) of total loans (vs. 55 bps estimated in 2023).
- Asset quality deterioration will become more evident, spurred by tighter financing conditions and lower private-sector savings. This should be manageable, though, with nonperforming exposure (NPE) ratios likely peaking at 5.6%.
- Banks will maintain their rebalanced funding profiles, supported by granular and abundant customer deposits amid an ongoing shift to term deposits, while wholesale funding needs are limited.
- We anticipate that banks' solid operating performance, coupled with improved capital positions and controlled asset quality erosion, should help them withstand the current slowing economic environment.
The Portuguese macro environment should compare favorably with the eurozone in 2024. Economic growth will slow down due to tighter financing conditions, as well as the lagged effects of higher inflation in 2022 and 2023, meek external demand, and weaker business and consumer confidence. Our economic growth forecast of 1.8% for Portugal in 2024 indicates stronger resilience than the eurozone (0.8%), partly on the back of its solid tourism industry (see chart 1). In the short term, however, risks persist in the form of domestic political uncertainty and the threat of recession across the eurozone, which could weigh on Portuguese exports. Labor market resilience will be key to supporting a slowing economic environment and higher for longer interest rates (see chart 2).
Chart 1
Chart 2
Fiscal consolidation should continue despite political uncertainty. The upcoming snap elections in March 2024 bring moderate risks to Portuguese public finances and the execution of EU funds (see “Portugal Snap Elections Pose Limited Immediate Fiscal Risk,” Nov. 13, 2023). However, since Parliament has now approved the 2024 budget, our target for the budget balance for 2024 remains unchanged at 0.2% of GDP. We expect Portugal to maintain its fiscal discipline and continue reducing public debt below 100% of GDP in 2024 (see chart 3). The execution of EU funds accelerated at the end of 2023, at which point 50% of funds had already been disbursed. The remainder should gradually kick in over the next three years (see chart 4). Nonetheless, the upcoming early elections could lead to a policy shift, potentially steering a deviation from Portugal's long track record of fiscal prudence and decelerating government debt reduction beyond 2024.
Chart 3
Chart 4
Our outlook for Portugal and our economic risk trend for the Portuguese banking system are both positive. We believe that Portugal's budgetary and external position could gradually improve, supported by tourism and investments under large EU funds (see "Portugal Outlook Revised To Positive On Resilient Growth And Government And External Deleveraging; Ratings Affirmed," Sept. 8, 2023). In addition, the ongoing deleveraging of the Portuguese private sector, with estimated private sector debt approaching 130% of GDP in 2024, could alleviate economic risks for banks (see chart 5), but not to the point of improving ratings. Lower economic risk in the country may support our view of banks' improving solvency levels (see chart 6), since borrowers would benefit from healthier financial profiles (see “Various Rating Actions Taken On Portuguese Banks Due To Positive Sovereign Outlook And Prospects Of Easing Economic Risk,” Sept. 12, 2023).
Chart 5
Chart 6
Bank ratings should endure following the recent upward trend. We anticipate that banks' solid operating performance, coupled with improved capital positions and controlled asset quality erosion, should provide a buffer against the current slowing economic environment (see chart 7). All banks carry stable outlooks, with the exception of Santander Totta, and all except one (BCP) benefit from parental support (see chart 8).
Chart 7
Chart 8
Further deleveraging and some asset quality deterioration might be on the cards. The rapid increase in rates has not yet translated into asset quality problems on banks' balance sheets. This is partly thanks to households' savings accumulated during the pandemic, as well as government measures to assist more vulnerable households, although this has been limited so far. As loan repricing is coming to an end and interest rates remain relatively high, we could see further loan deleveraging and some asset quality deterioration, particularly for more vulnerable households. According to the Bank of Portugal, however, the proportion of households with a loan-service-to-income (LSTI) above 50% should decline to 6.8% of the stock of mortgages by end-2024, compared with 9% at end-2023. We expect the damage to be contained, with an average LSTI estimated to reach around 20% by end-2024 (from an estimated 22% at end-2023), according to the Bank of Portugal's estimates.
Chart 9
Chart 10
Overall, we expect manageable asset quality deterioration in 2024. Problem loans continued to decline in 2023 despite tighter financing conditions and relatively high inflation, since there is usually some time delay in transmission to the real economy. We could see problem loans emerging in 2024 and forecast a peak in NPE ratios at 5.6% during the year (from 4.2% at end-September 2023). The cost of risk could reach 60-65 bps in 2024, up from 42 bps in 2022 and an estimated 55 bps in 2023, which we see as manageable for banks. This is because we expect the economy to continue to grow and the labor market to remain solid. In addition, banks have been deleveraging for years and more vulnerable segments represent a limited part of the system's loans.
Chart 11
Chart 12
Small and midsize corporate segments may be more vulnerable to asset quality issues. We will carefully monitor loans that are already classified as stage 2, which remain high in Portugal when compared with EU averages (see chart 13). We will also examine certain corporate segments that are potentially more indebted or seem more vulnerable than others to not servicing their financial costs (see chart 14). Unlike in other European regions, potential risks from real estate developers and construction should be limited this time (compared with the previous financial crisis) as Portuguese banks' exposure to the segment has gradually declined and is relatively contained (around 8% of the system's gross loans) compared with peer countries such as Malta (12%), and is similar to Spain (9%) and Italy (9%).
Chart 13
Chart 14
Profitability will likely remain healthy. Returns should converge with those of European peers in 2024 (see chart 15), with return on equity nearing 9%, like our 2024 forecast mean for our Top 100 rated European banks. Most of our rated Portuguese banks will likely post returns that better align with their cost of capital (see chart 16). We don't see much room for margin expansion since the repricing of the mortgage portfolio is completed. The higher rate environment has benefitted Portuguese banks' net interest income (NII) more than other European peers given that 85% of the mortgage stock is floating. We expect margins, rather than loan volumes, to support NII (see chart 17). Controlling deposit repricing, particularly the shift from sight to term deposits, will be key in 2024.
Chart 15
Chart 16
Chart 17
Banks will maintain their efficient operating models. Their lean operating structures, both in terms of employee volumes and branch numbers when compared with European standards (see chart 18), will likely sustain better efficiency ratios than peers' in 2024 (see chart 19).
Chart 18
Chart 19
The digital journey progresses. Following years of cleaning up their balance sheets, banks must now prioritize their digital transformation, including deployment of artificial intelligence. We believe that Portuguese banks are well positioned to manage the required investment in technology. Fintechs and bigtechs are not an imminent threat and the traditional customer base gives banks some leeway to adapt to digital trends without being disrupted (see “Tech Disruption in Retail Banking: Country-By-Country Analysis 2023,” Sept. 23, 2023). Non-financial risks, including cyber security and system availability, are key aspects of banks' credit profiles. The top five Portuguese banks will participate in the European Central Bank's cyber resilience stress test in 2024, which might have implications for 2025 SREP (Supervisory Review and Evaluation Process) requirements. 2024 will also be crucial for digital operational resilience as the EU's regulatory framework DORA will apply from early 2025.
Chart 20
Chart 21
Stable capitalization is our base case, with attractive shareholder distributions. Capital ratios have improved in recent years and should remain neutral to the ratings (except for Haitong Bank; see chart 22). Regulatory capital ratios have also improved, with the total capital ratio for the system average standing at 19% at end-June 2023, compared with 16.9% at end-2019. Still, we expect solvency levels to remain slightly behind EU averages as they are currently (see chart 23). Pension funds could become more volatile as rates decline, but we don't foresee a meaningful impact on banks' capitalization since they have accumulated pension surplus buffers in 2023. We also expect high dividend payout ratios for most banks, particularly those owned by Spanish parents. Regulatory initiatives that could affect Portuguese banks in 2024 include Basel IV implementation, though we expect this to be neutral for bank ratings (see “EU Banking Package: Inconsistencies Temper Framework Improvements,” Jan. 9, 2024).
Chart 22
Chart 23
Funding prospects reflect comfortable liquidity. Portuguese banks face 2024 with sound funding profiles since deposits comfortably exceed loans (loan-to-deposit ratios around 79% as of end-September 2023). While we expect some additional deposit migration into term deposits, the shift has already taken place compared with other European countries (see chart 24). This is partly balanced by the fact that the transmission of monetary policy into higher deposit remuneration in Portugal tends to be less sensitive when compared with the eurozone. This is driven by a mix of deposit granularity and lower reliance on wholesale funding needs than the EU average (see chart 25) given that countries that are more heavily funded in capital markets usually adjust their pricing faster to maintain stable funding sources. In addition, Portuguese banks are largely meeting minimum requirements for own funds and eligible liabilities (MREL) (see chart 26), so we expect funding needs to be limited in 2024.
Chart 24
Chart 25
Chart 26
Related Research
- Global Banks Country-By-Country-Outlook 2024: Forewarned Is Forearmed, Nov. 16, 2023
- Tech Disruption in Retail Banking: Country-By-Country Analysis 2023, Sept. 23, 2023
- Portugal Outlook Revised To Positive On Resilient Growth And Government And External Deleveraging; Ratings Affirmed, Sept., 8, 2023
- Various Rating Actions Taken On Portuguese Banks Due To Positive Sovereign Outlook And Prospects Of Easing Economic Risk, Sept. 12, 2023
- Banking Industry Country Risk Assessment: Portugal, April 28, 2023
- EU Banking Package: Inconsistencies Temper Framework Improvements, Jan. 9, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Miriam Fernandez, CFA, Madrid + 34917887232; Miriam.Fernandez@spglobal.com |
| Secondary Contacts: | Elena Iparraguirre, Madrid + 34 91 389 6963; elena.iparraguirre@spglobal.com |
| Anais Ozyavuz, Paris + 33 14 420 6773; anais.ozyavuz@spglobal.com | |
| Marta Escutia, Madrid + 34 91 788 7225; marta.escutia@spglobal.com | |
| Lucia Gonzalez, Madrid + 34 91 788 7219; lucia.gonzalez@spglobal.com | |
| Adrienne Benassy, Paris +33 144206689; adrienne.benassy@spglobal.com |
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