Portuguese banker issues capital ratios warning

The Portuguese CEO of Lloyds Bank in the UK has warned that the capital ratio banks are required to have by the European Central Bank will not be able to cover an expected avalanche of credit defaults, bad loans and bankruptcies once Government moratoria end.

António Horta Osório says that if the banks immediately up their ratio of cover for NPLs and NPEs to 80% as the ECB is demanding, the capital ratio of Portugal’s banks would fall from 13% to 10% which is “very low”.
The banker was talking at the Money Conference organised by Dinheiro Vivo and TSF about the capitalisation of Portuguese banks in a presentation via video call.
In his analysis, Horta Osório said that the capital ratios of Portuguese banks, in aggregate terms, had risen significantly and today have an average capital ratio of 13.5%, slightly above Italian banks and substantially above Spanish banks (12%).
But the banker stresses that this ratio has to be weighed against the value of non-productive assets as a percentage of the total of Portuguese bank loans, the ratios of which are still rather high compared to the banks of other European countries.
“The Portuguese banks’ Non-Performing Exposure (NPE) ratios have been declining (they reached 17% three years ago and are now 9%) but are still very high,” warns Horta Osório, who added that they were “unfortunately on the rise” again because of credit defaults, especially company loans in those sectors most affected by the crisis.
However, he also warns that the ratio of impairment coverage of Portuguese banks is around 52%, below that recommended by the ECB, which is 80%.
“If banks increased the coverage ratio by about 30%, immediately, the capital ratio of Portuguese banks would drop from 13,5% to around 10%, which is very low,” says António Horta Osório. This is a weakness of Portuguese banking, he said.
In conclusion, the Lloyds CEO argues that Portuguese banks have to increase provisioning to follow the ECB’s guidelines and the problem is exacerbated when bad debts inevitably increase, as is likely to be the case next year, making it imperative for banks to strengthen their balance sheets.
In this sense, António Horta Osório argues that banks should suspend the distribution of share dividends in order to further strengthen capital ratios in order to support the economic recovery, which “we hope will happen in 2021”.