LISBON (Reuters) - Ratings agency Moody’s cut the Portuguese banking outlook to stable from positive on Monday, warning the domestic economy will continue to weaken as euro zone growth slows, capping current low levels of profitability.
After a severe debt and economic crisis, Portuguese banks returned to profitability last year with reported net income of 1.1 billion euros ($1.21 billion), compared with a net loss of 88 million euros in 2017, Moody’s said.
However, Moody’s said banks’ profitability in recent years has been “distorted by sizable losses reported at Novo Banco”, which emerged from the ruins of Banco Espirito Santo after its collapse in 2014.
Novo Banco has been 75% owned by U.S. buyout firm Lone Star since October 2017 and 25% by the Portuguese Resolution Fund.
If Novo Banco’s losses are excluded, Portuguese banks’ return on assets stood at a low level of 0.7% at the end of last year and 0.8% in the first six months of 2019.
Moody’s said Portuguese banks’ capital, profitability and funding conditions were expected to “hold steady over the next 12 to 18 months” and that they were likely to “further reduce their stock of non-performing assets”.
But even though Portuguese banks’ non-performing assets will continue to “fall organically”, their “stock of problematic assets” will remain high, Moody’s said.
“Profitability will likely remain close to current low levels, with lower provisioning expenses and cost reduction initiatives broadly offsetting subdued business volumes and very low interest rates,” said Moody’s senior analyst Maria Vinuela.
According to Moody’s, banks have improved their “loss absorption capacity” in recent years, but a large volume of deferred tax assets - those carrying losses from previous years that may be used to reduce later taxable income - undermines their capital strength.
The ratings firm considers DTAs a “low quality form of capital”.
Moody’s expects Portugal’s economy growth to slow to 1.7% in 2019, and to 1.5% in the years ahead. The country’s central bank said last month that Portugal’s economy was likely to expand 2.0% this year, compared with 2.4% in 2018.
The central bank blamed a decline in export-oriented sectors, a fall in private sector consumption and an easing world economy.
Moody’s added that while credit conditions in Portugal have improved, “household indebtedness remains above the euro area average”.
The Socialist government, now in its second term, has presided over a period of solid economic growth and budget deficit cuts, but slower growth could undermine their efforts and put pressure on Prime Minister Antonio Costa.
($1 = 0.9074 euros)
Reporting by Catarina Demony; Editing by Sérgio Gonçalves and Jan Harvey