DBRS gives Portugal BBB rating lifeline, ECB continues to buy debt

Canada’s Dominion Bond Rating Service (DBRS) has reaffirmed Portugal’s BBB (low) rating on its sovereign debt, meaning the European Central Bank can continue to buy debt from the country.

In DBRS’s view the recent measures taken by the Portuguese government to promote banking stability could partly remove some of the uncertainties and concerns that have been surrounding the Portuguese banking sector since the resolution of Banco Espírito Santo S.A. (BES).

Among other actions, the Portuguese government recently reached an agreement with the European Commission to recapitalise the country’s largest bank, Caixa Geral de Depósitos S.A. (CGD), and has also added clarity to the mechanics of the Portuguese Resolution Fund (PRF).

Despite these recent measures, DBRS sees the banks as still facing two main challenges. First, the Portuguese banks need to reduce their high stock of non‐performing loans (NPLs). Second, capital levels are pressured by the challenging operating environment characterized by low interest rates, sluggish economic prospects for Portugal and increasing regulation.

A summary of key points made by DBRS include:

• Portuguese banks’ main challenges include the need to reduce high levels of nonperforming loans and reinforce capital levels while continuing to manage through the low interest rate environment
• DBRS views positively the recent actions taken by the Portuguese government to improve financial stability and remove some of the uncertainties surrounding the Portuguese banking sector
• A successful sale of Novo Banco remains an important step to boost confidence in Portuguese banks
• Higher levels of capital are still required to accelerate the clean up of the bank’s balance sheet and most banks are currently focused on reinforcing capital.
   

DBRS is a credit ratings agency based in Toronto, holding just a two percent share in the global market. It will review its decision again in April.

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