The Portuguese and Italian banking sectors are the two weakest in the eurozone, according to the latest Global Financial Stability Report from the International Monetary Fund.
The Portuguese banking sector’s profitability, or lack of, is highlighted in the report as there has only been one year in the past six that, 2015, that has shown a positive result.
Poor credit, excessive size, exposure to public debt and a crying need to change the way Portuguese banks operate can be added to the result that 12% of current loans are classed as unrecoverable.
The IMF recommends the sector actually does something about its bad debt, reduces its operating costs, uses proper and apt commercial criteria when granting loans (surely a dig at Caixa Geral de Depositos) and gets real about the realities of modern financial life.
As for overstaffing, the Portuguese banking system is laden when compared to the dozen countries analysed and the IMF report states that within Europe, the problem of the excessive size of the sector is its "main structural problem."
Portuguese banks do not have the worst bad debt problem in the eurozone but have been feeble in their attempts to reduce the problem compared to, for example, Ireland, which had the second highest bad credit ratio after Greece, but has taken measures to reduce this key indicator of sector health.
Poor credit in Portuguese banks rose from 3.6% of total credit in 2008 to a heart-stopping 12.6% in the third quarter of 2016. Italian banks’ bad debt ratio rose from 6.3% to 12% in the same period.
The report states that the Portuguese government is ‘studying a solution to the problem’ but has yet to announce anything sensible. This may largely be due to a weak regulator that the country’s banks have run rings around for so long that identifying and effecting change is beyond the Bank of Portugal’s capability.
The Portuguese financial system needs to apply recommendation to adapt its business models to a context of weak growth, historically low European Central Bank interest rates, an aging population and a stagnation in productivity.
There has been no comment yet from the government or the Bank of Portugal on this blunt report but the standard reply that "things are changing and we are addressing these problems," no doubt will be trotted out by the Finance Ministry.