The tightening of profit margins, due to strong competition, may lead to a worsening of bad credit, the Bank of Portugal has warned.
'It's déjà vu all over again' for the banking regulator as, just as before the last financial crisis, banks are lowering profit margins to attract more customers.
The Bank of Portugal does not like this scenartio at all, preferring that the nation’s banks club together and overcharge those applying for credit. The report warns about future default levels rising – despite low interest rates making credit more affordable.
Poor credit in Portugal, despite improvements, is still above the average in Europe with non-performing loans at the end of 2018 standing at 9.4% - hardly at crisis point.
"The attempt to increase the volume of credit by fixing interest rate spreads that do not cover credit risk in a sustainable way could result, in the future, in a higher level of default," the Bank of Portugal warned darkly in its June Financial Stability report, released on Thursday.
The State owned bank, Caixa Geral de Depósitos, is offering 1.23% above bank rate but others are undercutting and this is what worried the regulator.
The Bank of Portugal is determined to be negative, referring to a ‘spreads war’ that has come at a time when "there is aggregate evidence of overvaluation in the residential real estate market since the second half of 2017."
Due to this overvaluation, "it is important that institutions take particular care in defining credit criteria."
Exposure to the real estate market is one of the weaknesses that the Bank of Portugal has identified in Portuguese banking and "makes it vulnerable."
Stating the blindingly obvious, the report continues, "a possible sharp reduction in demand for real estate by non-residents constitutes to pose a risk to financial stability. The Portuguese real estate market continues to be particularly dependent on the intervention of non-residents, whether through tourism or direct investment."
The regulator warns that, "the more pronounced slowdown in global economic activity, particularly as a result of events of geopolitical tension, increases the risk premium and possible changes in the national regulatory framework on the real estate market could lead to an interruption real estate dynamism and, consequently, a downward adjustment in prices.” Quite.
But there are other factors that make the Portuguese banking system vulnerable - the sector also has a, "high exposure to Portuguese public debt securities. Political uncertainty or trade tensions between countries could lead to an increase in risk aversion and catch Portuguese banks in a situation of greater vulnerability.”
"It is essential to pursue policies that promote the sustainability of public finances, private and corporate savings, the potential growth of the Portuguese economy and the resilience of the banking system," concludes the report which adds that banks should not pay out too much in dividends and be prudent.
Come the next recession, the Bank of Portugal may care to look at its own support activities and ask taxpayers whether they actually want to continue to throw money at a sector whose members should stand of fall by their own decisions and operational controls.
