Moody's new positive outlook for Portugal's banks, despite Novo Banco

Despite the political hiatus in Portugal, its banking sector has had the thumbs up from Moody’s as the ratings agency today changed its outlook for the sector from "negative" to "stable."

The agency reported a "modest economic recovery in the country" and market conditions that are benefiting Portugal’s banks.

Moody's analyst Maria Vinuela said today that this change "replaces the negative view in force since 2008," adding that the change of heart is due to "an expectation of how the solvency of banks will evolve over the next 12-18 months."

For Vinuela, "the modest economic recovery of the country will help stabilise the credit fundamentals of Portuguese banks, slow the creation of new problem loans and see a return to the profitability of the banking sector, albeit at still at low levels."

The Moody’s good news report did mention the uncertainty over Novo Banco’s future as its sale was pulled due to risibile offers from Chinese chancers.

Novo Banco’s poor capital position, "contributes to banking system vulnerabilities in the country," as Portugal’s banks may be required to pay the difference between the money they were froced to add to the resolution fund and the eventual sale proceeds from the bank's sale.

Vinuela stresses that overall, "Portuguese banks are now better positioned to absorb potential losses, having been recapitalised, restructured and having been reinforcing their debt provisions in recent years."

Moody's does have a word of warning, commenting that "the capacity of Portuguese banks to generate recurring profits will continue to be limited because of low interest rates, a substantial amount of undervalued assets and reduced business volumes."

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