Will the banks help or hinder Portugal’s recovery?

There are some positive signs for Portugal’s banks, suggesting that they have become less of a risk to the public finances. But a meaningful recovery in lending over the next few years seems unlikely. As a quick recap, Portugal’s banking sector is one of the weakest in the euro-zone. Non-performing loans are high, at around 12% of all loans (this compares to 6% in Spain and 4% in France). What’s more, Portuguese banks have been steadily losing deposits since mid-2011. While domestic deposits have levelled off over the past couple of years, non-residents have continued to pull their deposits out. That said, Portugal’s banks have made provisions for expected losses on bad loans. In 2015, these provisions were equivalent to almost 70% of total non-performing loans. Net of these provisions, nonperforming loans do not look unusually high relative to banks’ capital (i.e. their ability to absorb losses). What’s more, bank equity prices have crept up over the past month, for several reasons. First, economic growth has picked up. Second, it was revealed that the fiscal deficit narrowed further than expected last year, to 2.1% of GDP, which bodes well for bond prices. This is good for banks, since government bonds make up about 7% of their assets.