In a statement released today, Morningstar DBRS noted that despite recent positive trends regarding Pillar 2, related to additional capital requirements that banks must maintain as defined by the European Central Bank (ECB), the average requirement remains “relatively high.”
The rating agency pointed out that the average requirement for comparable Spanish banks was 1.96% of risk-weighted assets (RWA), “considerably below the 2.29% average in Portugal.”
“We expect this difference to diminish over time, as banking fundamentals continue to reduce the perception of risk in Portuguese banks,” the authors of the commentary noted.
The authors also highlighted the “solid performance” in the European Banking Authority’s stress tests, where participating banks “reported a comparatively lower capital reduction in an adverse EBA scenario.”
Morningstar DBRS also observed that in recent years, banking regulators have “shown greater confidence” in Portuguese banks, something “evidenced by the revisions” of Pillar 2 requirements.
“In our opinion, the continuous improvement reflects the regulatory perception that the risk profiles of Portuguese banks—compared to just a few years ago—have strengthened due to robust profitability and improved asset quality,” they added.
Morningstar DBRS also highlighted changes in risk profiles and exposure to bad credit, noting that more stringent criteria for underwriting these products have been implemented since before the pandemic.
“Strong domestic demand has led to continual improvements in loan growth, while banks have aggressively corrected their balance sheets,” they stated, adding that, despite their increase, interest rates have not negatively impacted asset quality.
