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Portuguese Banks: An Analysis of Sovereign and Other Debt Exposures

The commentary analyses the sovereign exposures and other debt securities of large Portuguese banks, and the risks from rising yields.

Summary highlights from the commentary include:

• The steep rise in inflation, and the tightening of the monetary policy by the ECB and other central banks has seen European sovereign bond yields rise. This has been more notable in some European countries. However, spreads have narrowed since the ECB’s 15th of June announcement.

• Large Portuguese banks have meaningful exposures to sovereigns at around EUR 56 billion, including debt securities and loans, or 18% of total assets at end-2021.

• Domestic exposures account for 41% of the total exposure, or 7.7% of total assets, while the remaining exposure is made up of Spanish, Italian, Polish and Irish sovereigns.

• Since 2018, Portuguese banks have made changes in the accounting designation of some debt securities, which has led to a significant reduction in the exposures accounted at fair value, while debt securities accounted at amortised cost rose significantly, resulting in less impact on the P&L and capital ratios. Nevertheless, Portuguese banks still have an elevated level of assets accounted through other comprehensive income (43% of debt securities) which impacts capital ratios. This proportion is higher than the aggregate levels in the Italian and Spanish banking systems (32% and 41%, respectively).

“Portuguese banks still maintain a significant exposure to marked-to-market securities. The increase in sovereign spreads has had an impact on the fair value reserves and capital ratios of some Portuguese lenders in Q1 2022, however the impact, for the time being, seems manageable.” Said Nicola De Caro, Senior Vice President from the DBRS Morningstar Global Financial Institutions team.