Financial stability risks have increased in recent months, reflecting the unpredictability of US economic policies and the reactions of different geopolitical and trading partners. Due to their effects on economic agents’ confidence and financing conditions, substantial negative impacts on economic activity, inflation and asset prices can be generated.
Volatility and the likelihood of sharp financial market corrections have risen. Portuguese issuers benefit from a better assessment of Portuguese sovereign risk, with a positive impact on financing conditions and the value of domestic government bonds. Moreover, due to its low leverage, the banking sector has a lower refinancing risk. The potential effects on the sector are also mitigated by low exposure to capital instruments, the geographical diversification of issuers and the large weight of the component accounted for at amortised cost in exposure to debt securities, in particular public debt, which is material in the sector’s assets.
Another relevant exposure of the banking sector is associated with the Portuguese real estate market, particularly the residential segment. The materialisation of an adverse environment is likely to have a limited impact on that market. Combined with the slow adjustment in supply, an increase in the population, higher household disposable income and the recent cycle of declining interest rates have supported price growth. Banks’ exposure in the form of residential loans is mitigated by the low share of the property value that is financed by the loan and by the tightening of the debt-to-income ratio.
The current situation brings to the fore the merit of progress made in Portuguese public finances over the last decade. It is important that the Portuguese public debt ratio stays on a downward path, complying with sustainability criteria and EU fiscal rules, and to preserve countercyclical margins in preparation of possible economic downturns.
The materialisation of an adverse economic and financial scenario will affect household and corporate spending, as well as debt servicing capacity, especially of the most vulnerable agents. In this context, it is important to highlight how these sectors have adjusted in recent years. In 2024, firms maintained high operating profitability, improved their capital ratio, reduced their indebtedness and preserved high liquidity. Households saw their disposable income increase, strengthened their savings and reduced their indebtedness. Both sectors also benefited from declining interest rates, which made them more resilient to the materialisation of risk scenarios.
At the end of 2024, the banking sector had high profitability, liquidity and capital, and good asset credit quality, taking advantage of the significant adjustment in recent years. Looking ahead, net interest income will be under pressure, having an impact on the sector’s profits, which are expected to decline in comparison to those recorded in the past two years. In the current uncertain environment, it is essential that banks remain prudent in provisioning and capital conservation. Recent macroprudential measures adopted by the Banco de Portugal, namely the implementation of the sectoral systemic risk buffer (SyRB) and the application of a 0.75% countercyclical capital buffer (CCyB), alongside the macroprudential recommendation relating to new credit for house purchase and consumer credit, strengthen the sector’s resilience.
The external environment poses new challenges, be they economic, financial or technological – e.g. cyber risks and operational risks. As an economy highly interconnected with the outside world, Portugal should incorporate these risk factors into its policymaking and prepare to deal with them. The Banco de Portugal will continue to act towards fostering the stability of the financial system.
