Portugal’s three biggest banks plan to manage jointly some of their bad loans to avoid more writedowns, effectively taking on the task of trying to tackle one of Europe’s biggest bad-debt burdens.
The banks – state-owned Caixa Geral de Depositos as well as Novo Banco and Millennium bcp (BCP.LS) – will set up a private platform to manage loans that at least two of them have made to the same corporate borrowers, Deputy Finance Minister Ricardo Mourinho Felix told Reuters in an interview.
The plan, agreed with the government and central bank, also aims to ensure these troubled borrowers can return to health, the minister said.
Banks’ bad loans surged in Portugal during the country’s recession and the euro zone debt crisis in 2010-13. The economy has been recovering for the past 4 years, but Portugal still needs to solve its ‘bad loan legacy’ so banks can finance companies so they can invest and consolidate growth.
A Novo Banco spokesman confirmed on Thursday that the three banks had agreed to form the joint debt-management platform but gave no further details.
Millennium bcp and Caixa declined to comment.
Mourinho Felix said the three banks’ joint bad debt clean-up approach would avoid the need for a government-backed ‘bad bank’, a mechanism used by Spain and Ireland during Europe’s debt crisis at a heavy cost to taxpayers.
The Portuguese plan also differs from Italy’s actions to tackle its banks’ bad debts, Mourinho Felix said. In Italy, European Central Bank pressure to write down bad loans pushed several Italian banks into crisis, prompting Rome to mount state-funded rescues.
The joint-management approach to the bad loans also should help to put borrowers back on their feet, enabling them to attract new investors, the minister said.
“It will be important to attract investment, be it domestic or foreign.”
The three banks account for most of Portugal’s bad loans, estimated to total 25-30 billion euros, or about 15 percent of their total credit portfolios, mainly to companies. It is one of the biggest bad-debt piles in European banking.
Novo Banco, which has the weakest asset quality among Portuguese banks, with bad loans making up a third of its loan portfolio, is itself going through a debt restructuring needed to complete its agreed sale to U.S. fund Lonestar.
Analysts estimate Portugal’s banking sector has provisioned for only about half of total bad loans, and more writedowns may still be needed.
“An initial analysis is that this is positive because many bad loans are with the main banks and if this tool works, it could save viable companies and be crucial for the banks to continue cleaning their NPLs,” Filipe Garcia, head of the Informacao de Mercados Financeiros consultancy, said.
“It may reduce impairments and writedowns.”
It is unclear how many bad loans will be jointly managed by the three lenders’ new platform, which Mourinho Felix said would be structured as “a complementary group of companies” and focus on loans to corporate borrowers that were considered viable.
The loans would remain on the banks’ balance sheets.
“The ownership of the process is with the banks and they are already preparing the documents,” Mourinho Felix said.
The new body should start operating by the year-end, he said, adding the government would not provide any guarantee for the loans to be jointly managed.
The amount to be managed would be based on an evaluation of the banks’ joint loan portfolios.
Mourinho Felix said the coordination would help to speed up financial restructuring of the debtor companies and hopefully allow for a reduction of the three bank’s bad loans.
“By delegating this to only one entity, the capacity of deciding (on restructuring bad loans) will speed up and avoid the necessity for negotiations on a loan-to-loan basis between the banks,” he said.
“Instead of negotiating with two or three banks at the same time, the debtor will negotiate only with the entity.”
The new body’s executive board would propose which non-performing loans to restructure, based on evaluation work done by a committee of bankers and independent experts.