Real estate and debt securities represent 50% of banking assets

The Portuguese banking system continues to focus on real estate and debt securities, which represent 50% of total assets. The data is from the November 2023 Financial Stability Report, which also states that exposure to real estate represented 35.4% of assets in June this year, with loans to individuals secured by real estate continuing to be the most relevant component (26.2% of assets).

“Most components showed a slight increase in importance, which was contributed by the decline in assets. Although a 1.1% decrease was observed, loans to individuals secured by real estate still constitute the component with the largest weight in assets, 26.2%, the Development Bank reveals, Which adds that in June, 92% of home loans granted to individuals had a percentage Loan to value (LTV) less than or equal to 80%.

It is noteworthy that the correction of real estate prices is one of the risks facing banking services, which is that the low percentage of the housing loan portfolio with a high value-added ratio mitigates the impact of the potential decline in residential real estate prices.

On the other hand, he says: “There is a risk of falling prices in the residential sector, and a decline in the value of bank loan guarantees, and mitigating this risk is the scarcity of supply, which limits the possibility of lowering prices.”

In the first half of the year, housing prices continued to rise in Portugal, rising by 8.7%.

Regarding the accumulated growth in commercial real estate prices over the past ten years, it was moderate and much lower than the growth of residential real estate, according to the same source.

The Development Bank states that the banking sector’s exposure to commercial real estate is limited and much less than its exposure to residential real estate.

The supervisor also highlights that REITs in Portugal are mostly closed-end funds, with low liquidity risk.

In contrast, the public debt securities portfolio represented 15.5% of assets. The domestic debt burden has decreased over the past few years. In June 2023, Portugal represented 40.5% of the total public debt securities in the portfolio, a value that remains above the euro area average. Portuguese banks still hold large amounts of Portuguese public debt in their investment portfolios.

The supervisor talks about decreased exposure as geographic diversification of the portfolio increases.

“There has been an increase in the overall weight of Spanish and Belgian debt and, in particular, European Commission debt, while the weight of Italian debt in total has decreased. The weight of domestic debt in total public debt securities has decreased over the past few years,” the Financial Stability Report said.

What impact could banks suffer from exposure to sovereign debt? When public debt rises in the markets, banks record capital gains (which is what has happened in recent years), which boosts profits, but when it falls, as is happening now since the European Central Bank raised interest rates, it means capital losses (investment losses), which It may have an impact on capital ratios.

The Bank of Portugal revealed on Wednesday that the public debt securities portfolio, on a consolidated basis, increased by 1 percentage point, to 15.5% of assets, reflecting an increase in debt securities and a decrease in total assets, with a contribution of 0.8 percentage points and 0.2 p, respectively.

To avoid recording losses recorded in market sign, Banks will be able to place these securities under the heading “Assets for Investment”, where no devaluation will be recorded because at the end of maturity the bonds will be repaid, rather than under the heading “Assets for Negotiation” (where they will have to be valued at market prices).

“There is still an increase in debt securities at amortized cost (6.4%), which now represents about 78% of the total portfolio, meaning that any losses will only be recognized in the event of a sale,” he adds. supervisor.

On the other hand, fair value securities decreased by 0.8%, despite the increase in securities that had an impact on the results. The latter represents 3.7% of the public debt securities portfolio (+0.7 percentage points compared to December 2022).

The report also reveals that the weight of public debt securities in assets is heterogeneous among institutions, “after observing an increase of 1.2 percentage points in the difference between the tenth and ninetieth percentiles,” and in June 2023 they rose by 5% and 23 percentage points. %, respectively.

The document reveals that “although the weight of public debt securities at amortized cost in the portfolio is not homogeneous, they are the most represented in most institutions, with the 1910th and 97th percentile reaching 67% and 97%, respectively.”

The report adds that in domestic activity, in the first half of 2023, the average remaining maturity of public debt securities at the main institutions of the banking system decreased from 5.4 to 5 years.

This reduction reflects the lower weight of debt securities with an original maturity of more than two years, the Development Bank reveals.

“The heterogeneity of the average remaining maturity of the securities portfolio between institutions remained stable, with major institutions recording reductions. The shorter average portfolio duration means there is less sensitivity to fluctuations in the market value of debt securities,” says the banking supervisor.