Positive Signs for Rebalancing Portuguese Bank Funding, According to Fitch

The first public senior unsecured issuance from a Portuguese bank since April 2010, by Banco Espirito Santo (BES), is a sign that wholesale funding markets could reopen for other banks in Portugal, Fitch Ratings says. This could start to reduce the heavy reliance of the Portuguese banks on European Central Bank (ECB) funding.

According to the credit ratings agency (CRA), if the Portuguese banks are to substantially reduce their usage of ECB liquidity facilities, access to the wholesale funding markets is a critical step. Access to bond markets would also reduce the banks’ refinancing risks. This would be particularly helpful for Caixa Geral and Millennium BCP, which are the most reliant on ECB funding (€9bn and €11.3bn at end-H112, respectively). Both banks also face debt maturities between now and 2013.

Although BES’s bond issuance is a positive sign, investor appetite could be muted for the other Portuguese banks. Except for Santander Totta, the major Portuguese banks rated by Fitch all received some state support to meet the European Banking Authority’s (EBA) minimum 9% core capital ratio at end-June 2012. With better levels of capital, the standalone profiles of these banks have improved. But pressures remain from the recession in Portugal, expected asset quality deterioration, funding imbalances and the banks’ capacity to pay back state aid.

Fitch’s view is that the sovereign Portugal will receive further official support before it returns to the market. The CRA believes this is still some time away. While countries exiting programmes are eligible for ECB bond buying, the weak economic outlook in Portugal, the size of the fiscal adjustment and fragile nature of the eurozone sovereign debt market means there would need to be a significant improvement in sentiment for it to return to the market in full next year. Portuguese banks are unlikely to see a strong return to the market while Portugal remains excluded.

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