Portugal Interest Rate Measures Likely to Aid Borrowers, but Medium Term Asset Quality Risks Remain

This commentary reviews the measures adopted by the Portuguese Government to mitigate the impact of rising interest rates on household mortgages. The commentary provides an overview of the measures adopted, the risks for borrowers and banks, as well as potential mitigating factors.

Summary highlights from the commentary include:

• Most mortgages in Portugal are at variable rates, so the rapid increase in interest rates in 2022 has contributed to an increase in the cost of debt service. Risks for households, especially in the low income categories, have also been exacerbated by the rise in inflation.
• At the end of 2022, the Portuguese government approved a series of measures aimed at mitigating the impact of rising interest rates on household mortgages.
• The measures could help to prevent or manage future asset quality deterioration by encouraging a more proactive management of the clients at risk, and by introducing additional tools to facilitate the repayment of loans.
• The implications for banks remain uncertain at this point in time as the interest rate environment will keep evolving throughout the year. The banking sector is in a stronger position given the progress made with deleveraging and reduction of problem assets.

“We continue to expect that banks’ interest income will benefit from higher interest rates, although asset quality risks remain over the medium term” said Nicola De Caro, Senior Vice President from DBRS Morningstar Global Financial Institutions team. “Government support during the pandemic and solid economic fundamentals have acted as powerful shock absorbers for households.” said Jason Graffam, Vice President from DBRS Morningstar Global Sovereign team. “Unemployment has returned to pre-pandemic levels and by 2024, the Portuguese economy is expected to be over 5% larger than it was in 2019, a strong recovery compared to Euro area peers.”