TheIMF called onPortuguese banks April 1 to take further steps to strengthen their balancesheets.

Inaddition, the IMF's latest country report, based on the March 30 completion of itsthird post-program monitoring of the country, noted that the role of riskmanagement and audit committees should be strengthened further to minimizecredit risk and improve accountability. It also advised the banksto review how they select board members and management so that incentives areput in place to encourage cost-control and other measures aimed at boostingprofitability.

ThePortuguese banking system's return on assets is "positive but remains verylow," reflecting weak asset quality, the report explained.

TheIMF also warned Portuguese banks about their significant exposure to emergingeconomies such as Angola, which is likely to affect the evolution of NPLs.

Overall,the IMF said it would like to see a "more comprehensive strategy" toaddress NPLs as well as a more robust approach to dealing with corporate debtworkouts.

The IMF added: "[S]ignificant challenges remain,particularly those arising from the high level of public and corporate debt,unresolved structural impediments, the need to raise the underlying growthpotential and from the uncertain global environment."