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Fitch: Portuguese banks' asset quality hard to improve in current economy

Fitch Ratings said Portugal's slow operating environment hasmade it challenging for its lenders to build up capital, deliver adequateprofits and boost capital through earnings retention.

Fitch noted that asset quality remains the primary concernfor the Portuguese banking sector, making banks susceptible to downside risksfrom the country's economy. The rating agency predicted GDP growth of 1.2% forPortugal in 2016, increasing to 1.4% in 2017.

Credit at risk exposures, which Portuguese regulator definesas loans in arrears for 90 days or more, represented 12.2% of total riskexposures in the banking sector at March-end. The European Banking Authority'sdefinitions, which are stricter, say nonperforming exposures across thecountry's six leading banks have reached 19% of total exposures.

Fitch said a material improvement in asset quality willdepend on positive economic developments in Portugal and a recovery in realestate prices, "neither of which look promising for now."