Moody’s yesterday (Tuesday) downgraded by one notch Banco Comercial Português and Banco Internacional do Funchal, and affirmed Caixa Geral de Depósitos after lowering the standalone credit assessments of the Portuguese banks because of a more negative outlook for the Portuguese economy.

The rating agency cut Banco Comercial Português (BCP) from Ba3 to B1, negative outlook, and downgraded Banco Internacional do Funchal (Banif) from B1 to B2, on review with direction uncertain. Caixa Geral de Depósitos (CGD) was affirmed at Ba3, with a negative outlook.

Moody’s expects Portugal’s GDP to shrink by 1.2% in 2013, down from a previous August forecast of a contraction of 0.3%. The rating agency said the negative performance of the Portuguese economy will put additional pressure on the already “very weak risk absorption capacity” of the three banks.

Moody’s noted that an increasing portion of BCP’s, Banif’s and CGD’s pre-provision income has been eroded by asset impairments in 2012. Higher funding costs, ongoing balance sheet deleveraging and an increase in non-earning assets prevented the banks from compensating for the losses.

Moody’s acknowledged improved solvency levels for BCP, Banif and CGD following recapitalisation efforts made by the Portuguese government in June 2012, but noted that “very negative” economic conditions may prevent the implementation of the recapitalisation and funding plans.

The rating agency also said that restrictions in the access to wholesale funding made the banks more reliant on European Central Bank funding, and that this trend is expected to continue.

“Heightened uncertainties on the health of the Portuguese economy as well as on the creditworthiness of the banking system will prevent banks to regain normalised access to private markets in the foreseeable future,” it said.

BCP was cut by one notch from Ba3 to B1, on negative outlook, as a result of a three notch downgrade of its standalone credit profile. Factors prompting the review of the bank’s creditworthiness were its negative performance, as a 35.6% decrease in net interest income and losses for more than Eu790m were reported in September, a high NPL ratio of 13.4%, compared with a system’s average of 10%, and a high exposure to Greece by BCP’s fully owned subsidiary Millennium Bank.

Moody’s mentioned that BCP received significant support from the Portuguese government to meet the 9% core tier 1 ratio requirement imposed by the European Banking Authority (EBA). However, it said that the enhanced capital ratio may still not be sufficient to offset the risks deriving from “the country’s very difficult operating environment”. The rating agency expects the bank to continue to make losses in 2013.

Banif was cut by one notch from B1 to B2, with direction uncertain, following a three notch downgrade of its standalone credit profile due to a decrease in the bank’s profitability, asset quality and ability to generate capital.

The bank reported losses for Eu61m and a NPL ratio of 13% at the end of June, and required public support for recapitalisation. As part of the recapitalisation, Banif was asked to implement some restructuring plans, namely a merger with former parent Banif SGPS. However, Moody’s noted that the plan is still subjected to final registration; therefore it placed a direction uncertain on the issuer’s rating.

The standalone credit assessment of CDG was also downgraded as a result of weaker absorption capacities of the bank. Moody’s said this was due to modest profitability indicators, namely a net loss of Eu102m and a 15% decrease in net interest income at the end of September, deteriorating asset quality and direct exposure to Portuguese sovereign risk.

However, the rating of CGD was affirmed at Ba3 because Moody’s grants four notches of uplift over the standalone credit assessment to take into account the high likelihood of support that the state-owned bank may receive from the Portuguese government.