The Portuguese banking sector presents a “significant exposure” to companies located in areas vulnerable to the materialization of risks of water stress, heat stress and fires, and to a lesser extent, floodsreveals the Bank of Portugal (BdP) in the second edition of Annual Report on the Banking Sector’s Exposure to Climate Riskreleased this Wednesday.
Regarding new loan operations granted to companies, these do not show significant changes in the banking sector’s exposure, notes the BdP.
The analysis of the interaction of physical risks, including simultaneous exposure to the most relevant physical risks or their sectoral distribution, with credit risk as well does not indicate the existence of increased concentration risks. According to the BdP, the distribution of the credit portfolio granted to companies by level of physical risk shows some heterogeneity in the exposure of institutions.
The banking sector’s exposure to transition risks, through its portfolio of loans granted to companies, is limited, according to indicators based on carbon intensity. And, in general terms, it has shown a downward trend over the last decade.
These indicators place Portugal in an intermediate position in the euro areawhere there has also been a trend towards reducing the carbon intensity of the bank credit portfolio for companies, reveals the supervisor.
“The carbon intensity weighted by the value of loans granted exceeds the average carbon intensity of the economy, indicating that the weight of the most carbon-intensive sectors in the loan portfolio is greater than their weight in the total gross value added (GVA) of companiesa fact also observed in the euro area”, the document reads.
In terms of sectors of activity, hotspots of vulnerability to transition risk are identified in agriculture and utilities, for which a high and growing carbon footprint is identifiedand in transport, which records a high proportion of loans in the highest credit risk class, although showing a downward trajectory.
The banking sector’s exposure via credit to the most carbon-intensive sectors, which also correspond to a higher credit risk represents about 5% of total loans to companies. “Therefore, there is no concentration of loans with higher credit risk in the sectors that will tend to be more negatively affected by the climate transition process. These results suggest that the likelihood of climate transition risk and credit risk occurring together is limitedhaving shown a downward trend”, points out the BdP.
Taking into account that physical climate risks are associated with potential economic and financial impacts arising from the increased frequency and intensity of natural disasters resulting from climate change, the BdP highlights that “climate change poses a source of risk to the economy and credit institutions. These risks are of a very varied nature and therefore constitute a potential source of systemic risk for the financial system.”
In addition to analyzing the potential impact of climate risks on the Portuguese banking sector, the report also identifies the main regulatory and prudential supervision initiatives developed to promote greater resilience of banks throughout the climate transition process, responding to the mandate provided for in the Climate Framework Law.
Source: www.jornaldenegocios.pt
