OREANDA-NEWS. Increased investor interest in Portugal's banks, with live offers for Banco BPI and Novo Banco, is one of the indicators that the country's banking system is stabilising, says Fitch Ratings. Portugal's banks have long traded well below book value but 2015 share price recoveries for quoted Banco BPI, Millennium BCP and Banif have raised market values, aligning these closely with book values.

Reported offers of EUR4bn for Novo Banco, the successor to failed Banco Espirito Santo, imply an 18% discount to the EUR4.9bn injected into the bank by the government. This should be manageable for Portugal's banking system, which, under the terms of the Novo Banco recapitalisation agreement, must fully cover any shortfall between the sale price and the capital injected into the bank. Five bidders for Novo Banco have been selected by the Bank of Portugal for the final stage of the process, which closes 30 June. These are US investors Apollo and Cerebrus, Banco Santander Totta, conglomerate Fosun and investor Anbang, the latter two being Chinese.

In March, Spain's Caixabank offered EUR1.09bn for the 55.9% stake in Banco BPI it does not already own, representing 90% of the bank's book value at the time of the offer.

Our portfolio review of Portuguese banks, completed on 19 May, highlighted that asset quality indicators are gradually stabilising and the banks are returning to profitability, supported by improving macro-economic trends. Fitch expects annual GDP growth of 1.5% in 2015 and a steady decline in still high levels of unemployment.

Banks' problematic assets, hovering at 10% of total assets, are expected to peak in 2015 although significant improvement will be slow as the stock of problem assets is high. Profitability remains fragile, especially within the core commercial banking business units. This is likely to improve, supported by falling impairment provisions, lower funding costs, particularly as banks cut back on deposit remuneration, savings on overheads and higher contributions from international operations, notably Angola and Mozambique. Positive signals are still timid but may be confirmed when banks post their 1H15 results in July and August.

Portugal's national statistics institute reported an improvement in banks' housing appraisals in April 2015 of 2.3% yoy, with peaks of close to 6% in the metropolitan area of Lisbon. This is good news for the banks because 40% of their loan portfolios comprise mortgages to individuals and 32% of loans to companies are backed by real estate collateral.

Chinese interest in Portugal's financial sector is not new. In October 2014 Fosun acquired 80% of Caixa Seguros, the country's largest insurance company. Broader Chinese investment has been substantial, in excess of EUR5bn, spanning utilities, infrastructure and real estate.