Circular Letter No. CC/2023/00000021

Circular Letter No. CC/2023/00000021
Sent to:
Credit Institutions.
Mod. 99999924/T – 01/14
Subject: Expectations of the Bank of Portugal regarding policies and procedures related to the holding, assessment, and alienation of real estate acquired in repayment of own credit

1. Under Articles 112 and 114 of the General Regime of Credit Institutions and Financial Companies (RGICSF), credit institutions, as a rule, cannot acquire real estate that is not indispensable to their installation and operation or to the pursuit of their corporate object, except those resulting from acquisitions in repayment of own credit, and the situations resulting therefrom must be regularized within a period of two years.

2. Regarding real estate acquired in repayment of own credit, the Bank of Portugal recommended, through Circular Letter No. 44/2009/DSB, of May 19, 2009, the reinforcement of the processes for re-evaluating such real estate, and through Circular Letter No. 1/2011/DSP, of February 22, 2011, clarified the accounting treatment applicable to them. Subsequently, through Circular Letter of the Bank of Portugal No. CC/2019/00000061, of July 15, 2019, it transmitted that credit institutions must apply the European Banking Authority Guidelines on the management of non-performing exposures and restructured exposures (EBA/GL/2018/06 or “Guidelines”)1, which cover real estate acquired in repayment of own credit.

3. This Circular Letter consolidates and updates the Bank of Portugal’s expectations regarding the management of real estate acquired in repayment of own credit, with a view to minimizing the time of their holding on the balance sheet or ensuring the effective reduction of the prudential exposure to these assets.

4. The assessment of overall compliance with the expectations transmitted through this Circular Letter will be considered by the Bank of Portugal in the supervisory review and evaluation process (SREP) for institutions subject directly to its prudential supervision.

Policies and procedures supporting the management of real estate acquired in repayment of own credit

5. In accordance with the provisions of Bank of Portugal Notice No. 3/2020, credit institutions must have policies and procedures that support the management process of these assets. Such policies and procedures must take into account the minimum requirements set out in sections 9.1.2, 9.2, and 9.7 of the Guidelines, regarding the assessment process, monitoring and control, and frequency of assessment.

Real estate valuers

6. The policies and procedures referred to in the previous paragraph must establish the requirements applicable to assessments carried out by a qualified real estate valuer, which must safeguard:

1 The European Central Bank and the Bank of Portugal adopted these Guidelines regarding significant and less significant institutions under their supervision.

Mod. 99999924/T – 01/14 a) Compliance with the criteria defined in section 9.1.4 of the Guidelines for the selection of qualified and independent valuers; b) The definition of maximum concentration thresholds for assessments by a qualified real estate valuer; c) The provision to qualified real estate valuers of all relevant information regarding the real estate subject to assessment, namely i) their age on the institution’s balance sheet; ii) history of attempts to alienate the real estate; iii) encumbrances or charges; iv) factors that may hinder or delay the sale processes.

7. Regarding the periodicity of assessments, the policies and procedures must also consider the requirements set out in section 9.1.3 of the Guidelines, according to the following thresholds:
   a) For real estate with a gross balance sheet value exceeding 300,000 euros, annual on-site assessment by a qualified real estate valuer must be ensured; b) For real estate with a gross balance sheet value less than or equal to 300,000 euros, other methods of annual assessment by a qualified real estate valuer may be used, provided that the assessment is not supported exclusively by statistical methods.

Accounting treatment

8. The accounting treatment of real estate acquired in repayment of own credit must be carried out in accordance with: (i) IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations, when the conditions defined therein are met, (ii) IAS 40 – Investment Property, when leased or for capital appreciation, or (iii) IAS 2 – Inventories, when held by real estate companies2.

However, as expressed in section 9.7 of the Guidelines, it is the expectation of the Bank of Portugal that these assets meet the requirements that allow credit institutions to use IFRS 5 for the accounting framework of these assets, as it is considered the standard that best meets the substance of these transactions in light of the legal restrictions provided for in the RGICSF.

Plan to reduce exposure to real estate

9. In compliance with the provisions of Article 114 of the RGICSF, credit institutions must adopt the necessary measures to ensure the alienation of real estate acquired in repayment of own credit within a maximum period of two years.

10. Real estate that, for justified reasons, remains on the institutions' balance sheets after the period referred to in the previous paragraph, must be subject to a reduction plan, in accordance with the provisions of section 4.3.2 of the Guidelines3. In particular, this plan, with a reasonable but demanding time horizon, must establish calendarized targets for the progressive and full reduction of exposure, based on the age and characteristics of the real estate on the balance sheet, as well as concretize the strategy that will support the projected reduction.

2 In consolidated accounts, a consolidation adjustment to IAS 40 must be made when they are merely service companies in which the majority of real estate comes from credit repayment granted by entities of the same group.
3 Note that, as provided for in paragraph 13(c) and paragraph 44 of the Guidelines, the materiality of exposure to real estate acquired in repayment of own credit may imply subjecting that exposure to the other requirements set out in sections 4 and 5 of the Guidelines. In such cases, it may be required that the reduction plan covers all real estate regardless of its age on the balance sheet.

Mod. 99999924/T – 01/14

11. The plan to reduce exposure to these real estate defined by institutions may contemplate alienation, establishment of impairments, write-offs against assets, or a deduction from core Tier 1 capital elements4.

12. For the purposes of establishing impairments or deductions from capital elements, institutions must take into account, when necessary, the application of adjustments to assessment values based on the age of the real estate on the balance sheet, the characteristics and age5 of the assessments, and the sales strategy.

13. Institutions must ensure coherence between the plans to reduce exposure to real estate acquired in repayment of own credit and requests for extension of time limits to cease exposure to real estate risk made under Article 5 of Bank of Portugal Notice No. 1/2016. Integration with other risk management instruments, internal control, internal and external reporting, including financing and capital plans, and the internal capital adequacy assessment process must also be ensured.

14. This Circular Letter takes effect the day following its publication and replaces Circular Letters No. 044/2009/DSB, of May 19, 2009, and No. 1/2011/DSP, of February 22, 2011.

4 As derived from Article 3 of the CRR.
5 When the assessment by a qualified real estate valuer is older than 1 year, the values indicated in Annex II to Circular Letter of the Bank of Portugal No. CC/2018/00000062, of November 15, 2018, must be considered at a minimum.