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Faster De-Risking Drives Positive Rating Actions on Greek Banks

The recent positive rating actions on Greece’s four domestic systemically important banks reflect the acceleration of the banks’ de-risking plans, Fitch Ratings says. We expect the credit profiles of Eurobank (‘B-‘/Positive), National Bank of Greece (‘B-‘/Positive), Alpha Bank (‘CCC+’/Positive) and Piraeus Bank (CCC+) to improve faster as a result of the updated plans, helped by Greece’s economic recovery, which we expect to gather pace. We also revised the outlook for the Greek banking sector’s ‘b’ operating environment score to positive as the asset quality clean-up should give banks more financial flexibility to provide new lending.

The banks’ low ratings still reflect weak asset quality and high capital encumbrance by unreserved impaired loans. But their recently updated strategic plans now aim to accelerate the reductions in their impaired loan ratios in the next two years. This will be supported by the recent extension of Greece’s Hercules Asset Protection Scheme (HAPS) and the implementation of capital enhancement actions, most notably the recent EUR1.3 billion share capital increase by Piraeus Bank.

The banks’ plans to securitise additional impaired loans through the second phase of HAPS would be a major step in the sector’s asset quality clean-up. These HAPS-backed securitisations, along with other initiatives, could reduce the sector’s impaired loan ratio to below 15% in the next twelve months from about 35% at end-2020. We previously estimated that the ratio could decrease to below 30% at end-2021, considering only the securitisations we envisaged in the first phase of HAPS (see Greek Banks’ Progress with De-Risking is Credit-Positive).

In our analysis, we also factor in the likely inflow of new impaired loans due to the economic fallout from the pandemic, mainly coming from exposures that have benefited from moratoria. The four banks had granted moratoria on EUR26 billion of loans at end-2020 (16% of gross loans), most of which have now expired. They have been using private restructurings and government-backed loan instalment subsidy schemes to mitigate pressure on borrowers and asset quality as moratoria expire.

We believe the de-risking plans carry execution risks given the likely size of the securitisations and their potential impact on the banks’ thin capital buffers. However, the HAPS extension and the capital enhancement actions should help to mitigate these risks.

Operating profitability in 2020 was weak due to high loan impairment charges as the banks increased their provisions in anticipation of asset quality deterioration and to support securitisations. However, we expect earnings in 2021-2022 to benefit from lower provisioning, particularly for Eurobank and National Bank of Greece, which are more advanced with their asset quality clean-ups.

The positive rating actions also reflected improvements in the banks’ funding and liquidity profiles, supported by deposit growth (9% for the sector in 2020), accommodative measures by the ECB and better access to debt markets, reflected in subordinated and senior unsecured debt issuance in recent months. The sector’s liquidity coverage ratio improved to 175% at end-2020 from 131% at end-2019, and all four banks now meet the minimum regulatory liquidity requirement of 100%.
Source: Fitch Ratings

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