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Greek Banks’ Progress with De-Risking is Credit-Positive

Renewed progress by systemic Greek banks in de-risking through planned securitisations making use of the Hercules Asset Protection Scheme (HAPS), after pandemic-related delays in 2020, is credit-positive, Fitch Ratings says. The securitisations should significantly reduce the banks’ capital vulnerability to unreserved problem loans and could reduce the need for provisioning, notwithstanding the negative up-front capital impact. The agency will take account of the de-risking in its next rating reviews, along with the effects of a deteriorated operating environment following the pandemic.

The securitisations should more than offset new impaired loan inflows related to the pandemic. We expect the impaired loan ratio for the sector to decrease to about 30% or lower at end-2021 from 36% at end-September 2020 (see Fitch Ratings 2021 Outlook: Western European Banks). However, the banks will remain exposed to execution risks in reducing their still-high stock of impaired loans even after the planned securitisations given the challenging operating environment and capital pressures. Additional capital-accretive actions by banks and potentially new sector-wide solutions, including the extension of HAPS and the Bank of Greece’s proposal for the transfer of bad loans, could accelerate the asset quality clean-up in the medium term.

Alpha Bank (CCC+) announced on 22 February it had secured a binding agreement with Davidson Kempner for the sale of an 80% stake in its loan servicer and 51% of the mezzanine and junior notes in its Galaxy securitisation. This will allow it to de-consolidate up to EUR10.8 billion of impaired loans upon completion of the transaction in 2Q21. We estimate this could significantly reduce its impaired loans ratio to about 24% (including senior notes) from 43% at end-September 2020. The bank will retain all of the senior notes guaranteed by HAPS and 5% of the mezzanine and junior notes, while the remaining notes will be distributed to its shareholders. This agreement also suggests that investor appetite for Greek banks’ distressed assets is resilient despite the pandemic.

Alpha, like other Greek banks, will undertake a corporate restructuring before the completion of the securitisation to avoid diluting shareholders by triggering deferred tax credits from the loss recognition of the transaction. The combined capital impact from the transactions is likely to be about 280bp, resulting in a pro-forma total capital ratio of 15.5% at end-September 2020 (including 9M20 profits). The outsourcing of loan-servicing activities should also help to improve the bank’s operating efficiency in the medium-term, along with other restructuring initiatives.

Piraeus Bank (CCC) is also making progress. It has completed the necessary corporate restructuring ahead of its two planned securitisations (see Fitch Rates Piraeus ‘CCC’ on Completion of Restructuring). The bank expects to securitise and sell off EUR7 billion in impaired loans, which we estimate would reduce its impaired loan ratio to about 37% from 48% at end-September 2020. Piraeus also outlined in its 3Q20 results the possibility of an additional disposal of nearly EUR5 billion of impaired loans by end-2021, supported by capital-accretive actions.

National Bank of Greece (CCC+) has recently applied to benefit from the state guarantee on its senior securitisation notes through HAPS. This is in preparation for a EUR6.1 billion impaired loan securitisation, which would reduce its impaired loan ratio to below 15% from 29% at end-September 2020. Unlike the other systemic banks, National Bank of Greece will not undertake a corporate restructuring as its pre-impairment profit should cover most of the capital impact of the transaction.

Eurobank (B-/Negative) securitised EUR7.5 billion of impaired loans in June 2020, reducing its impaired loan ratio to 15% at end-September 2020 from 29 % at end-2019 (see Fitch Upgrades Eurobank to ‘B-‘; Outlook Negative).
Source: Fitch Ratings

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