Fitch expects upgrade of Greek banks' credit rating following faster de-risking drives

Fitch Ratings

The credit profiles of Greece's four systemic banks are expected to be improved faster as a result of the updated de-risking pans of the banks, Fitch Ratings said on Tuesday.

In a report, the credit rating agency said:

"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, Fitch said, adding that their (banks) 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 1.3 billion euros 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.

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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.

Fitch Ratings 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.

Fitch said it also factored 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 26 billion euros 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," Fitch Ratings noted.

"However, the HAPS extension and the capital enhancement actions should help to mitigate these risks," they added.

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%.

READ MORE: Fitch Ratings Classifies National Bank of Greece With “B-” Positive Outlook from “CCC+.”