Fitch affirms long-term rating of Greek systemic banks

Fitch Ratings on Monday affirmed the Long-Term Issuer Default Ratings (IDRs) of Greece’s four systemic banks (National Bank of Greece, Alpha Bank, Piraeus Bank and Eurobank Ergasias) at ‘Restricted Default’ (RD). At the same time the agency has upgraded the four Greek banks’ Viability Ratings (VRs) to ‘ccc’ from ‘f’.

The credit rating firm said this rating action followed a periodic review of Greek banks’ ratings. Their IDRs were downgraded to ‘RD’ on 29 June 2015 following the imposition of restrictions on the withdrawal of deposits after large outflows from the banks in the first half of 2015. The upgrade of the VRs reflects the banks’ improved liquidity and Fitch’s expectation that the completion of the second review of Greece’s third economic adjustment programme reduces political risks and will strengthen depositor and investor confidence in the Greek banking system.

The banks’ IDRs of ‘RD’ reflect Fitch’s view that the Greek banks are defaulting on a material part of their senior obligations given that capital controls, through restrictions on deposit withdrawals, are still in place in Greece.

Full lifting of capital controls is unlikely in the short term in Fitch’s view, but the credit rating agency expects gradual steps towards capital controls relaxation and in particular, gradual removal of restrictions on deposit withdrawals. The roadmap published by the Greek Ministry of Finance in May 2017 outlines preconditions for such steps, which include improvements in economic environment and confidence indicators, inflows of deposits into the banking system and strengthening of the banks’ liquidity and market access. Fitch said it expected some form of relaxation of withdrawal restrictions may follow the conclusion of the second review, for example, a further increase in the withdrawal limits or in limits on transfers abroad, although not significant enough at this stage to affect the banks’ IDRs. The banks’ long-term senior unsecured debt ratings, including those on the debt programmes of their issuing vehicles, have been affirmed at ‘C’/’RR6′ (Recovery Rating). The ratings reflect exceptionally high levels of credit risk, because of poor recovery prospects in the event of the default on senior debt obligations, due to the banks’ weak asset quality, high levels of preferred liabilities (comprising mainly insured deposits) and high asset encumbrance. VRs The upgrade of the banks’ VRs mainly reflects the banks’ improved, albeit still weak, liquidity. It also reflects our expectation that successful completion of the second bailout review will reduce political risks, improve confidence and facilitate stronger deposit growth in 2H17. The VRs still reflect that the banks’ capacity for continued operation is highly vulnerable to deterioration in the business and economic environment.

This is driven by our view that confidence in the banking system remains fragile and is still highly sensitive to political developments. The VRs also reflect the Greek banks’ exceptionally weak asset quality and high capital encumbrance by unreserved problem loans.

“The agreement on conclusion of the second bailout review and disbursement of around 8.5 billion euros of bailout funds reached between Greece and its creditors on 15 June 2017 should pave the way for further improvement in confidence. We expect this will result in further deposit growth, particularly since new money coming into the banking system is not subject to deposit withdrawal restrictions. The banks are still reliant on central bank funding, in particular on Emergency Liquidity Assistance (ELA).

The reinstatement in June 2016 of the waiver allowing the ECB to accept Greek government bonds as collateral in regular refinancing operations, the inflow of deposits and improved access to the secured interbank market helped the banks reduce their aggregate ELA funding by EUR23 billion or over 35% in the 12 months to end-March 2017. Reliance on ELA remains significant however, ranging from around 7% to around 19% of end-March total assets. Fitch estimates that at end-March 2017, the banks’ liquidity buffers, comprising cash and equivalents and collateral that can be pledged to obtain ELA funding, covered around 13%-24% of total deposits across the four banks. We believe this should allow the banks to withstand a moderate liquidity stress, considering recent and expected deposit trends.

The political and economic environment in Greece remains fragile, however, and we expect the banks’ funding and liquidity profiles will remain highly sensitive to depositor and investor sentiment. Asset quality is poor, with non-performing exposures (NPEs) ranging 38%-54% of gross loans at end-March 2017. Weak asset quality and moderate coverage of problem loans result in high capital encumbrance, with unreserved NPEs equal to 1.3x-2.1x of the banks’ end-2016 common equity Tier 1 (CET1) capital. The banks are pursuing ambitious targets to reduce the stock of NPEs in Greece by roughly 40% by end-2019. However, the bulk of the NPE reduction is back-loaded at some banks, and meeting the targets will require a stable operating environment and well-functioning markets for foreclosed assets and non-performing loans.

Greek banks’ Support Ratings of ‘5’ and Support Rating Floors of ‘No Floor’ highlight our view that support from the state cannot be relied upon, given Greece’s limited resources and the implementation of the Bank Recovery and Resolution Directive (BRRD).