Greek banks remain very vulnerable to “any deterioration of the Greek operating environment due to their exceptionally weak asset quality, high capital encumbrance by unreserved non-performing exposures (NPEs) and tight liquidity,” Fitch Ratings said on Tuesday.
The credit rating agency, in a dispatch entitled “Greek Banks Still Face Multiple Challenges”, said this is reflected in their Viability Ratings of ‘ccc’ and pointed to the “mountain” of debt entailed in the number and value of non-performing loans (NPLs) and exposures (NPEs) held by Greece’s four systemic banks. Reducing NPLs and NPEs in Greece is a standing demand by the country’s institutional creditors and Eurozone monetary and banking official.
The entire text reads: “…The NPE/gross loans ratios of the four largest banks (Alpha, Eurobank Ergasias, National Bank of Greece, and Piraeus) are exceptionally high, ranging from 45% at Eurobank to 55% at Piraeus at end-September 2017, despite a moderate improvement in 2016-2017. We expect NPE reductions to accelerate this year, supported by a pick-up in the economy, sales of NPE portfolios already announced and last year’s introduction of electronic auctions for foreclosed properties and a simplified out-of-court workout process. But progress will hinge on a stable operating environment and a well-functioning market for problem assets.
The introduction of IFRS 9 on 1 January 2018 is likely to have resulted in a one-off increase in banks’ provisions, but the regulatory capital impact will be limited, given the long phase-in schedule. Only 5% of the impact will be taken into account in 2018, gradually increasing to 15% in 2019 and 30% in 2020. Greek banks are likely to maintain a material reliance on the ECB’s Emergency Liquidity Assistance (ELA) for most of the year, with the exception of National Bank of Greece. However, reliance is reducing, helped by deposit inflows, divestments, deleveraging, access to interbank repos and issuance of covered bonds. Private-sector deposits grew by EUR3.4 billion (3%) in July-November 2017, reflecting reduced uncertainty following the completion of the second review of Greece’s economic adjustment programme, in June 2017, and a strong tourism season. We expect continued moderate deposit inflows as new deposits are no longer subject to withdrawal restrictions, but depositor confidence remains sensitive to the political and economic environment.
Greek banks will be subject to a stress-test ahead of the conclusion of Greece’s economic adjustment programme in August 2018. The stress-test will be conducted on static end-2017 balance sheets, disregarding the banks’ NPE reduction plans.
The four largest banks have buffers that could withstand moderate stress. It is not clear how the stress test will be calibrated or acted upon, but we estimate that they could accommodate an increase in their impairment reserves over the stress-test period to 32%-37% of gross loans (from 23%-26% at end-September 2017) before breaching their fully-loaded capital requirements.
Continuing capital controls in Greece mean that banks’ Issuer Default Ratings are likely to remain at ‘RD’ (restricted default) in the near term. Upgrades would require significant further relaxation of restrictions on deposit withdrawals, which appears unlikely at least until after the conclusion of Greece’s economic adjustment programme.”