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Fitch Affirms Greek Banks' IDRs at RD; Upgrades VRs
June 19, 2017 / 5:03 PM / 6 months ago

Fitch Affirms Greek Banks' IDRs at RD; Upgrades VRs

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Affirms Greek Banks’ IDRs at RD; Upgrades VRs - Rating Action Report here LONDON, June 19 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of National Bank of Greece S.A. (NBG), Alpha Bank AE (Alpha), Piraeus Bank S.A. (Piraeus) and Eurobank Ergasias S.A. (Eurobank) at 'Restricted Default' (RD). At the same time the agency has upgraded the four Greek banks' Viability Ratings (VRs) to 'ccc' from 'f'. A full list of rating actions is available in the related Rating Action Report. This rating action follows 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 1H15. 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. KEY RATING DRIVERS IDRS AND SENIOR DEBT 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 we expect 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. We expect some form of relaxation of withdrawal restrictions may follow the conclusion of the second review, for example, a further increase in the withdrawal limits (currently EUR840 per account per fortnight) or in limits on transfers abroad. We however do not expect such relaxation to be 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 Greek banking system recorded in total around EUR6 billion of deposit inflows in Greece since the imposition of capital controls to end-April 2017, of which half were private sector deposits. Almost all of the inflows occurred since end-May 2016, following the completion of the first bailout review and the relaxation of capital controls in July 2016. The agreement on conclusion of the second bailout review and disbursement of around EUR8.5 billion 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. SUPPORT RATING AND SUPPORT RATING FLOOR 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). SUBORDINATED DEBT AND OTHER HYBRID SECURITIES - Eurobank and Alpha The 'C/RR6' ratings on Eurobank's (ISINs DE000A0DZVJ6, XS0234821345, XS0440371903 and XS0232848399) and Alpha's (ISIN DE000A0DX3M2) preferred securities issued through their funding vehicles reflect exceptionally high credit risk and poor recovery prospects. The banks' preferred securities are currently non-performing. STATE-GUARANTED DEBT - Eurobank and NBG Fitch affirmed Eurobank's government-guaranteed debt and assigned a long-term rating to NBG's. These are senior unsecured instruments that benefit from a full guarantee from the Greek State. Fitch rates government-guaranteed debt at 'CCC', at the higher of the senior unsecured debt ratings of the issuer (C for both Eurobank and NBG) and the guarantor's Long-Term Foreign Currency IDR (CCC for Greece). We believe that these guaranteed programmes and issues will be treated equally with other obligations of the Greek State. RATING SENSITIVITIES IDRS AND SENIOR DEBT An upgrade of the banks' IDRs would require a significant relaxation of deposit withdrawal restrictions. Ratings of senior unsecured debt are mainly sensitive to the level of asset encumbrance. A significant shift of funding from secured debt to unsecured facilities could result in an upgrade of senior unsecured debt ratings. VRs An upgrade of the VRs is unlikely in the near term and would require an upgrade of Greece's 'CCC' sovereign rating, an extended record of economic recovery and political stability, significant reductions of banks' NPEs and capital encumbrance by unreserved problem loans, and further improvements in the banks' funding and liquidity profiles through deposit growth and reduction and eventual elimination of ELA reliance. The VRs could be downgraded if depositor and investor confidence weakens, compromising the banks' already weak liquidity profiles, or if capitalisation materially deteriorates. SUPPORT RATING AND SUPPORT RATING FLOOR Any upgrade of Support Ratings and upward revisions of Support Rating Floors would be contingent on a positive change in Greece's ability and propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES - Eurobank and Alpha Ratings of preferred securities issued, respectively, by Eurobank and Alpha could be upgraded if the securities return to performing status and if there is a multi-notch upgrade of, respectively, Eurobank's and Alpha's VR. STATE-GUARANTED DEBT - Eurobank and NBG Ratings of Eurobank's and NBG's state-guaranteed debt are sensitive to Greece's sovereign rating. CRITERIA VARIATION The analysis includes a variation from Fitch's "Global Bank Rating Criteria", which state that a bank's Long-Term IDR will only be assigned below the VR in limited circumstances when constrained by the Country Ceiling. Although Greece's Country Ceiling of 'B-' does not directly constrain the banks' IDRs, the legal restrictions on deposit withdrawals mean the IDRs remain at 'Restricted Default'. As such, Fitch has varied its criteria to permit a VR higher than 'f' to be assigned whilst still maintaining a Long-Term IDR of 'RD'. Contact: Primary Analyst Konstantin Yakimovich Director +44 20 3530 1789 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Fernando Sanchez Analyst +44 20 3530 1221 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 9174 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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