Moody's Investors Service, ("Moody's") has today changed the outlook to stable from positive on the long-term deposit ratings of Alpha Bank AE (Alpha Bank), Attica Bank S.A. (Attica Bank), National Bank of Greece S.A. (NBG), Pancretan Cooperative Bank Ltd (Pancreta Bank) and Piraeus Bank S.A. (Piraeus Bank). The rating agency has also affirmed all outstanding ratings of the five Greek banks, and said that the outlook change takes into consideration the negative impact that the Coronavirus pandemic will have on the economy and on these banks' plans to further improve their asset quality and profitability. A full list of affected ratings is provided at the end of this press release.
RATINGS RATIONALE
RATINGS RATIONALE FOR STABLE OUTLOOKS
The primary driver for today's rating action on Greek banks is Moody's expectation of a delay in implementing the banks' strategic plans to further improve their asset quality and profitability in 2020-21, due to the impact on the Greek economy of the Coronavirus pandemic. According to Moody's the coronavirus-induced slowdown in economic activity will not only weigh on Greek banks' already weak earnings, but also significantly challenge their ability to reduce their elevated nonperforming exposures (NPEs). Policy support measures and regulatory forbearance will offset the adverse impact on their loan quality to some extent. In addition, the rating agency expects banks' capital to deteriorate moderately but remain above the relaxed regulatory requirements. The revised rating outlook also takes into consideration the improvements in banks' funding and liquidity, which are unlikely to be significantly affected by the pandemic.
Moody's regards the coronavirus outbreak as a social risk under its environmental social and governance (ESG) framework, given the substantial implications for public health and safety.
Moody's expects economic conditions in Greece will worsen, with a sharp slowdown in economic activity in 2020, when GDP is likely to contract by around 5%, recovering to 4% growth in 2021. The coronavirus outbreak has led to widespread shutdowns aimed at halting the spread of the virus, which will stifle large sections of the economy. Coronavirus-related travel restrictions will hit the tourism sector in particular, which is one of the main pillars of the Greek economy accounting for around 12% of the country's GDP. At the same time, the rating agency anticipates a steep drop in domestic demand will weigh on the transportation and logistics, trade and manufacturing sectors, which will impact the affordability of banks' related borrowers.
As a result of this economic slowdown, banks' asset quality will remain weak, with NPEs persisting at high levels, around the 40% of gross loans reported at the end of 2019. Banks' previously positive rating outlook took into account the rating agency's expectation of an improvement in Greek banks' asset quality, mainly via securitisations or sales in 2020. However, Moody's now expects that these transactions will be delayed and are likely to be completed in 2021. Concurrently, rising unemployment and deteriorating conditions in the tourism and trade sectors, which between them account for 15% of banks' loan books, will likely lead to an increase in new NPEs although the extent of the deterioration is uncertain. Government support measures including additional liquidity and subsidised credit facilities for businesses will help slow new NPE formation, as will payment moratoriums and extended loan repayment periods for banks' more vulnerable companies and households.
The rating outlook change to stable from positive, also considers banks' already weak profitability that will come under pressure in the next 12-18 months, Moody's said. Banks' profitability will weaken as coronavirus-related economic and financial market disruption will likely impact good quality lending growth and erode fee and commission income, impacting core pre-provision income. Net interest income will remain low, due to falling loan balances and reduced new business, but we expect limited deterioration since banks will continue to accrue interest despite the government relief measures for borrowers, while robust disbursements to corporates in the first quarter 2020 will also be supportive. Continued high loan-loss provisioning needs will weigh further on profitability, although a regulatory exemption allowing banks not to immediately categorise loans affected by the coronavirus outbreak as nonperforming "Stage 3" loans will mitigate the negative impact on banks' performance.
Moody's added that the outlook change also reflects its expectation that regulatory capital adequacy will decline marginally but remain above minimum requirements that have been relaxed throughout the EU. Banks' weak profitability will undermine capital retention, pressuring their core capital metrics.
The stable outlook also considers the rating agency's view that banks' funding and liquidity has strengthened significantly in the last few years and will remain broadly unchanged over the outlook period. Greek banks will likely make increased usage of European Central Bank (ECB) funding facilities at lower cost, while customer deposits should remain on balance stable assisted by the government support measures and reduced household consumption, providing a cheap and stable funding source.
RATIONALE FOR AFFIRMATION OF INDIVIDUAL BANKS' RATINGS
The affirmation of Alpha Bank AE's Caa1 long-term deposit ratings, as well as the affirmation of all other outstanding ratings, is driven by the bank's Baseline Credit Assessment (BCA) of caa1 that was also affirmed, with no resulting rating uplift through the rating agency's loss given failure (LGF) analysis.
The bank's BCA balances the future prospects for further enhancements in its asset quality and profitability against the negative impact from the recession expected in 2020. The bank's immediate challenge includes its still-very-high NPEs of 44.8% of gross loans as at December 2019. Alpha Bank's updated strategy for 2020-22 envisages the acceleration of NPE reduction, which Moody's expects to be delayed given the current setback to the Greek economy caused by the pandemic. The bank's BCA also takes into account its relatively high regulatory capital ratios with a reported Common Equity Tier 1 (CET1) ratio of 17.9% as of December 2019, the highest among its local peers. The ratings affirmation also considers the bank's still weak profitability (€145 million profit before tax in 2019), which will be pressured in 2020, although has good prospects to improve significantly when the economy recovers in 2021 and the bank completes its NPE securitisations.
ATTICA BANK S.A.
The affirmation of Attica Bank S.A.'s Caa3 long-term deposit ratings reflects the affirmation of its BCA of caa3, with no rating uplift from Moody's LGF analysis.
Attica Bank's BCA reflects its high level of NPEs at 46% of its gross loans as at December 2019, which although significantly lower in absolute terms (approximately €850 million) than other local banks, remains the most immediate challenge and the biggest solvency risk for the bank. It also considers its modest capital levels, with a CET1 capital ratio of 11.4% as at December 2019, which is lower than that of its larger domestic peers, and also includes a high level of deferred tax credits (DTCs). The bank's losses before tax amounted to €23.7 million for 2019, and it will be challenged to report positive profitability in 2020, constrained by the downside risks of the pandemic on the Greek economy.
NATIONAL BANK OF GREECE S.A.
National Bank of Greece S.A.'s long-term deposit ratings affirmation at Caa1 is driven by the BCA affirmation at caa1, with Moody's LGF analysis resulting in no rating uplift from its BCA.
The bank's BCA reflects the immediate challenge to reduce its very high level of group NPEs, which represented 31.3% of gross loans as at December 2019, and also improve further its recurring profitability (€235 million core operating profit before tax in 2019). NBG's BCA also takes into consideration its sufficient regulatory capital, with a CET1 capital ratio of 16.1% as at December 2019, including a high level of DTCs. The bank's BCA balances the ongoing enhancements and better prospects for the bank's asset quality and profitability, as well as the strongest funding/liquidity position among its local peers, counterbalanced by the downside risks stemming from the impact of the coronavirus outbreak on the Greek economy.
PANCRETAN COOPERATIVE BANK LTD
The affirmation of Pancretan Cooperative Bank Ltd's Caa2 long-term deposit ratings reflects the affirmation of the bank's BCA at caa3 and also Moody's assessment of potential loss severity for senior creditors and counterparties through the agency's advanced LGF analysis, which provides one notch of rating uplift from its BCA.
The BCA takes into consideration the bank's relatively narrow franchise, which caters to the financing needs of small and medium-sized enterprises (SMEs), mainly on the island of Crete, which limits the geographical diversification of its assets and earnings. The BCA also takes into account the expected increase in loan impairments in 2020-21 in view of the pandemic and the potential impact on the tourism sector that the bank is highly exposed. The ratings are constrained by the bank's high level of problem loans at 63.4% of gross loans, combined with a modest provisioning coverage of 36% as at December 2019, which pose downside risks to its solvency. The bank had the lowest CET1 capital ratio among Greek banks at around 10.2% as of December 2019, which incorporates a high level of DTCs.
PIRAEUS BANK S.A.
The affirmation of Piraeus Bank S.A.'s Caa2 long-term deposit ratings is consistent with the affirmation of the bank's BCA at caa2, with no rating uplift through the agency's LGF analysis.
Piraeus Bank's BCA of caa2 reflects its weak asset quality with very high level of group NPEs, which were 49% of its gross loans as at December 2019, the highest among its large domestic peers. Moody's believes that further improvements in the bank's fundamentals are currently constrained by the downside risks stemming from the negative effects of the coronavirus outbreak on the Greek economy. Piraeus Bank's BCA also takes into account its capital levels that are currently above its Supervisory Review and Evaluation Process (SREP) requirement, with a pro forma CET1 capital ratio of 14.8% as of December 2019, although incorporating a high level of DTCs.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Over time, upward deposit and senior unsecured debt rating pressure could arise following improvements in the country's macro-economic environment, and once the economy normalises from the effects of the Coronavirus resulting in better asset quality, profitability and capitalisation. The return of more deposits back to the banking system would also increase the pool of unsecured obligations available to banks, which could trigger a deposit and senior debt rating upgrade driven by the rating agency's LGF approach.
Greek banks' deposit and senior unsecured debt ratings could be downgraded in the event that the pandemic substantially affects domestic consumption and economic activity for an extended period of time, which will severely affect banks' underlying financial fundamentals that have gradually been recovering from a very low base.
