Fitch downgrades Greece's four largest banks

ATHENS/NEW YORK Tue Feb 23, 2010 2:48pm EST

ATHENS/NEW YORK (Reuters) - Fitch Ratings on Tuesday downgraded the ratings of Greece's four largest banks on expectations fiscal tightening would weigh on the economy and loan demand, hurting profits.

Fitch downgraded National Bank (NBGr.AT), Alpha Bank (ACBr.AT), EFG Eurobank EFGr.AT and Piraeus Bank (BOPr.AT) by one notch to BBB from BBB-plus.

The outlook is negative, which typically signals the ratings may be downgraded again over the next one to two years.

Greek bank stocks .FTATBNK fell 2.87 percent on Tuesday, with analysts saying the downgrade could burden the lenders with higher funding costs.

"(The downgrade) reflects the country's sovereign rating pressures. It's a negative development but it was more or less expected. It may affect Greek banks' funding with a potential negative implication on credit growth," said an analyst who did not want to be named.

Fitch said the rating action reflected its view that banks' already weakening asset quality and profitability would come under further pressure due to considerable fiscal adjustments in Greece.

Fitch also downgraded the mortgage covered bonds issued by National Bank of Greece by two notches to AA, the third-lowest investment grade, from AAA. It also downgraded by one notch to AA-plus from AAA the mortgage covered bonds of Alpha Covered Bonds Plc and Marfin Egnatia Bank EGNr.AT All three covered bond programs are on review for further downgrade.

Greece is scrambling to cut its deficit by four percentage points to 8.7 percent of gross domestic product (GDP) this year under a European Union-endorsed fiscal plan. Its borrowing costs have soared as markets fret over its fiscal woes.

Fitch said Greek banks' operations in southeast Europe and Turkey add revenue diversification, but this comes from more volatile economies, some of which also experienced recessionary pressures.

"The downgrade is likely to render Greek banks' borrowing more expensive," said analyst Manos Hatzidakis at Pegasus Securities.

Fitch said concerns over Greece's public finances had constrained banks' access to wholesale and, to a lesser degree, interbank markets at reasonable prices. As a result, Greek banks continued to rely to some degree on European Central Bank (ECB) funding.

"While unhindered access to ECB facilities provides short-term liquidity, Fitch would welcome a rebalancing of the banks' funding and liquidity profiles toward more traditional funding sources," the ratings agency said.

On a positive note, it said Greek banks continue to be primarily funded by customer deposits, which account for about 86 percent of gross loans on average for the five largest lenders, meaning limited reliance on non-bank wholesale funding.

It said wholesale funding maturities for 2010 are manageable and funding needs for the year should be limited.

(Reporting by George Georgiopoulos and Dena Aubin; editing by Andrea Ricci)

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