Fitch: NBG-Eurobank merger will provide medium-term benefits; short-term risks elevated
March 7 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings expects that the latest consolidation move in the Greek banking sector, involving the two largest banks, National Bank of Greece S.A. (NBG 'CCC'/'f' and Eurobank Ergasias S.A. (Eurobank 'CCC'/'f'), will prove beneficial to the new group's credit profile in the medium term, assuming achievement of synergies. However, in the near term, the risks may outweigh benefits. Fitch expects Eurobank to merge into NBG following the acquisition of Eurobank by NBG, clearing the way to form Greece's biggest lender with pro-forma assets of EUR178bn. The creation of the NBG-Eurobank group should facilitate a more efficient structure to cope with Greece's weak macro-economic prospects. With this transaction, NBG will enlarge its already leading franchise in Greece, widening the gap with its direct peers which have also been involved in consolidation moves, albeit on a lower scale. According to NBG, the new group's pro-forma market shares will be about 32% for loans and 36% for deposits. Fitch expects the group's strong domestic franchise to eventually lead to an enhanced deposit base and to enable a lowering of retail funding cost over time. The new group will also benefit from a strengthened international footprint, particularly in South-East Europe, where both NBG and Eurobank have had a presence for some time. However, Fitch notes that challenges related to the NBG-Eurobank merger are greater than those faced by other Greek banks that have played a role in the Greek banking sector consolidation process. This is due to the two banks' relatively large size and significant overlap in resources and risks, which results in larger integration and execution risks. Added to these concerns, Fitch anticipates that both banks' funding pressures will persist, at least in the near term, and notes that the merger comes at a time when the two banks also need to meet restructuring requirements under the recapitalisation processes. Both NBG and Eurobank have been provided with sizeable capital support (EUR9.8bn and EUR5.8bn, respectively) by the Hellenic Financial Stability Fund (HFSF) following the capital needs assessment conducted by the Bank of Greece in 2012. However, the ultimate capital needs will have to be reassessed by the national and international authorities. Fitch does not expect the capital needs of the new group to be higher than the sum of those specified for each individual bank in view of cost-restructuring efforts and potential synergies. The new group expects to realise about EUR570m-EUR630m of synergies per annum, centred on cost and funding synergies, to be fully phased-in within the next three years. Fitch believes the new group could find it challenging to generate revenue synergies quickly, given the continued economic recession, which will keep business activity at low levels. Pressure on deposit rates is unlikely to ease substantially in the near term until Greek banks gain sustained access to other forms of funding, including through the wholesale markets. Moreover, Fitch remains cautious about the evolution of banks' asset quality in view of the economic recession in Greece (Fitch expects 4% GDP contraction in 2013) and rising unemployment from already record-high levels (27% at end-November 2012). Fitch expects the new group's credit profile to suffer from increased concentration levels and continued asset quality deterioration. Finally, execution risks could be exacerbated by the poor operating environment, the banks' differing corporate cultures, and union resistance that could make it difficult to achieve cost synergies. Fitch-rated Greek banks' Long-term Issuer Default Ratings (IDRs), including those of NBG and Eurobank, are at their Support Rating Floor (SRF) of 'CCC' based on support and remain linked to the sovereign. However, the major Greek banks' Long-term IDRs could at some point be driven by their standalone financial strength as expressed by banks' Viability Ratings (VRs) if these improve. Currently, Greek banks' VRs of 'f' reflect Fitch's view that Greek banks would have defaulted had they not received external support. Fitch will reassess the banks' VRs when there is more visibility as to their overall standalone credit profile after the receipt of capital support through the HFSF in the form of ESFS bonds and in the context of recent and significant bank acquisitions, likely re-designed restructuring plans and recapitalisation prospects. Fitch believes there is near-term upgrade potential for Greek banks' VRs due to strengthened capital levels after the receipt of support, stabilised deposit bases and regained access to the ECB. The latter allowed banks to shift away from more expensive ELA funds back towards ECB funds. However, Greek banks' VRs are likely to remain at a deeply sub-investment grade level, still constrained by materially weak credit fundamentals and the poor operating and macro-environment in Greece.
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