Fitch Upgrades Greek Banks After Recapitalisation and Sovereign Upgrade

Thu May 16, 2013 12:38pm EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, May 16 (Fitch) Fitch Ratings has upgraded National Bank of Greece's (NBG), Piraeus Bank's (Piraeus), Alpha Bank's (Alpha) and Eurobank Ergasias' (Eurobank) Long-Term Issuer Default Ratings (IDRs) to 'B-' from 'CCC', Short-term IDRs to 'B' from 'C' and Viability Ratings (VR) to 'b-' from 'f'. The agency has also revised the Greek banks' Support Rating Floors (SRF) to 'No Floor' from 'CCC' and affirmed the Support Rating (SR) at '5'. These rating actions follow the banks' recapitalisation and a more stabilised macroeconomic environment in Greece, which is reflected in the agency's upgrade of Greece's sovereign rating to 'B-' from 'CCC' with a Stable Outlook (see "Fitch Upgrades Greece to 'B-', Outlook Stable," dated 14 May 2013 on www.fitchratings.com). The Outlook on the banks' Long-term IDRs is Stable, reflecting the close correlation with that of the sovereign. A full list of rating actions is included at the end of this rating action commentary. KEY RATING DRIVERS - IDRs, VRs, SENIOR DEBT The Greek banks' Long-term IDRs are upgraded to be in line with their 'b-' VRs. Senior debt ratings have also been upgraded by one notch to 'CCC' in tandem with the banks' IDRs, based on RR5 Recovery Ratings. In the absence of Greek authorities' ability to support the Greek banks, as evidenced by the sovereign's weak creditworthiness and the receipt of a sizeable IMF/EU bail-out plan which included support to banks, the four banks' Long-term IDRs and senior debt ratings are now driven by their improved stand-alone fundamentals as expressed by their VRs. The upgrade of the VRs reflects the banks' recapitalisation, which is in its final stage, and a more stabilised macroeconomic environment in Greece, as expressed by the sovereign upgrade. Despite the upgrade, at the 'b-' level the VR denotes weak prospects for ongoing viability as per Fitch's rating definitions. Upon the completion of the capital raising exercises in the coming weeks and considering recent bank acquisitions, the pro forma EBA core capital ratios are estimated to be above 8% for NBG, 10.9% for Eurobank, 13.9% for Alpha (excluding the recently completed liability management exercise) and 14.3% for Piraeus. Except for NBG, this is above the minimum 9% required by the authorities. The VRs also reflect the banks' improved deposit bases and regained access to ECB funding, although banks' funding and liquidity remain highly vulnerable and dependent on central bank funding. The VRs of Alpha and Piraeus acknowledge their improved domestic retail franchises and market shares following bank acquisitions in 2012 and Q113, in particular Piraeus which is now the second largest bank by assets and first by domestic market shares (29% for both loans and deposits). Piraeus made several bank acquisitions, including the healthy balance sheet of ATEbank, the Greek subsidiaries of a French bank as well as a Portuguese bank and the Greek operation of the three Cypriot banks in a short period of time, which allowed it to double its assets size to EUR102bn. Alpha acquired the Greek subsidiary of Credit Agricole, Emporiki, which accounted for about 30% of its assets. NBG is now the second-largest bank by deposit market share (22% in deposits and 18% in loans) followed by Alpha (20% in deposits and 24% in loans). After the suspension of the merger between NBG and Eurobank, Eurobank has lost ground and is now Greece's fourth largest bank (12% of deposits and 16% of loans). In Fitch's view, Eurobank will be challenged to create value if it remains as an independent entity, given its relatively smaller size and franchise. The VRs of NBG and Eurobank benefit from some geographical diversification, especially NBG through its profitable Turkish operations held by its majority-owned Finansbank A.S. (rated BBB/Stable). The latter provides NBG good internal capital generation prospects. This together with its better than peers credit risk profile, as reflects its better asset quality indicators and comparatively lower credit loss projections under the Black Rock exercise (particularly its Greek loan book) partially mitigates NBG's relatively weaker capital ratios. In this regard, NBG is currently proceeding with capital enhancement measures, which include liability management exercises and the sale of assets. The latter is expected to boost its EBA core capital significantly by June 2013. However, the VRs of Greek banks continue to reflect the risk of potentially higher asset quality and profitability pressures, which if not contained could ultimately renew capital concerns, as well as funding vulnerabilities. Banks also face the challenge of managing restructuring and/or integration risks (particularly Alpha and Piraeus) whilst the economic conditions will remain weak, as shown by Fitch's estimates that Greece's GDP will contract by 4.3% in 2013 and with only a marginal recovery in 2014. The Stable Outlook on the banks' Long-term IDRs is correlated to that of the sovereign. Being largely domestic banks, their revenue generation, credit and funding profiles are, in Fitch's opinion, highly sensitive to Greece's operating environment. As per Fitch's rating definitions, the 'RR5' on the senior notes reflects below average recovery prospects due to downside risks on asset and liabilities valuations from the weak operating environment and the relatively large level of assets pledged (between 38% and 50%), implying some collateral constraints. According to the Black Rock stress test exercise, Greece's four largest banks had combined capital needs of EUR27.5bn. The recapitalisation of the four banks has unfolded in several phases with the Hellenic Financial Stability Fund (HFSF) channelling most of the capital needs through capital advances. Banks are now in the final stage of their recapitalisation process, which includes the completion of capital raising exercises and potentially the issuance of contingent convertible bonds (CoCos), to be fully subscribed by the HFSF. Under the terms of Greece's international bail-out, Greek banks must raise at least 10% of their capital needs from private investors to remain in private hands. While most of the capital needs are expected to be covered by the HFSF, Fitch understands that Alpha's private rights issue will be fully underwritten by a syndicate of international investment banks that will allow the bank to reach the minimum private participation threshold to avoid nationalisation and the bank will not issue heavy interest burden CoCos. NBG and Piraeus also expect to raise capital through private sources and avoid nationalisation. Also they may avoid issuing CoCos. Eurobank, by contrast, is the only bank that has stated that it cannot meet the 10% threshold and will be nationalised through an imminent capital injection by the HFSF. Fitch expects banks' capital ratios to remain under pressure in 2013 as profitability and asset quality will continue to deteriorate. However, capital pressures may ease thereafter unless risks of a prolonged and/or deeper recession renew. While capital ratios at Alpha and Piraeus compare better than their domestic peers', these need to be seen in light of their higher pro forma impaired loan (NPL) ratios following acquisitions of weaker banks. Also, these banks, especially Piraeus, face larger restructuring and integration risks. Greek banks' NPL ratios have followed a rapidly increasing trend since 2008 caused by five consecutive years of economic recession. The reported NPL ratios at end-2012 were 19% for NBG (coverage of 54%), 22.8% for Eurobank (42.8%), 28.6% for Alpha (52%) and 28% for Piraeus (52%). The ratios for Alpha and Piraeus are pro forma, which means they include recent bank acquisitions. Fitch expects NPLs to continue rising in 2013, albeit at a slower pace as evidenced in the Q412 results. The four banks made net losses in 2012 mainly due to margin compression and large loan impairment charges (LIC). Fitch expects operating profitability to be negative in 2013 given further revenue pressures and sustained high LIC. The four banks' aggregate net loans/deposits ratio improved to 132% at end-2012 from 142% at end-2011, although figures are not fully comparable due to bank acquisitions in 2012. This was largely the result of loan contraction, although a degree of deposit recovery has also been observed since H212, helped by a stabilisation of Greece's political climate and the fading away of the risk of a Grexit. However, the consolidation of this deposit trend still needs to be tested, also in view of depositors' fragile confidence in the aftermath of the Cypriot banking crisis. Central bank funding continues to underpin banks' funding and liquidity, representing about 25% of banks' total assets at end-Q113 from the peak at 32% at end-August 2012. In Fitch's view, correcting banks' funding imbalances will take time, illustrating constraints to access wholesale markets. Positively, Greek banks became ECB eligible from January 2013, and this enabled them to replace more expensive Emergency Liquidity Assistance funds. KEY RATING DRIVERS - SRs AND SRFs The SRs and the revision of the banks' SRFs to 'No Floor' reflects Fitch's view that despite the banks' systemic importance, future support to Greek banks cannot be relied upon in light of scarce resources at the Greek authorities' disposal, even though the state's willingness to provide support may be high. RATING SENSITIVITIES - VRs AND IDRs Any change in the Greek banks' IDRs will be driven by changes in their VRs, for which there is little upside potential in the near term given the challenges that Greek banks are facing. Greek banks remain highly vulnerable to the Greek macroeconomic developments. Their overall financial strength is sensitive to the recessionary pressures in Greece and the risk of this prolonging in time, the return to profits, capacity to absorb further loan losses without putting renewed concerns on capital levels, a material reduction in central bank funding and to depositors' and investors' confidence. Also, banks will need to attain targeted synergies from integration and restructuring, which are vital for future profitability. RATING SENSITIVITIES - SRs AND SRFs Greek banks' SRs and SRFs could benefit from a considerable improvement in the government's ability to provide extraordinary support, although this seems unlikely in the near term considering Greece's debt profile and prevailing sovereign downside risks. Fitch also notes the intent within the EU to reduce implicit state support for banks in view of the EU bank resolution proposals. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Fitch has affirmed the bank's subordinated debt and hybrid capital issues at 'C/RR6' and 'C', respectively, highlighting a high probability of non-performance under Fitch's definitions. Under Fitch's criteria, hybrid non-performance can arise in a number of ways, including coupon deferral or omission or if a tender or exchange offer is considered to be a distressed debt exchange. The ratings of Greek banks' subordinated debt and hybrid capital issues are primarily sensitive to any change in the banks' VRs. The RRs are sensitive to various factors, most importantly valuation and availability of free assets and the mix of unsecured and secured liabilities. The rating actions are as follows: NBG: Long-term IDR upgraded to 'B-' from 'CCC'; Stable Outlook Short-term IDR upgraded to 'B' from 'C' VR upgraded to 'b-' from 'f' Support Rating affirmed at '5' Support Rating Floor revised to 'No Floor' from 'CCC'; Senior notes upgraded to 'CCC'/'RR5' from 'CC'/'RR5' Short-term senior notes upgraded to 'B' from 'C' Hybrid capital affirmed at 'C' State-guaranteed issues upgraded to 'B-' from 'CCC' Piraeus Bank: Long-term IDR upgraded to 'B-' from 'CCC'; Stable Outlook Short-term IDR upgraded to 'B' from 'C' VR upgraded to 'b-' from 'f' Support Rating affirmed at '5' Support Rating Floor revised to 'No Floor' from 'CCC' Senior notes upgraded to 'CCC'/'RR5' from 'CC'/'RR5' Commercial paper upgraded to 'B' from 'C' Alpha Bank: Long-term IDR upgraded to 'B-' from 'CCC'; Stable Outlook Short-term IDR upgraded to 'B' from 'C' VR upgraded to 'b-' from 'f' Support Rating affirmed at '5' Support Rating Floor revised to 'No Floor' from 'CCC'; Senior notes upgraded to 'CCC'/'RR5' from 'CC'/'RR5' Short-term senior notes upgraded to 'B' from 'C' Market-Linked Senior notes upgraded to 'CCCemr'/'RR5' from 'CCemr'/'RR5' Subordinated notes affirmed at 'C'/'RR6' Junior subordinated notes affirmed at 'C' Hybrid capital affirmed at 'C' State-guaranteed issues upgraded to 'B-' from 'CCC' Short-term state-guaranteed issues upgraded to 'B' from 'C' Eurobank: Long-term IDR upgraded to 'B-' from 'CCC'; Stable Outlook Short-term IDR upgraded to 'B' from 'C' VR upgraded to 'b-' from 'f' Support Rating affirmed at '5' Support Rating Floor revised to 'No Floor' from 'CCC'; Senior notes upgraded to 'CCC'/'RR5' from 'CC'/'RR5' Short-term senior notes upgraded to 'B' from 'C' Market-Linked Senior notes upgraded to 'CCCemr'/'RR5' from 'CCemr'/'RR5' Commercial paper upgraded to 'B' from 'C' Subordinated notes affirmed at 'C'/'RR6' Hybrid capital affirmed at 'C' State-guaranteed issues upgraded to 'B-' from 'CCC' Short-term state-guaranteed issues upgraded to 'B' from 'C' The rating impact, if any, from the above rating actions on Greek banks' subsidiaries and covered bonds will be detailed in separate comments. Contacts: Primary Analyst Cristina Torrella Senior Director +34 93 323 8405 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Secondary Analyst Josep Colomer Director +34 93 323 8416 Committee Chairperson: Maria Jose Lockerbie Managing Director +44 203 530 1083 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Recovery Ratings for Financial Institutions', dated 15 August 2012, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 and 'Evaluating Corporate Governance', dated 12 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here Recovery Ratings for Financial Institutions here Assessing and Rating Bank Subordinated and Hybrid Securities here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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