Fitch Affirms Four Greek Banks at 'B-', Outlook Stable

Tue May 13, 2014 12:18pm EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, May 13 (Fitch) Fitch Ratings has affirmed National Bank of Greece S.A. (NBG), Piraeus Bank, S.A. (Piraeus), Alpha Bank AE (Alpha) and Eurobank Ergasias S.A.'s (Eurobank) Long-term Issuer Default Ratings (IDRs) at 'B-' with Stable Outlooks, Short-term IDRs at 'B', and Viability Ratings (VRs) at 'b-'. Fitch has also affirmed the banks' Support Ratings (SR) at '5' and Support Rating Floors (SRF) at 'No Floor'. The agency has also upgraded the senior debt ratings of the banks and their issuing vehicles to 'B-'/'RR4' from 'CCC'/'RR5' and subordinated debt rating to 'CC'/'RR6' from 'C'/'RR6', primarily reflecting lower balance-sheet encumbrance following restructuring including capital increases. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS AND SENIOR DEBT, VRS The banks' Long-term IDRs are driven by their intrinsic credit profiles, reflected in their VRs of 'b-'. The VRs are influenced by the challenging (albeit stabilising) operating environment in Greece (B-/Stable), which among other factors is characterised by high unemployment and weak domestic demand, in turn affecting negatively the banks' credit risk profiles. After six years of recession, the banks' asset quality is weak. At end-2013, Fitch calculates that the problem loan ratios, which include all impaired loans and 90 days past due but not impaired loans, had reached a high 45.6% for Alpha, 41.3% for Piraeus, 31.7% for Eurobank and 29.7% for NBG, while reserves held against problem loans were below 50%, a proportion that Fitch views as low in a stress scenario. NBG's better asset quality ratios are in part due to its majority-stake in Turkey's Finansbank A.S. (BBB-/Stable), which has shown better asset quality performance. While diversification at NBG is rating positive, it is counterbalanced by potential constraints on capital and liquidity fungibility. Eurobank's NPL ratios benefit from a relatively more resilient mortgage portfolio. In addition to NPLs, Fitch notes that Piraeus has a portion of forborn loans that are not classified as NPLs, which could pose add-on risks. Fitch expects asset quality deterioration to continue for the remainder of 2014 (albeit at a slower pace), mainly reflecting the lag between NPL recognition and economic recovery. Fitch forecasts 0.5% real GDP growth in 2014. Greek banks have strengthened their internal arrears and restructuring units, complying with the Bank of Greece's guidelines, which face the challenging task of restraining further credit deterioration and managing down their existing large NPL portfolios. Following the identification of capital shortfalls by the Bank of Greece in its March 2014 stress test, all four banks completed capital increases by private means, most recently NBG in May 2014 with a EUR2.5bn equity issue. Piraeus and Alpha plan to fully repay state preference shares. Following capital increases, we calculate pro-forma Fitch core capital ratios of 11% for Alpha, 10.9% for Piraeus, 9.3% for NBG and 8.2% for Eurobank as of end-2013. Including state preference shares still held at NBG and Eurobank, the respective Fitch eligible capital ratios improve to 11.8% and 10.7%. However, Fitch still views these capital levels as vulnerable to shocks, notably in view of large stocks of unreserved NPLs. In 2013, the bank remained loss-making at the operating level (after provisions), albeit only moderately for NBG backed by its more profitable Turkish operations and impairments which halved. Fitch expects Greek banks' pre-impairment profitability to improve in 2014 largely because of lower funding costs and synergies; the latter being more relevant for Piraeus and Alpha given their larger size post-integrations. These factors will provide further flexibility to make impairments, which will remain elevated, constraining internal capital generation at least for 2014. The banks' VRs are supported by their improved funding and liquidity profiles, largely due to the recapitalisations in the form of EFSF bonds and cash, which resulted in larger stocks of high-quality liquidity and subsequent access to funding through interbank repos and the ECB. Piraeus and NBG have also been able to re-access the senior unsecured markets, although a track record of sustained capital market access still needs to be established. As a result, Greek banks' dependence on central bank funding has reduced sharply, but in Fitch's view remains fairly large at about 21% of the banks' assets, highlighting funding constraints. Loan contraction has continued, allowing the four banks to reduce their loan/deposit ratios to more reasonable levels, ranging from 107% for NBG to 123% for Alpha. However, Fitch considers that the banks' deposit franchises, while showing initial signs of stabilising, remain vulnerable in light of Greece's economic conditions. The Outlooks on the Long-term IDRs of all four banks are Stable, mirroring that on the sovereign. This also reflects Fitch's belief that downside rating potential is currently relatively limited in a stabilising environment. The upgrades of the senior debt ratings and recovery ratings highlight a lower level of assets pledged, completion of capital increases and a stabilising operating environment, implying lower collateral constraints and better recovery prospects. RATING SENSITIVITIES - IDRS AND VR, AND SENIOR DEBT The banks' IDRs and senior debt ratings are sensitive to changes in their VRs. A VR upgrade would most likely follow more evidence of asset quality stabilisation and tangible progress in reducing their large problematic asset portfolios, whilst sustaining capitalisation. A sovereign upgrade would not automatically trigger an upgrade of Greek banks' IDRs, although it could bring upward potential if it was associated with improved macro-economic fundamentals. The banks' VRs could be downgraded due to further stress in asset quality, resulting in insufficient loss-absorption capacity and inability to raise more capital internally. The VRs could also be adversely affected by any further liquidity shocks, although in Fitch's view these are currently unlikely. KEY RATING DRIVERS - SRs AND SRFs The banks' Support Ratings of '5' and SRFs of 'No Floor' reflect Fitch's view that any additional support from the state, although possible, cannot be relied upon in light of the scarce resources at Greece's disposal, as evidenced by the receipt of an international support package that included a EUR50bn facility for banks' recapitalisations via the Hellenic Financial Stability Fund. This is despite the banks' systemic importance, with national deposit market shares of roughly 29% for Piraeus, 26% for NBG, 20% for Alpha and 19% for Eurobank. RATING SENSITIVITIES - SRs AND SRFs Fitch considers there is little upside potential for the SRs and SRFs of Greek banks given the limited ability of the Greek authorities to provide support, but also given the clear intent to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives, including the EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism. In September 2013 and March 2014, Fitch commented on its approach to incorporating support in ratings of banks worldwide in light of evolving support dynamics (see "The Evolving Dynamics of Support for Banks" and "Bank Support: Likely Rating Paths", and 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support', at www.fitchratings.comn). KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and other hybrid capital of NBG, Alpha and Eurobank are all notched down from the banks' 'b-' VRs, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The upgrade of lower Tier 2 subordinated debt ratings reflects reduced non-performance risk. These instruments are notched twice from the VR due to weak recovery prospects, as reflected by the 'RR6' Recovery Rating. The banks' hybrid capital, which is currently not performing, has been affirmed at 'C'/'RR6' to reflect a high probability of non-performance under Fitch's definitions. Hybrid non-performance can arise in a number of ways, including coupon deferral or omission or if a tender or exchange offer is deemed to be a distressed debt exchange. The subordinated debt and hybrid capital ratings are broadly sensitive to any change in the banks' VRs. The Recovery Ratings assigned to subordinated debt and other hybrid capital are sensitive to various factors, most importantly valuation and availability of free assets and the mix of unsecured and secured liabilities. Alpha's junior subordinated debt notes (ISIN XS0313221110) have been affirmed and simultaneously withdrawn as these are no longer considered analytically meaningful by Fitch given that there is only a de minimis amount outstanding. The rating actions are as follows: NBG: Long-term IDR: affirmed at 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' VR: affirmed at 'b-' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Senior notes: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Short-term senior notes: affirmed at 'B' Hybrid capital: affirmed at 'C'/'RR6' State-guaranteed debt: affirmed at 'B-' NBG Finance plc: Long-term senior unsecured debt rating: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Short-term senior unsecured debt rating: affirmed at 'B' Piraeus Bank: Long-term IDR: affirmed at 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' VR: affirmed at 'b-' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Long-term senior notes: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Short-term senior notes: affirmed at 'B' Commercial paper: affirmed at 'B' Piraeus Group Finance PLC: Long-term senior unsecured debt rating: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Alpha Bank: Long-term IDR: affirmed at 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' VR: affirmed at 'b-' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Senior notes: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Short-term senior notes: affirmed at 'B' Market-linked senior notes: upgraded to 'B-emr'/'RR4' from 'CCCemr'/'RR5' Subordinated notes: upgraded to 'CC'/'RR6' from 'C'/'RR6' Junior subordinated notes: affirmed at 'C'; withdrawn Hybrid capital: affirmed at 'C'/'RR6' State-guaranteed debt: affirmed at 'B-' Short-term state-guaranteed debt: affirmed at 'B'. Eurobank: Long-term IDR: affirmed at 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' VR: affirmed at 'b-' Support Rating: affirmed at '5' SRF: affirmed at 'No Floor' Senior notes: upgraded to 'B-'/'RR4' from 'CCC'/'RR5' Short-term senior notes: affirmed at 'B' Market-linked senior notes: upgraded to 'B-emr'/'RR4' from 'CCCemr'/'RR5' Commercial paper: affirmed at 'B' Subordinated notes: upgraded to 'CC'/'RR6' from 'C'/'RR6' Hybrid capital: affirmed at 'C'/'RR6' State-guaranteed debt: affirmed at 'B-' Short-term state-guaranteed debt: affirmed at 'B' Contact: Primary Analyst Josep Colomer Director +34 93 323 8416 Fitch Ratings Espana S.A.U. Paseo de Gracia, 85 7th Floor 08008 Barcelona Secondary Analyst Josu Fabo, CFA Director +44 20 3530 1513 Committee Chairperson Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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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