March 11, 2014 / 3:37 PM / 4 years ago

Fitch: Greek Bank Recap Manageable; Senior Bail-in Unlikely

(The following statement was released by the rating agency) , March 11 (Fitch) The four systemically important Greek banks’ capital needs appear manageable, even under the Bank of Greece’s adverse scenario, in light of the remaining international backstop funds and the expected ability of the stronger banks to raise capital privately, Fitch Ratings says. Greek banks should therefore be able to address capital shortfalls from the Bank of Greece’s stress test without bail-in of senior debt. Greek banks need a further EUR6.4bn of capital under a baseline scenario and EUR9.4bn under an adverse stress, according to the Bank of Greece’s assessment. There was significant divergence in performances among the four systemically important banks - Piraeus, National Bank of Greece (NBG), Eurobank and Alpha Bank. The regulator requires Greek banks to present their plans to meet capital needs under the baseline scenario by mid-April 2014. We will re-assess these banks’ Viability Ratings (VRs) as capital plans are clarified. In our view, Piraeus and Alpha are best placed to cope with capital raising challenges privately. We expect a combination of internal options and fresh share capital to be injected into the banks, although some form of state aid is also possible. Under state aid rules, hybrid and subordinated debt may be subject to burden sharing. However, of the four banks’ aggregate EUR4.9bn of these securities at end-3Q13, EUR4bn related to state-owned preferred stock issued in 2009, which we see less at risk of bail-in. Eurobank had the largest capital shortfalls at EUR2.9bn (1.3x Core Tier 1 as of end-1H13) in the baseline and EUR5bn (2.2x) in the adverse scenarios. While the bank has announced a share capital increase to cover basic capital needs, we believe the Hellenic Financial Stability Fund (HFSF) may also participate considering the size of the capital gap. We estimate there are around EUR9bn of HFSF funds remaining. NBG had the second largest capital shortfalls under the exercise - EUR2.2bn (45% of CT1) in the baseline and EUR2.5bn (53%) in adverse scenarios, with a portion arising from its Turkish subsidiary. NBG plans a partial sale of Finansbank, and although this is sensitive to macroeconomic developments in Turkey, it could raise additional capital depending on the timeframe allowed for the sale since the Turkish operations have been highly profitable. Other internal measures may include recognition of deferred tax assets, which were capped at 20% of CT1 in the Bank of Greece’s exercise. If any bank is unable to raise capital privately or internally to meet the capital shortfall, we would assess if it is in need of material extraordinary support, which could ultimately impact its VR. But the identification of a capital shortfall from a stress test alone is not the equivalent of a bank’s failure. Capital shortfalls at Piraeus and Alpha were 5% or less of CT1 in the baseline scenario and less than 10% in the stress case, so are much smaller and most likely to be raised privately. Piraeus announced a EUR1.75bn equity issue last Friday, well in excess of its EUR425m (5%) baseline capital shortfall and its EUR757m (9%) deficit under the adverse scenario. It would also be sufficient to repay the bank’s EUR750m of state preferred stock. Alpha has also announced a EUR1.2bn equity issue to cover its EUR262m baseline shortfall and to repay EUR940m state preferred stock. NBG and Eurobank will retain their state preferred stock. We believe small Greek banks are likely to consolidate further as they address capital shortfalls. The results also revealed weaknesses for Attica Bank and Panellinia Bank, which are not systemically important as they account for less than 5% of the system. Their combined capital shortfall was only EUR0.6bn, but this is large relative to equity. The HFSF will support the four systemic banks, so smaller banks are likely to be further integrated into the large four. On completion of this round of recapitalisations, we believe the EU-wide stress tests later this year won’t result in any additional material capital shortfall for Greek banks, unless the scenarios involve a prolonged Greek recession. Bank of Greece’s exercise involved a comprehensive credit quality and troubled asset review by an independent third-party. The assumptions for expected loss and house price declines were broadly in line with our expectations. However, our GDP growth forecast for 2015 at 2% is below the 2.9% assumed in the Bank of Greece’s base case, so recapitalisation needs may creep up towards the adverse scenario. Banks with capital plans, like Piraeus, may benefit from greater improvement in investor sentiment if they aim to meet the adverse scenario shortfall, rather than the baseline requirement. Contact: Josep Colomer Director Financial Institutions +34 93 323 8416 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Cristina Torrella Senior Director Financial Institutions +34 93 323 8405 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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