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Sept 4 (The following statement was released by the rating agency)
The four largest Greek banks' efforts to restructure and integrate recent bank acquisitions could deliver cost synergies and support earnings and capital, Fitch Ratings says. But there remain downside risks if there is a prolonged and deeper recession in Greece and planned cost savings do not materialise.
We expect the restructuring and integration costs recognised in H113 to eventually produce greater efficiency. Piraeus has been the most active in acquiring banks since H212, achieving total assets of EUR95bn and a leading position in Greece with its market share for loans and deposits around 30%. Alpha's acquisition of Emporiki Bank and Eurobank's acquisition of New Hellenic Postbank and New Proton Bank have given them critical mass with EUR74bn and EUR82bn total assets at end-H113, respectively.
National Bank of Greece (NBG), the largest bank by assets (EUR110bn), has been less active in domestic consolidation as it already has critical mass. It also benefits from its profitable Turkish operations, which contributed 56% to group pre-impairment operating profit despite making up only 22% of total assets at end-H113.
Integrating weaker-performing banks in a poor operating environment will be challenging. We currently forecast Greece's GDP to return to growth in 2014, but by only 0.3%. Low interest rates, subdued business activity and further balance-sheet deleveraging depressed operating revenue in H113. The country's macroeconomy remains fragile and uncertain.
Nevertheless, the four banks improved profitability in H113, largely benefiting from a decline in loan impairment charges as the inflow of problem loans decelerated and from lower funding costs. Integration synergies from recent acquisitions, together with a further reduction in funding costs and a slower pace of asset-quality deterioration could improve domestic operating profitability in H213 and 2014.
We expect problem loans to continue to rise until at least the end of 2014 as the economy remains weak, but at a slower pace than in 2012. This should reduce loan impairment charges although they will remain high. At end-H113 non-performing loan ratios were 20.5% at NBG, 25.3% at Eurobank, 31.8% at Alpha and 33.2% at Piraeus, with the loan impairment reserve coverage ratios staying around 50%-55%.
The banks also benefitted from lower funding costs in H113 as a result of reduced term deposit rates and dropping the costlier Emergency Liquidity Assistance funds. Greek banks resumed funding directly from the ECB in December, a cheaper source of funding and liquidity. Funding and liquidity have also improved through balance-sheet deleveraging, restored depositor confidence after the recapitalisation and the risk of a Greek exit from the eurozone receding. However, we expect banks' funding imbalances to persist and to continue to be sensitive to macroeconomic and sovereign developments.
Capital injections have put the four major Greek banks largely under state ownership. Only Eurobank failed to meet the 10% of capital needs from private investors, causing it to become a nationalised bank run by the Hellenic Financial Stability Fund. The EBA pro forma core capital ratios of the four major banks were 8.1% at Eurobank, 9.2% at NBG, 13.8% at Piraeus and 13.9% at Alpha at end-H113.
Both Eurobank and NBG need to improve their capital, despite their credit quality being better than peers. They expect to achieve this internally through earnings and further restructuring (ie, non-core asset disposals). This, together with the EUR5bn capital buffer of the EUR50bn capital backstop facility under the IMF/EU programme, provides all four banks with some cushion to absorb any additional credit impairments that could arise from the next loan stress test in late 2013.