March 7 (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
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.