Fitch: ‘Prohibitive’ to any exit of the Greek banks to the markets by the current crisis

Her Eleftherias Kourtalis

Although the road to single-digit NPEs for the entire Greek banking sector remains open despite the current difficult economic environment, Fitch estimates that plans to exit the markets will be put on hold due to the jump in credit spreads.

In more detail, as Fitch notes in today’s report on the outlook for Southern European banks, there is still no evidence of deterioration in asset quality in Southern European banks, despite the difficult geopolitical and macroeconomic environment and the two-year pandemic crisis. However, downward revisions to GDP forecasts, higher inflation and supply chain disruption will lead to higher borrower default rates, but these will be mitigated by further declines in NPEs, loan loss provisions created in recent two years of the pandemic and the benefits of expected interest rate hikes.

Regarding Greek banks and the Greek economy, Fitch emphasizes that Greece has limited direct trade relations with Russia and Russian visitors are not important to its tourism sector. The house does not expect the current climate of uncertainty on the economic and geopolitical front to affect the ability of Greek banks to complete the planned €4bn of distressed asset sales in 2022, to bring the sector to high single-digit NPEs by the end of the year.

However, it expects the four Greek systemic banks to postpone debt issuance and refinancing due to increased market volatility and wider credit spreads. They have until the end of 2025 to meet the final MREL target and the house estimates that they still need to raise around €12bn given their transitional total funds at the end of 2021.

As Fitch notes, Greek real GDP grew by 8.3% in 2021 and expects the post-pandemic recovery to continue this year, supported by a further recovery in tourism and a boost from the Recovery Fund. However, Fitch cut its growth forecasts for 2022 and 2023 due to higher prices, lower confidence and weaker growth in key trading partners following Russia’s invasion of Ukraine. So it expects growth of 3.5% this year from 4.1% before and 3.2% in 2023 against 4% previously.

The “Bridge” program and the solutions applied by the banks, which in some cases served to extend support for loans coming out of the moratorium, pose a moderate risk to the asset quality of Greek banks, the house notes. The subsidies covered €8bn of loans at the end of 2021 (6% of gross loans), and only around 5% of these loans have gone into default. Based on EBA estimates, around 16% of loans previously in moratorium (which also include loans supported by the “Bridge”) were classified as Stage 3 at the end of March 2022 – the highest among countries in the region – and around 39% were classified as Stage 2. These numbers highlight the risk that the asset quality of Greek banks could deteriorate if the economic recovery is delayed.

Regarding the war, the house notes that Greek banks have negligible direct exposure to Russia or Ukraine, although some have operations in Cyprus and Bulgaria, countries which are quite exposed.

In terms of monetary policy, Fitch says that southern European banks are generally well placed to benefit from a rise in interest rates, due – among other things – to northern European banks’ greater reliance on net income from interest in total, and a large portion of variable rate loans. Overall, based on the assumption of a gradual increase in the euro area main refinancing rate to 1% by the end of 2022 and 1.5% in 2023, Fitch expects Spanish and Portuguese banks to benefit the most as this combines with better economic prospects, while Greek banks together with Cypriot banks will have the least positive impact on the region from ECB interest rate hikes.