Moody’s at Capital.gr: Positive prospects for Greek banks, but challenges ahead

Of Leonida Stergiou

The outlook for Greek banks is positive and this assessment has incorporated the risks of a change in monetary policy by the ECB.

The baseline scenario envisages an increase in interest income for Greek banks, a reduction in bond losses due to the ECB’s new intervention tool, and, in general, an improvement in their financing conditions.

However, declining disposable income and demand for loans, combined with rising defaults, pose risks that may not confirm the goals of their transformation plans and profitability.

In this case, it is possible that the positive outlook today will not translate into upgrades to their credit rating, but into a downgrade of their outlook to stable, after 12 to 18 months.

This is warned by the Vice President and Chief Assessor (VP- Senior Credit Officer) of Moody’s, Mr. Nontas Nikolaidis, analyzing in capital.gr the consequences of the new monetary policy of the ECB and in particular the decision to create a new tool to intervene in the bond markets, after the spread of the spreads and the extraordinary board of directors of the central bank last week.

The ECB decision

According to Mr. Nikolaidis, “the decision of the extraordinary meeting of the ECB for flexibility through reinvestment in the PEPP bond market program aims at the smooth transition, in a functional and uniform way, in all Eurozone countries.

PEPP flexible policy will be used by the ECB in all markets in the medium term. Greece is expected to have the most positive impact in terms of bond spreads, given the high debt ratio in the hands of investors, where the ECB tool will be implemented.

Respectively, the restraint of the expansion of the spreads in the bonds of the Greek State will also be credit positive for the Greek banks as it will limit any significant negative valuations in their books “.

Impact on banks

Therefore, as Mr. Nikolaidis clarifies, “to some extent, the ECB decision will reduce the vulnerability of the Greek financial system to the expansion of spreads that has occurred in recent months.

This will also help their financing plans and their total money costs.

At the same time, the Governing Council of the ECB has decided to speed up the completion of the design of a new tool for normalization of bond markets, which will probably announce the relevant details at the July meeting, further supporting European banks during this difficult period in the midst of difficult credit conditions ”.

Credit rating

Regarding the impact on banks’ credit ratings from rising interest rates, inflationary pressures and geopolitical developments, Nikolaidis said: “We believe that the ECB will raise interest rates by 25 basis points in July and that it will probably move forward. further increases by the end of 2023.

This environment of rising interest rates will enhance the net interest income of Greek banks, as the large volume of loans is floating interest rate, thus supporting organic income and ultimate profitability.

However, higher interest rates can limit borrowers’ ability to repay their loans, which can lead to increased borrowing and provisioning requirements, as well as hurting economic growth and new banking activities.

“In addition, current inflationary pressures and higher energy costs are also having a negative impact on household disposable income, which could also affect consumer spending and demand for new loans.”

At the same time, adds Mr. Nikolaidis, “we believe that these downside risks are integrated into the ratings of Greek banks and that they are in a good position to meet these challenges.”

In fact, at the moment we have positive prospects in the ratings for all Greek banks, mainly due to the improvement of their credit profiles in recent months, while taking into account their future transformation plans.

However, depending on the evolution of the challenges mentioned above and the risk that their transformation plans will be derailed, we could see a scenario where the positive outlook does not translate into rating upgrades of Greek banks in the next 12-18 months and that the outlook change to constants ”.

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